TerraUSD (UST) is fast becoming the leading stablecoin based on dollar algorithms. To counter fears of losing ties, the protocol is in the midst of a $10 billion plan to diversify treasury reserves with bitcoin and other digital assets.
Arithmetic stablecoins They are not associated with collateral, unlike their centralized counterparts. Therefore, they are also referred to as unsecured stablecoins. The algorithm or protocol underlying these stablecoins acts as a “central bank.” terra one uses A token burning mechanism that provides financial incentives for arbitrators to maintain the currency’s peg to the dollar. To further hedge residual risk, founder Do Kwon announced $10 billion worth of Bitcoin purchases. Over the past few weeks, Terra Protocol has already invested 1.7 billion in Bitcoin (42,500 BTC) and entered the top 20 largest Bitcoin holders.
Rapid growth exacerbates the risks
The Terra blockchain, with its UST stablecoin and several DeFi applications, has established itself as one of the fastest growing cryptocurrency ecosystems. Much of the demand comes from the Anchor savings protocol, which offers a very attractive stablecoin yield of around 20% per annum. Today, more than $15 billion in digital assets have been deposited on Anchor, making the savings protocol the third largest DeFi app by total value deposited (TVL).
However, the rapid growth of the Terra ecosystem also increases the risk of losing bonds. Since USTs are directly correlated with the LUNA token, large fluctuations in price can greatly affect the correlation. like this Loss of attachment has occurred During the general market recession on May 23, 2021 when only $2 billion was covered by $1.6 billion in LUNA. The bond could only recover when Terraform Labs and other investors bought the LUNA device and got back the 1:1 dollar price. A similar event would be devastating with the current number of deposited assets.
Treasury diversification with bitcoin
Investors often refer to bitcoin as “digital gold”. in groups with Many advantages For the precious metal, crypto assets have established themselves as one of the most efficient stores of value. Against this backdrop, Terra has now also decided to hold a portion of its reserves in Bitcoin.
P2P e-cash is easier to spend and more attractive to keep #btc
– Is Kwon? (stablekwon) March 14, 2022
These decentralized cryptocurrency reserves are intended to back the Terra blockchain UST stablecoin and be used to hedge short-term cryptocurrency payments. in numerous purchases invest The protocol has already placed $1.7 billion in cryptocurrency. This gives Terra the second largest Bitcoin company reserves after MicroStrategy ($3.9 billion).
Systemic risk to the industry
Terra’s $1 billion purchase offers a hedge to the original stablecoin UST. But if the Terra peg mechanism fails, part of the Bitcoin reserves will therefore have to be exchanged for US dollars. Thus, according to some voices, the potential liquidation of these reserves could create a huge risk for the entire cryptocurrency industry.
With 10 billion bitcoins, Terra Protocol will be right next to the pseudonymous founder Satoshi Nakamoto Largest Bitcoin holder. Selling pressure of this magnitude will inevitably lead to significant price declines even if the currencies do not expire in the open market. Do Kwon himself is aware of this, but seems to interpret it as an advantage for his project.
Together with Satoshi, we will be the largest single owner of BTC dollars In the world”
“to fail UST equivalent to encryption failure itself”
Legomakers? (tlagomi) March 29, 2022