Direct from the desk of Dane Williams.
Questions around the almost too perfect, $1 billion BTC reserve for UST, still remain.
With both the markets and our own community having digested the news of UST's $1 billion BTC reserve, the news has been met with overwhelmingly positive sentiment.
But viewing the news of this reserve through my Hive-tinted glasses, I can’t help but feel this may not be all rainbows and butterflies like the relentless Terra PR machine has successfully painted it.
At the very least I feel there are a few questions going unanswered and wanted to dig a little deeper on what the fund means for Terra (LUNA)’s decentralisation.
How UST currently maintains its peg
First up, let’s go over a quick refresher on how Terra’s algorithmic stablecoin UST, currently maintains its peg.
So Terra's swap function allows you to always swap $1 worth of LUNA for 1 UST (and vice versa).
Depending on which direction you're going, LUNA or UST is burned to maintain the price peg.
As we've seen, the function works great when prices are trending up.
But when prices are going down and people are forced to sell their UST as well, price can spiral downward as the opposite token gets minted instead of burned.
How the $1 billion BTC reserve helps UST maintain its peg
So with the above in mind, Terra adding a $1 billion BTC reserve to help UST maintain a peg is designed to help stabilise the stablecoin during periods of market volatility.
What this BTC fund essentially does is minimise the risk of a death spiral by giving the function an alternative to minting/burning LUNA.
Instead of being required to mint LUNA to arbitrage UST's price, it offers an option to swap UST to BTC instead.
While this all sounds like rainbows and butterflies for both the price prospects of LUNA and UST, there are a few questions that I think need more discussion.
Who paid for the BTC and controls this fund?
When it comes to algorithmic stablecoins, all that will matter in the end is being decentralised to the point where they’re completely untouchable by regulators.
In terms of who controls the fund and paid for the BTC, that would be the Luna Foundation Guard (LFG) on the back of VC money..
The LFG, a 'nonprofit organisation', hosted one of the biggest private token sales in the crypto world, raising $1 billion from several VC companies.
But with Terra’s Do Kwon vs the SEC battle raging on, is using VC money to finance a single company (don’t give me this foundation bullshit) backed ‘fund’, really a good thing?
Keeping in mind that UST is meant to be the premier, decentralised algorithmic stablecoin on the market today.
How and when does the function decide whether to swap LUNA or BTC?
Now we know where the money came from and who controls it, I think it’s entirely fair to question how UST can call itself the best decentralised algorithmic stablecoin, when one of their price stabilisation mechanisms puts them at the mercy of VC money?
No, the $1 billion BTC reserve doesn’t affect the core relationship between UST and LUNA, but it adds a level of centralised discretion that completely goes against everything we need.
They say it is:
"...to be used by the foundation in times when the natural stability mechanisms of the token fail due to extreme market conditions.”
“Such as caused by a hypothetical bank run on the native coins of the Terra ecosystem."
Again, so essentially they’re a company using VC money at their discretion.
How is this an industry positive path for UST to be going down?
Unanswered questions around UST's $1 billion BTC reserve
With this in mind, there are a few more questions which I want to throw out to the LeoFinance community to answer in the comments section.
- What are the VC companies getting in return for stumping up this capital?
- Could the reserve still 'run out' during a dip and a UST + LUNA downward price spiral continue?
- How does this entire mechanism compare to what Hive Backed Dollars has in place?
Leave a comment and let's provide some genuine critical analysis to the news.
Best of probabilities to you.