The Luna Foundation Guard continues to accumulate funds in its vault. Indeed, on Thursday, Terraform Labs, the organization behind Terra and the UST, gave it $880 million in LUNA tokens. LUNAs that will probably be burned, but that help consolidate the cash flow of the Terra ecosystem.
$880 million for the Terra ecosystem
Terraform Labs, the organization behind UST, Terra’s stablecoin, “gifted” $880 million in LUNA to the Luna Foundation Guard (LFG) on Thursday.
TFL has gifted an additional 10 million $LUNA to the @LFG_org https://t.co/tNirkgGGm0
– Terra (UST) Powered by LUNA (@terra_money) April 14, 2022
The Luna Foundation Guard is responsible for ensuring the UST’s reserves and balance in order to keep it pegged to the US dollar. Do Kwon, Terra’s founder and CEO, announced last month that he wanted to build up a $10 billion reserve in Bitcoin (BTC), among other things, to secure the UST.
This is a considerable figure, but one that is still commensurate with the growth of Terra’s ecosystem: LUNA is in 9th place in the cryptocurrency rankings with a market capitalisation of $29 billion, while UST is in 14th place with $17.2 billion. One of the reasons for UST’s success is the unheralded Anchor protocol, which currently provides a 19.5% return on stablecoin.
The new funding comes just days after the Luna Foundation Guard was to endow itself with 4,130 BTC, or $176 million at the time of the transaction, to fill its vault.
With 42,530 BTC, Terra now holds the third-largest Bitcoin wallet in the entire ecosystem behind MicroStrategy and Tesla, the first and second largest respectively.
Fig. 1: Ranking of companies with the largest Bitcoin holdings
At current prices, Terra’s Bitcoin holdings are currently worth $1.7 billion. According to Do Kwon, Terra’s next step is to own $3 billion in total value.
Terra’s cash strategy
Firstly, in order to delve deeper into how Terra’s treasury is built, it is worth recalling how its ecosystem works.
LUNA, Terra’s token, is not a stablecoin and is therefore inherently subject to unpredictable market volatility. In order to keep the UST pegged to the dollar, Terra burns LUNA tokens to rebalance the UST price when it is subject to slight fluctuations.
However, in order to avoid a critical devaluation of the LUNA tokens in the event that a large number of people decide to exchange their USTs for LUNA at the same time, Terra has decided to diversify the assets of its treasury.
Fig. 2: Asset allocation of the Luna Foundation Guard treasury
Bitcoin, which is inherently better structured and more established than LUNA due to its age, now accounts for the largest share of the LFG’s cash holdings. As shown in the figure above, the foundation also holds 398.6 million USDC and 151.2 million USDT.
To further diversify its reserves in order to consolidate against the volatility of the cryptocurrency market, Terra also plans to add $100 million of AVAX, the Avalanche blockchain cryptocurrency, to its treasury.
