Terraform Labs Intervenes To Address UST Reserve Imbalance

The recent spike in demand for UST has led to a pool imbalance on Curve Finance and other decentralized platforms, resulting in a need for intervention.

Terraform Labs CEO and Founder Do Kown announced on Friday that TFL has donated around 12 million LUNA, worth $1.1 billion at the time, to the Luna Foundation Guard (LFG).

LFG launched in January with the aim of growing the Terra ecosystem and improving the sustainability of its stablecoins. Kwon also noted that the funds, denominated in LUNA, will be burned so that UST can be minted to grow the LFG’s reserves.

UST is an algorithmic stablecoin which, theoretically, maintains a 1:1 peg with the U.S. dollar. The exchange rate between UST and USD, Terraform’s algorithm mints or burns UST. The burning of $1 in UST results in the minting of $1 in LUNA, and vice versa.

However, the recent high demand for UST on decentralized platforms such as Curve Finance has resulted in unbalanced pools for swapping stablecoins. Without Terraform Labs’ intervention, it would only be a matter of time before the pool’s reserves become completely depleted.

This will cause high levels of volatility in UST’s price as supply starts to lag behind demand.

Just recently, TFG had already voted on burning the 4.2 million LUNA left in its treasury to protect UST’s peg, according to TFG who announced,

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.