09 May 2022 · 5 min read

Luna Foundation Loans Out BTC to Defend Bitcoin Peg, Faces Community Backlash

Source: AdobeStock / sdx15

 

The Luna Foundation Guard (LFG), the entity tasked with holding bitcoin (BTC) as part of the reserves backing the TerraUSD (UST) stablecoin, has loaned out USD 750m worth of BTC to a trading firm “to help protect the UST peg.” Confronted with what this really means, Terra (LUNA) founder Do Kwon claimed that the LFG is not seeking to exit its BTC position.

According to a series of tweets from the LFG, the move to loan out BTC was necessary in order to protect the stablecoin’s peg in the face of increased volatility in crypto markets – and a temporary drop in the price of UST – over the weekend.

“Per the LFG’s mandate, the LFG will proactively defend the stability of the UST peg & broader Terra economy, especially under volatility and the uncertainty of macro conditions in legacy markets,” LFG said in a Twitter thread posted on Monday, adding that crypto market volatility recently has been “significant.”

Further, the thread added that the LFG Council – in order to deal with the situation – has voted to:

  • loan USD 750m worth of BTC to OTC trading firms to help protect the UST peg;
  • loan UST 750m to accumulate BTC as market conditions normalize.

As of Monday at 11:24 UTC, BTC has fallen by 5.4% over the past 24 hours, while Terra’s native token LUNA has fallen by 5.3% over the same time period. Over the past 7 days, the two coins are down by 15% and 27%, respectively.

Meanwhile, the price of UST dipped as low as 0.986 against tether (USDT) on Binance on Saturday, before trimming losses. As of press time, UST remained below its peg, trading at USDT 0.995 on the exchange.

“Not very clear” communication

Perhaps not surprisingly, the LFG’s communication on the issue led to discussions in the community on Twitter, with some criticizing the foundation for what they described as “not very clear” communication.

“Has BTC been sold,” and in that case, “how much,” asked Twitter user Tundra who described himself as a core developer for Nexus Protocol (PSI), a decentralized finance (DeFi) platform for Terra. “What does this ‘loan’ structure entail,” the user followed up by asking.

Other users also chimed in, asking why the LFG chose to loan out its BTC rather than just sell it to defend the UST peg. Others argued that the move is “very likely PR” from the LFG’s side.

LFG “haven’t sold bitcoin yet”

Shortly after, however, Terra founder Do Kwon came out with his own clarification of the situation, claiming that the LFG is “not trying to exit its bitcoin position.” Instead, Do Kwon said that the goal is to have capital ready for market makers so that they can buy UST if the price is below the peg, and buy BTC if the price is above (or equal to) the peg.

“As markets recover, we plan to have the loan redeemed to us in BTC, increasing the size of our total reserves,” the Terra founder added.

Further, he also stated that they “haven’t sold bitcoin yet,” stressing once again that the transaction is “a loan to a market maker.”

Meanwhile, other members of the community took the opportunity to question the degree of decentralization around UST, asking why the decisions about defending the peg are made by “a council.”

“Definitely not desirable,” Do Kwon said, in what could be interpreted as an admission that UST still has a way to go before it can be considered decentralized. He added that the goal was to have “an onchain BTC redemption mechanism” ready by the next time the Terra economy would contract, but claimed that “we just lost the race against time.”

Meanwhile, Sam Trabucco, CEO of the crypto trading firm Alameda Research, said that his firm “doesn’t have any particular plans” to sell UST.

As suggested by other users, however, the firm is still likely hedging risks associated with its position by trading UST futures on FTX, a crypto exchange of which Alameda is the parent company. Do Kwon also hinted at the same in the thread, asking: “Does this apply for perps as well?”

‘Perps’ refer to perpetual futures contracts, a common trading instrument in the crypto derivatives market.

Still, not everyone was critical of the foundation's move, with one user saying that the Terra foudner just “loaned the BTC so that he has cash on hand to protect the peg if it’s needed during a capitulating market.”

“Drama queens making a big deal out of the end purpose behind buying BTC,” the same user added.

The UST stablecoin made headlines earlier this year when Do Kwon revealed his plan to partially back the coin with BTC reserves. He has also previously said that the LFG plans to acquire as much as USD 10bn worth of BTC for the task, which he said would make LFG “the largest single holder of bitcoin in the world,” besides Bitcoin's creator Satoshi Nakamoto.

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Learn more: 
- USDT vs. USDC vs. UST: How Do They Compare?
- Bitcoin Extends Sell-Off Despite Luna Buying, Strong On-Chain Data

- Luna Foundation Guard Buys Additional USD 100M in Bitcoin, Now Holds BTC 42.4K
- Terra’s USD 10B Bitcoin Bet May be Both a Curse and a Blessing

- Terra’s Do Kwon Makes Massive Bet That LUNA Will Stay Above USD 88
- Luna Jumps as Terra Asks USD 38M From Community to Fund an Undisclosed Sports Partnership