Terraform Labs donates $1.1 billion to Luna Foundation Guard reserves

On Friday, Do Kwon, founder and CEO of Terraform Labs, which develops a blockchain ecosystem that includes Terra Luna (MOONLIGHT) and stablecoin TerraUSD (UST), announced that the TFL has donated 12 million LUNA, or $1.1 billion at the time of publication, to the Luna Foundation Guard (LFG). LFG launched in January to grow the Terra ecosystem and improve the sustainability of its stablecoins. Kwon noted that the funds, named LUNA, will be burned to mint UST to increase LFG’s reserves:

“We will continue to increase reserves until idiots cannot mathematically confirm to reduce the risk to UST.”

UST is an algorithmic stablecoin with a theoretical 1:1 exchange rate to the US dollar and is partially maintained by swapping/taking LUNA tokens when its market value deviates from the rate. Burning $1 in UST leads to mining $1 in LUNA and vice versa.

However, due to the high demand for UST on decentralized finance (DeFi) platforms like Curve Finance, this results in unbalanced regions for stablecoin swaps. For example, as more and more crypto enthusiasts exchange their USD Coin (USDC) and Tether (USDT) for the UST, the pool’s reserves will be exhausted and cause price fluctuations because supply lags behind demand. Two days ago, TFG voted on burning the remaining 4.2 million LUNA in its coffers to protect the UST peg. According to to TFG:

“LFG will swap LUNA to UST (swap = burn) and sell UST to the Curve team. The proceeds will go back to the LFG reserve to buy BTC. ”

Thanks to Terra’s flagship Anchor Protocol, UST is a very popular coin among crypto enthusiasts and promises annual returns of up to 20% on UST savings deposits. However, due to the imbalance between depositors and interest-paying lenders, the Anchor Protocol’s reserve (to pay the promised return) remains declineat the time of publication, although it has recently undergone a big capital.