by Martin Gaspar

$1 Billion BTC to Backstop UST Peg

LUNA posted a strong recovery after Terra’s Luna Foundation Guard (LFG) announced last week that it raised $1 billion in a private token sale, with the proceeds to be used to acquire BTC to backstop the UST peg. Currently, LUNA and UST are intertwined — users mint $1 equivalent of each asset via burning $1 of the other asset. This means when the UST peg is pressured, users are incentivized to burn UST to mint LUNA, presumably to sell LUNA for other cryptoassets, or cash. The resulting greater supply can resulting in more pressure on LUNA and UST, potentially leading to a downward spiral.

A Buffer for LUNA

With the $1 billion of BTC reserves to backstop UST, users will supposedly be able to swap UST for BTC. This could help bolster the price of LUNA during market weakness as it will mitigate the amount of UST being burned or swapped into LUNA, assuming users would prefer to hold BTC. Such a scenario seems plausible given that BTC is one of the most liquid assets within the crypto markets.

Moreover, linking BTC to LUNA could lead to synergies for all crypto users. BTC users will benefit in that BTC is now further linked to DeFi activities via the UST/Terra ecosystem and that they now have access to a decentralized stablecoin, should they need it. UST users benefit in that their previously “unbacked” stablecoin is now backed by pristine, decentralized collateral (BTC).

Ushering an Era of BTC-backed Coins?

Through this, UST is evolving into a partially backed algorithmic stablecoin. Considering that UST has a market cap of $12.9 billion as of writing, the potential consequences of adopting BTC as a reserve are profound — we have never seen a partially backed algorithmic stablecoin of this size. This could mark the start of an era of bitcoin-backed tokens as users opt for true decentralization in light of global uncertainty.

It’s unclear, however, how this BTC reserve will work. Will it involve native or wrapped BTC? Moreover, will regular users be able to access it or is it OTC?

There have been few details on the aforementioned questions from the LFG, with the press release stating more details would be released in the coming weeks. But this could very well involve THORChain — a decentralized liquidity network of native assets, which may be the only platform that allows users to swap cryptoassets to UTXO chains like Bitcoin in a trustless, non-custodial manner. It just so happens that native UST and LUNA are reportedly being added to THORChain over the next couple weeks, which will allow users to swap directly from native UST or LUNA to native BTC. It is possible a portion of UST’s new $1 billion BTC reserve will be deposited by LFG into THORChain, potentially creating a very deep pool of BTC liquidity for users to trade UST with. Maybe there will be a special Terra-focused front end that connects to THORChain just for this purpose.

The opinions expressed in the CrossTower Classroom are those of the author(s) and not necessarily that of CrossTower. We appreciate diverse perspectives of our employees and we thank them for having a voice.


CrossTower Inc. provides this content for general information purposes, to better inform you on your digital asset investment journey. We do not provide investment recommendations or provide tax advice. Please consult your investment professional or tax advisor if you require assistance in these areas.

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