Luna Foundation Guard may be forced to sell its Bitcoin holdings as UST loses its peg to the dollar.
The sharp drop in cryptocurrency prices over the past week, and especially over this weekend, has caused Terra's stablecoin, UST, to become temporarily de-linked from the US dollar. UST reached plummet to $0,68, before slowly recovering and trading at $0,91 at the time of writing this article.
How does UST work?
Terra's stablecoin relies heavily on the native token MOON FABRIC, to maintain its stability. Being an algorithmic stablecoin, UST has a algorithmic minting and burning mechanics, which creates an arbitrage opportunity when UST is pegged 1 to 1 to the dollar.
In this way, operators can Burn LUNA and create new UST, as long as the UST is greater than $1 and thus make a profit. On the other hand, when UST is below the dollar, stablecoins are burned and more LUNA is minted to stabilize the parity.
What has happened this time is that UST has suffered a strong blow in both demand and liquidity, which has been coupled with a drop of almost a 26% of LUNA price in 24 hours and the 8% drop in the price of Bitcoin.
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Luna Foundation Guard and Bitcoin
What does the Bitcoin crash have to do with the price of UST? The reason why the fluctuation in the price of Bitcoin affects the Terra stablecoin peg is because the Luna Foundation Guard has accumulated a huge amount of Bitcoin (about $3.500 billion) as reserves, which will be used to stabilize the UST bond in certain situations where the parity falls below the dollar.
In an effort to maintain the UST parity, the Luna Foundation has voted to lend $750 million in Bitcoin and another $750 million in UST to OTC trading firms. On the other hand, the foundation has also announced the withdrawal of almost 37.000 BTC to lend them to professional market makers who will use them to purchase stablecoins.
This dynamic has caused a new problem: the biggest buyer of Bitcoin in recent months could now become the biggest forced seller, which could destabilize the market.
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The problem with forced sales
In this regard, according to data from the Blockchair explorer, on Monday 42.530,82827771 Bitcoins were spent from the LFG address. Although the whereabouts of the funds are unknown, it is speculated that they were distributed in two parts (12.500 BTC and 30.000 BTC, respectively) and that one of them was sent to OKEX.
In response to rumors about the possible forced sale of the Luna Foundation's Bitcoins, Do Kwon, CEO of Terra Labs, said that They are not trying to “exit their Bitcoin position”, but are sending capital to professional market makers to buy stablecoins whenever the price falls below their peg to the dollar.
🚨 Update on LUNA 🚨
Terra’s stablecoin has continued to fall overnight, plummeting to the $0,30 level on May 11. Meanwhile, Terra’s stablecoin issues, coupled with the weekend LUNA token sell-off, have caused the price of LUNA to fall below $XNUMX (at the time of writing).
Throughout May 11, LUNA has lost almost 98% of its value, going from $33 to less than $1. However, over the past few hours, the Terra token has bounced back from a level of $0,75 and is holding above the dollar, struggling to break the $2 barrier.
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