Due to the increased demand for UST, a pool imbalance has developed on Curve Finance, necessitating action.
On Friday, Do Kwon, founder and CEO of Terraform Labs (TFL), revealed that TFL has contributed 12 million LUNA ($1.1 billion at the time of publishing) to the Luna Foundation Guard (LFG). LFG began in January with the goal of expanding the Terra ecosystem and ensuring the long-term viability of its stablecoins. Kwon said that the funds, which are denominated in LUNA, would be used to mint UST in order to bolster the LFG’s reserves:
“We will continue to build reserves until it becomes mathematically impossible for fools to claim UST de-peg risk.” UST is an algorithmic stablecoin with a theoretical exchange rate of 1:1 with the US dollar, which is maintained in part by swaps of/for LUNA tokens when the market price deviates from the peg. When a dollar in UST is burned, a dollar in LUNA is minted, and vice versa.
Due to the increased demand for UST on decentralised finance, or DeFi, platforms such as Curve Finance, this leads in lopsided stablecoin swap pools. For instance, when more crypto fans exchange their USD Coin and Tether (USDT) for UST, the pool’s reserves would dwindle, resulting in price fluctuation as supply falls short of demand.
TFG had previously voted two days earlier to burn the 4.2 million LUNA remaining in its coffers to safeguard UST’s peg. TFG states: “LFG will exchange the [new] LUNA for UST (swap=burn) and then sell UST to the Curve pool.
The revenues will be reinvested in LFG reserves for the purpose of purchasing BTC.” Due to Terra’s flagship Anchor Protocol, UST is an extremely popular coin among cryptocurrency aficionados, since it offers an annual payout of up to 20% on UST savings accounts. However, as a result of an imbalance between depositors and lenders paying interest, the Anchor Protocol’s reserve (for paying the stated return) is still declining at the time of publishing, despite a recent significant capital inflow.
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