DeFi

$4B non-profit established to stabilize UST stablecoin

With a market cap of more than $170 billion, stablecoin adoption is exploding. The total market of stablecoins grew 450 percent in 2021 alone. Stablecoins are viable internet-native mediums of exchange between public blockchains, and act as the base layer and collateral for the DeFi space.

The dominant stablecoins on the market today, USDT and USDC, are digital tokens pegged 1:1 to the U.S. dollar by maintaining a reserve backing in the form of cash or cash equivalents. In the case of USDT, issued by Tether, the true nature of the reserve is still a subject of debate.

4 billion dollar donation

There is, however, another issue regarding dollar-pegged stablecoins: they are centralized to the issuers, and users are subject to issuers terms of use. Just the other week, Tether froze three Ethereum addresses holding $150 million in USDT. Regardless of the justification in individual cases, it’s not an ideal situation from a decentralization or permissionlessness standpoint.

To address the centralization challenge, a number of crypto projects are developing decentralized stablecoin. With a current outstanding market cap of nearly 11 billion (rank 16 by market cap), TerraUSD (UST), developed by Terraform Labs, is now the leading decentralized stablecoin in the market, and the 4th overall behind USDT, USDC, and BUSD. The second decentralized stablecoin DAI ranks number 30 with a $9.3 billion market cap.

To further support and stabilize UST’s peg to the U.S. dollar, the newly announced Luna Foundation Group LFG will initially be funded with a 50 million LUNA ($3,97 billion at the moment of writing) gift from Terraform Labs to help bootstrap its stabilizing reserves and grants framework.

The planned execution from the Terraform Labs wallet is scheduled for the 22nd of January. According to the blog post announcement, the transaction hash will be shared publicly once complete for transparency.

Mission to stabilize the stablecoin

As per the blog post by Terraform labs, LFG’s core mandate “is to buttress the stability of the UST peg and foster the growth of the Terra ecosystem. Building reserves that backstop the peg of algorithmic stablecoins amid volatility and funneling resources into research that further advances what’s possible with stablecoins are only just the beginning.”

“The LFG will also allocate grants for builders, researchers, community members, and anyone else pursuing bold ideas in the interest of the Terra economy. Establishing a non-profit organization unlocks a new pathway for the future development of a decentralized economy built on truly decentralized money.”

Initially, LFG will be overseen and operated by a governing council, composed of “leaders and experts” in the industry. Taking seats in the council will be Do Kwon, co-founder and CEO of Terraform Labs; Nicholas Platias, founding member of Terraform Labs; Kanav Kariya, president of Jump Crypto; Remi Tetot, co-founder of RealVision; Jonathan Caras, project lead at Levana Protocol; Jose Maria Delgado, co-founder of Delphi Digital; and Bill Chin, head of Binance Labs Fund.

Supporting the peg and grants to developers

Terraform Labs official Twitter account posted that “LFG is a non-profit organization mandated to build reserves supporting the UST peg amid volatile market conditions and allocate resources supporting the growth and development of the Terra ecosystem.”

“Initial target areas for LFG include driving awareness of blockchain technology, building out educational programs, allocating grants funding product development, and providing transparency to online communities about ongoing activities and projects.”

Do Kwon, co-founder and CEO of Terraform Labs tweets: “As UST grew to become the largest decentralized money in crypto, two questions popped up most frequently: Is UST sufficiently collateralized, and is the Terra network sufficiently decentralized? LFG is a strong start to answering both.”

“Expect fewer cockroaches”

Do Kwon also comments on the substantial donation of nearly four billion dollars from Terraform Labs to LFG to bootstrap the foundation, and the purpose of the funds.

“Terraform Labs is donating $50 million luna to LFG to focus on the stability and adoption of UST, and to cement its place as the undisputed leader in decentralized money across all blockchains. Right now that’s $4 billion worth of assets – what to do?”

“Concretely, LFG will be doing two things: First, building a decentralized forex reserve against which UST can be redeemed during currency contractions. It will work towards reserves to operate decentralized and onchain. Expect fewer cockroaches. Second, LFG will be funding public goods projects via grants, and will be a counterweight to Terraform Labs in the Terra ecosystem,” Kwon tweets.

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