In recent weeks an interesting relationship has begun to blossom between multiple cryptocurrencies. Terraform Labs, the group behind stablecoin TerraUSD (UST -0.29%) and cryptocurrency Terra (LUNA -1.17%), have been on the frontline of innovation for quite some time. Recent developments insinuate that they do not plan on slowing down.
Terraform Labs announced in March that they will start purchasing Bitcoin (BTC -2.43%) as a reserve asset to back UST. In the event that UST deviates from $1, then Bitcoin could be used just like LUNA is now to stabilize the price. Founder of Terraform Labs, Do Kwon, tweeted out that the end goal is for a reserve of $10 billion worth of Bitcoin. They currently hold around $1.6 billion and will purchase more intermittently. The group now owns more Bitcoin than Tesla does.
How it all works
Terraform’s ecosystem of UST and LUNA is unlike any other blockchain. UST maintains its value of $1 US dollar by using an algorithm. Instead of keeping a reserve of US dollars to maintain stability, like Tether or USDC, the algorithm either adds or destroys LUNA.
When the price of UST begins to increase, LUNA holders can sell their coins for a profit. Their LUNA coins are converted into UST and they are paid out with the new UST. Subsequently, the newly issued UST lowers the price back to a dollar.
If UST slips below one dollar, holders of UST can convert their holdings into LUNA. With less UST in circulation the price rises back to one dollar. The algorithm is always trying ensure UST is worth one dollar.
This can be slightly complicated. However, understanding the dynamic between UST and LUNA is most important. If no one wants to exchange their LUNA or UST when prices are out of balance then the stability of UST is at risk. Without UST being worth $1 then the LUNA coin becomes less attractive to hold as well. The recent announcement of adding Bitcoin introduces another layer of protection to ensure that UST is worth one dollar. Now Bitcoin can be used to maintain this balance just like LUNA.
The perfect match
For many years Bitcoin was portrayed as a speculative asset. Yet today, Bitcoin is being purchased as a reserve asset to back another cryptocurrency. These purchases represent a milestone for just how far Bitcoin has progressed in the last decade. The king of cryptocurrency isn’t going anywhere any time soon.
Furthermore, this has all unfolded in an extremely timely fashion. In the last few months LUNA has hit many new all time highs. These all time highs likely reflect the growing popularity of LUNA as a favorite for DeFi developers. It now holds the second largest Total Value Locked (TVL) among all DeFi blockchains. Just a year ago LUNA only captured 3% of the DeFi market. Now LUNA accounts for roughly 14%. As LUNA has grown so has UST. It recently became the third largest stablecoin by market cap, just behind Tether and USDC.
Here for the long haul
It is common for memecoins and other cryptocurrencies to rise and fall as they gain and lose popularity. But the growth of the Terra ecosystem is astounding and isn’t just some fad. The Terra blockchain hosts a variety of DeFi apps (dApps) that serve many different utilities. Chai is a popular payment platform for e-commerce due to its extremely low fees. There are lending and borrowing dApps like Anchor that offers nearly 20% interest rates on holdings. And even better, the ecosystem will now integrate the world’s largest and most valuable cryptocurrency, Bitcoin. Further growth might be explosive.
There is unique potential for all three of these cryptocurrencies. Incorporating Bitcoin is an ingenious way to solidify the LUNA/UST ecosystem for years to come. Investors should expect new use cases of LUNA in DeFi to continue to expand. Holders of UST will be rewarded as a direct result of its relationship with LUNA. And best yet, Bitcoin has proven that it might just have what it takes to be the reserve currency for other cryptocurrencies.