LFG will commit $1.5 billion to strengthen UST peg and build BTC reserves

Amid the sharp pullback in Bitcoin (BTC) and the broader crypto market this week, the Luna Foundation Guard (LFG) is set to deploy $1.5 billion worth of capital to “fix” Terra USD’s peg to the US Dollar protection”.

Singapore-based non-profit LFG is part of the Terra (LUNA) ecosystem and is tasked with collateralizing the network’s algorithmic stablecoin UST to keep its USD peg intact, while managing the network’s reserves.

While details are sparse at this point, LFG detailed on Twitter today that it will initially loan $750 million worth of BTC to over-the-counter (OTC) trading firms to manage the capital and trade.

Following this, once the market stabilizes, LFG will receive a UST750 million loan – most likely from Terraform Labs – to rebalance its reserves.

The LFG noted that the council voted to go ahead with the plan after observing “significant” market volatility in BTC, UST and LUNA over the past few days.

4/ As a result, the LFG Council has decided to implement the following:

– Lend $750 million worth of BTC to OTC trading firms to help protect the UST peg.

– Borrow 750M UST to accumulate BTC when market conditions normalize.

— LFG | Luna Foundation Guard (@LFG_org) May 9, 2022

Terraform Labs founder Do Kwon provided further explanation, stressing on Twitter that “LFG is not attempting to exit its Bitcoin position” and is ultimately using capital to strengthen UST in the short-term to increase its BTC holdings in the long-term .

“While UST buys and sells do not currently have a meaningful direction, we felt it was valuable to have capital to deploy in the current market. When markets recover, we plan to have the loan repaid to us in BTC, which will increase our overall reserves.”

1/ The LFG Council just voted to deploy 1.5Bn capital (0.75Bn in BTC, 0.75Bn in UST) to allay market concerns about UST. A little more context on the why and how: https://t.co/TfaAPkzgUJ

— Do Kwon (@stablekwon) May 9, 2022

With LFG’s $2.91 billion reserves mostly backed by BTC (91% or $2.7 billion), the falling asset price is forcing the company to readjust its balance sheet to reflect the peg maintained by UST. At the time of writing, BTC is down 12.7% over the past seven days to around $33,600, while UST is slightly off its peg at $0.99.

Related: Bitcoin is clinging to $36,000 as data suggests the sell-off in BTC price came from short-term holders

Terra’s native asset LUNA, which also plays a role in maintaining UST’s peg via its burn and mint mechanism, has also suffered significantly over the past week, falling a whopping 24.5% to $62.15.