Luna Foundation Guard Deploys $1.5B to Defend Troubled UST Peg

The Luna Foundation Guard (LFG), a non-profit organization supporting all things Terra, has recently announced that it will lend $1.5 billion to protect the peg of its algorithmic stablecoin UST amid present volatility.

In a tweet thread on Monday, the organization voted to lend $750 million worth of bitcoin from its reserves to over-the-counter (OTC) trading firms to defend UST’s peg.

The LFG noted that it will also lend an additional $750 million worth of UST to accumulate more bitcoin to help stabilize the market. 

The LFG said, “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.”

Terra’s Founder Addresses Speculations

To clarify the organization’s latest move and address rising speculation, Terraform Lab’s co-founder Do Kwon made a separate tweet thread.

He noted that the latest developments should not be seen as the Luna Foundation Guard trying to exit its bitcoin position. Rather, it is to significantly strengthen liquidity around the UST peg by lending the funds to an unnamed “professional market maker.”

Hence, the lent capital will be used to acquire UST if the stablecoin falls below its peg and on the flip side, if it goes above or is equal to its peg, the funds will be used to acquire more bitcoin.

Kwon added,

“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.”

UST Slips Below $1 Peg

Terra’s native UST stablecoin had faced a rather eventful weekend. The stablecoin slipped below its $1 peg over the weekend amid severe market conditions.

UST is a unique stablecoin as it operates differently from traditional stablecoins like USDT and USDC. Rather than being backed by centralized assets, UST maintains its $1 peg via a mint and burn mechanism using Terra’s governance token LUNA.

Over the past few weeks, however, the stablecoin depegged as it was hit by an onslaught of multi-million dollar selloffs, with traders trading UST for other stablecoins on Curve and Binance. Etherscan data shows that one account sold about 85 million worth of UST for USDC on Curve.

UST is currently trading at $0.996 at the time of writing.

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