Once again the price of Terra (LUNA) surpassed $55 as it attempted to regain a bullish trend.
At the time of writing, the price stood at $61.56, reflecting a 13.18% increase over the past 24 hours. During the day the coin reached a high of $63.99 and a low of $52.71.
Why is Terra (LUNA) rising?
One of the main drivers behind Terra (LUNA)’s rise was the recent $1 billion raise by the Luna Foundation Guard (LFG) through an over-the-counter sale of LUNA to build a Bitcoin-backed reserve for UST.
For context, LFG is a non-profit organization launched in early January 2022 to support development and stability within the Terra ecosystem.
Participants in the LUNA sale included firms such as Three Arrows Capital, Jump Crypto, DeFiance, Tribe Capital, GSR and Republic Capital.
Reports indicate that LFG chose a Bitcoin-dominated reserve because Bitcoin is less correlated with the Terra ecosystem, which could help reduce systemic risk.
How the UST reserve works
Terra’s native stablecoin UST is a widely used algorithmic stablecoin in DeFi ecosystems. It does not rely on traditional collateral to maintain its peg and was one of the first of its kind; its market capitalization exceeds $22 billion.
According to Terra:
“When demand for Terra is high while supply is limited, Terra’s price rises. When demand is low and supply is excessive, Terra’s price falls. The protocol ensures that Terra’s supply and demand are always balanced, which leads to a stable price.”
New stablecoins on Terra can be minted by burning LUNA, or conversely LUNA can be minted by burning UST. A key challenge of this mechanism is the hypothetical risk of a “bank run” scenario and the system’s reflexive properties.
Regarding the choice of Bitcoin as the reserve asset, LFG said:
“While broad adoption of UST as a consistently stable asset through market volatility should already counteract this, a decentralized Reserve can provide an additional pathway to preserve peg strength during contractionary cycles, which reduces the system’s reflexivity.”