The Terra (LUNA-USD) ecosystem is becoming a force to be reckoned with within the DeFi space. The sibling token of the LUNA crypto, TerraUSD (UST-USD) is becoming a fast favorite among stablecoin users. But while this widespread adoption is largely very good for the Terra network, it also has brought a bit of turmoil. In the midst of some unforeseen volatility, the Terra network is looking to back its UST project with Bitcoin (BTC-USD) reserves. The rapid accrual of BTC stands to greatly benefit both LUNA and UST.
UST, the $1 USD-pegged stablecoin of the Terra network, is one of the most popular modes of DeFi earning. This is thanks in huge part to its link to the Anchor Protocol (ANC-USD), a Terra-based staking platform that promises a consistent 20% annual percentage yield (APY) on UST staking. The Anchor Protocol is becoming a favorite staking platform because its APY is quite high while also never fluctuating, contrary to the yields of other platforms.
However, the stablecoin ran into a bit of trouble earlier this year, and its price peg suffered as a result. UST’s close connection to the Wonderland DeFi platform ultimately came back to bite the token; when it was revealed that a Wonderland executive was a known crypto scammer, the resulting flood of users from the platform caused enough of a ripple to knock UST from its $1 price peg, alongside another stablecoin called Magic Internet Money (MIM-USD).
Of course, developers don’t want to see this happen again. As such, the Terra team is looking to pad the UST value by adding Bitcoin reserves to back the token.
Bitcoin Buying Hopes to Help Bolster UST, LUNA Crypto Values
UST keeps its $1 value through its relationship with the LUNA crypto. The two cryptos have elastic total supplies that are joined to one another. When UST moves below $1, UST holders can burn their tokens for LUNA rewards; the UST supply drops, demand rises and the value returns to $1. When it moves above $1, LUNA holders can burn LUNA to mint new UST; the supply rises, demand sinks and value returns to $1.
However, as the Wonderland fiasco demonstrates, this process doesn’t hold up against a catastrophic event. This is a detriment to both currencies; because of the linkage between LUNA and UST, LUNA values saw rapid losses from the de-pegging of UST. The Terra developers are now deciding that the ecosystem needs more solid reserves to supplement this model.
In late February, the Terra team raised $1 billion to supplement the ecosystem and help bring stability to the stablecoin. It seems as though now the project is taking things a step further. CoinTelegraph reports today that the Terra network is buying a whopping $10 billion Bitcoin to act as a UST reserve.
Do Kwon, founder of Terra, says the network is already beginning to accumulate these reserves. Kwon says that the choice to use Bitcoin as a reserve over USD is because Bitcoin is more attractive to hold and easier to use. Ultimately, he argues that the $10 billion purchase will usher in “a new monetary era of the Bitcoin standard.”
On the date of publication, Brenden Rearick did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
