The "proactive strategy"
On Monday, May 9th, LFG announced a “proactive strategy” to maintain the peg. LFG plans to decentralize its reserve strategy through a BTC reserve architecture developed by Astroport, with the testnet being “a few weeks away from launch” – but the foundation had to act now. Shortly after the proactive strategy was communicated, UST once again faced problems with maintaining its peg – the proactive strategy was viewed as a confirmation that the foundation was indeed willing to activate its reserves and perform discretionary open market operations to maintain the peg. UST traded for a while at around $0.95, before declining to $0.9. Then the sell-off accelerated, leading UST to trade at lows of $0.6 – well, well, well below its $1 peg. The entire UST peg ordeal felt like a clash of titans. Certain entities with the financial chutzpah to challenge the UST peg are illustrating – in real-time - the structural risks related to UST’s structure and reserve strategy. For now, the barbarians at the gate seem to win, while LFG depletes its BTC reserves in the violent battlegrounds of the market as we illustrate below.There are three major takeaways to learn from the current UST situation
- Algorithmic stablecoins involve structural risks. Regulators should be aware of these when building a framework vs. stablecoin providers such as Tether and Circle.
- BTC reserves (at least at a ratio of $3bn to $18bn market cap) are not sufficient in building confidence related to maintaining a peg.
- UST is currently far from being a decentralized stablecoin. The active involvement from LFG in the last few days confirms this.
Luna Foundation Guard’s BTC reserves reaches 80,000 BTC... and its gone?
The Luna Foundation Guard’s BTC reserves reached its initial target of $3bn after a massive $1.5bn purchase last week, leading LFG to briefly hold 80,394 BTC. Fast forward five days, and the entire reserve has been lent to market makers seeking to save the UST peg amid the unfolding UST turmoil.Preview