Luna Foundation Guard aims to invest $1.5 billion to strengthen the UST peg and increase BTC reserves

The Luna Foundation Guard (LFG) is planning to deploy $1.5 billion in cash to “help strengthen” Terra USD’s (UST) peg to the US dollar, amid a significant drop in Bitcoin which affected the whole crypto market this week. The Terra ecosystem includes the Singapore-based NGO LFG, which is entrusted with collateralising the network’s algorithmic stablecoin UST to maintain its USD peg while also maintaining the network’s reserves.

While specifics are few at this time, the LFG said earlier today on Twitter that it will initially lend $750 million in BTC to over-the-counter (OTC) trading businesses to handle and trade the funds. Following that, the LFG will seek a 750 million UST loan, most likely from Terraform Labs, to rebalance its reserves once the market has calmed.

5/ The traders will trade the capital on both sides of the market to help accomplish both #1 and #2, eventually maintaining parity of the LFG Reserve pool (denominated in BTC) as market conditions progressively stabilize.

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

According to the LFG, the team opted to carry out the plan after noticing “substantial” market volatility in BTC, UST, and Terra (LUNA) during the previous several days.

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

— Do Kwon 🌕 (@stablekwon) May 9, 2022

Terraform Labs CEO and co-founder Do Kwon clarified the decision on Twitter, saying that “LFG is not trying to exit its Bitcoin position” and that the funds would be used to boost UST in the short term before increasing its BTC holdings in the long run:

“While buys and sells of UST are not meaningfully directional now, we felt it was valuable to have capital ready to be deployed in the current market. As markets recover, we plan to have the loan redeemed to us in BTC, increasing the size of our total reserves.”

Because the LFG’s $2.91 billion in reserves are backed by BTC to the tune of 91%, the institution is being forced to alter its balance sheet to preserve the UST’s peg. BTC is currently trading at around $33,600, down 12.7% in the last seven days, while UST is slightly off its peg at $0.99.

Terra’s native asset LUNA, which also contributes to UST’s peg via its burning and minting process, has lost a substantial amount of value in the last week, falling 24.5% to $62.15.

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