Intervention was required as high demand for the stablecoin UST caused a severe pool imbalance on Curve Finance. In light of this need, yesterday (March 11, 2022), Terraform Labs (TFL) founder and CEO Do Kwon announced TFL donated 12 million LUNA tokens (valued at $1.1 billion) to the Luna Foundation Guard (LFG) to address the imbalance. LFG was formed in January 2022 for the purposes of growing the Terra system and improving the sustainability of the stablecoins offered by Terra.

It should be noted that two days prior to this (March 9, 2022), LFG voted to burn the 4.2 million LUNA remaining in its Treasury to protect the peg of UST.

In making the announcement, Kwon disclosed that the Luna tokens would be burnt to mint new UST to bolster the reserves held by LFG. Kwon noted: “We will keep growing reserves until it becomes mathematically impossible for idiots to claim de-peg risk for UST" [Pandey, A. Luna Foundation Guard receives $1.1B worth donations from Terraform Labs for its reserves. (Accessed March 12, 2022)].

UST is an algorithmic stablecoin of Terra, possessing a theoretical 1:1 exchange rate with the US Dollar. This peg is, in part, maintained through the swapping of or for LUNA tokens when a deviation from peg presents. Burning a dollar of UST results in the issuance (minting) of a dollar of LUNA - and the reverse is true as well [See, Nagoda, K. How does Terra (LUNA) work?. (Accessed March 12, 2022)].

High demands for UST on the various DeFi platforms (including Curve Finance) cause unbalanced pools for swapping amongst the various stablecoins. As swaps of other stablecoins are made for UST, reserves within the pool deplete causing volatility in price as supply lags demand. To rectify the current pool imbalance, according to TFL: “LFG will swap the LUNA to UST (swap=burn) and sell the UST to the Curve pool… The proceeds will go back to LFG reserves to purchase BTC" [Pandey, supra].

UST is a highly sought after stablecoin, due in large part to Anchor Protocol. Anchor pays up to 20% yield on UST savings deposits, so the coins popularity is evident. However, this popularity caused Anchor some recent problems as well. Anchor is still currently experiencing an imbalance of depositors and lenders paying interest with its reserves declining. This is so even though Anchor received 450 million UST from the LFG on February 18, 2022.

AUTHOR'S NOTE: This article was previously published on Leo Finance and several other tribes on the Hive blockchain.