Luna Foundation to lend $1.5 billion to protect UST stablecoin

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On Monday, May 9, 2022, the Luna Foundation Guard (LFG) decided to lend a total of $1.5 billion to protect the TerraUSD (UST) stablecoin from future volatility. The LFG announced their decision via Twitter where they posted a thread last May 9, 2022, saying that they will ‘proactively defend the stability of the $UST peg & broader Terra economy’ and to do so, they will loan $750 million worth of Bitcoin (BTC) and 750 million UST to trading firms.

In the Twitter thread, they further explained how the lending will help: ‘The traders will trade the capital on both sides of the market to [protect the UST peg and accumulate BTC], eventually maintaining parity of the LFG reserve pool (denominated in BTC) as market conditions progressively stabilise’.

In a separate Twitter thread, Terra co-founder and LFG council member Do Kwon said that the council unanimously agreed to the preemptive decision.

‘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’, Kwon shares. 

He also expressed how essential these steps are in strengthening the liquidity of UST, stating that ‘this will be an important opportunity for the Terra and wider crypto community to gather empirical data on how LFG operates & fits into the Terra ecosystem’. 

The UST stablecoin has previously maintained a stable price of $1 but suffered a steep drop last May 7, 2022, where it decreased from $1 to $0.7. The price has since remained at the same level and currently sits at $0.7361 at the time of writing. Both LFG and Kwon did not mention the drop as the reason behind the lending despite it being an opportune solution.

There are currently no updates as to whether or not the LFG’s involvement will make a difference and give UST the push it needs to retrieve parity. 

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