Key Takeaways:
- Ethereum competitor Terra prepares to back its UST stablecoin with BTC instead of USD
- The platform's chief executive mentioned that Terra plans to buy out $10 billion worth of Bitcoin
- The "symbiotic relationship" could be potentially beneficial to both cryptos, setting a precedent of a BTC-pegged stablecoin
YEREVAN (CoinChapter.com) — Stablecoin issuance platform Terra stirred the crypto community by purchasing $125 million worth of Bitcoin (BTC) and further extending the purchasing plans to $10 billion to ensure a Bitcoin reserve for its main stablecoin, TerraUSD (UST).
In detail, UST is currently pegged to the U.S. dollar, backed by Terra’s governance token LUNA. The latter absorbs the volatility of the fiat-pegged stablecoin and has to be burned to create new UST coins. First, however, it is essential to back up a few days to unravel the story behind BTC-pegged UST.
Terra starts a Bitcoin reserve
Terra’s chief executive, Do Kwon, announced the blockchain’s intention to open “a new monetary era” on Mar. 14 and gradually buy up $10 billion worth of BTC. As a result, Terra might have been responsible for BTC’s 6% price jump on Tuesday, as the alpha crypto hit over $43,000.
If there is any confusion left at this point, we will keep growing reserves until it becomes mathematically impossible for idiots to claim de-peg risk for UST.
added the developer.
Also read: Terra eyes a new record high after LUNA’s 35% rally in 48 hours.
Subsequently, crypto enthusiast and podcaster Luke Martin linked the two events as he detected a single $125 million BTC purchase.
Moreover, entrepreneur and outspoken Bitcoin supporter Anthony Pompliano commented on UST’s possible Bitcoin peg, calling it a “crypto experiment worth paying attention to.”
BTC the new gold standard for stablecoins?
In retrospect, most fiat currencies used to be backed by gold reserves (gold standard). Thus, by entering into a ‘symbiotic’ relationship with Bitcoin, Terra could create a blockchain equivalent of the gold standard, backing its stablecoin with ‘digital gold,’ aka Bitcoin.
In detail, Luna Foundation reserves count approximately $3 billion in Bitcoin, Tether, and LUNA. However, the platform will slowly convert most of the mentioned reserves to BTC. Thus, the team will no longer burn all of the LUNA to create UST.
Instead, Terra will burn 60% of the LUNA tokens, and use the remainder to purchase Bitcoin, adding Bitcoin-backing to the UST coins in circulation. Mr. Pompliano further commented on the process:
The math shows that UST won’t be 100% backed by bitcoin initially. The idea is that over time, bitcoin’s price will continue to rise and will eventually pull in-line with the outstanding value of UST. There is a strong likelihood that the bitcoin-backing will actually exceed the UST value over a long enough timeline.
said the entrepreneur in his newsletter.
Also read: Bitcoin ‘death cross’ spells more trouble as BTC risks decline to $30K.
He also added, that the ‘symbiotic relationship would benefit both Bitcoin and Terra. While Terra would become a new demand for BTC, the latter will get a “credible layer two.”
There is a lot of conversation around what bitcoin can and can not do, but now it is becoming obvious that bitcoin’s role as pristine collateral opens a world of possibilities.
commented Mr. Pompliano.
