Do Kwon, the founder of Terraform Labs, which powers the Terra ($LUNA) blockchain, has said he believes the Bitcoin ($BTC) market is liquid enough to handle a potential loss of Terra’s flagship stablecoin $UST.
In an interview with Bloomberg Quicktake, Do Kwon said that “people need to have a little bit more faith in crypto,” before adding that Bitcoin “turns over more than $20 billion per day” and that with time he sees it becoming “even more liquid.”
Kwon, as reported, has suggested the Terra Protocol will be one of the largest holders of the flagship cryptocurrency as the project creates its BTC-denominated reserves to build an additional layer of security for its decentralized stablecoin. Terraform Labs has plans to accumulate $10 billion worth of Bitcoin to add to the project’s stablecoin reserves.
UST is a decentralized stablecoin used to facilitate trading n cryptocurrency exchanges, the same way other stablecoins like DAI, USDC, and USDT are used. UST, however, does not have formal backing and instead relies on LUNA to maintain its peg.
The stablecoin’s value s fixed through the minting and burning of LUNA as users can always swap $1 worth of LUNA for 1 UST and vice-versa.
If the price of UST drops below $1, it can be swapped for LUNA and sold for $1, making it attractive for arbitrage traders. If it goes over the $1 mark, LUNA token holders can trade tokens for 1 UST for a profit. LUNA is minted and burned to enable these transactions.
To bolster UST’s security, the Luna Foundation Guard ($LFG) has purchased more than $1.4 billion worth of BTC for its reserves. Kwon said:
Even if a stablecoin were to de-peg over time and those reserves would be used to defend that peg. I think [the Bitcoin market] would more than easily be able to absorb the Bitcoin that enters the market.
Kwon has detailed that after an initial $3 billion purchase, more Bitcoin will be added to UST’s reserve through seigniorage, or the use of profit made while issuing UST because of the difference between its face value and production cost.
The founder of Terraform Labs added that it’s important to remember Terra “is a decentralized stablecoin in the sense that it has no issuer.” Per his words, holding centralized collateral such as bonds, USDT or USDC would mean that “whoever is holding the largest amount of these reserves would be subject to censorship.”
Last month, Kwon defended that UST is going to be the first internet-native currency to implement a Bitcoin standard as part of its monetary policy.
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