The Terra Foundation recently augmented its reserves with around $230 million in bitcoin to reinforce its terraUSD stablecoin.
Do Kwon, founder of Terraform Labs and Terra’s chief executive, posted a seemingly whimsical-sounding status message on Twitter on April 6th. He nonchalantly spoke of his day’s chores and that he had purchased $230 million worth of bitcoin. The purchase was made through the Luna Foundation Guard, Terra’s non-profit group, and will bolster Terra’s bitcoin reserves.
This most recent purchase brings Terra’s total bitcoin assets to around $1.6 billion. It is seen as a step closer to the company’s target of $10 billion in bitcoin reserves for terraUSD.
What are stablecoins?
The terraUSD token is a stablecoin, a form of digital currency pegged to specific assets like the US dollar or the UK pound sterling. Of late, the popularity of stablecoins has risen considerably as these are seen as a more stable and sensible investment than most cryptocurrencies characterized by volatility. Interestingly, terraUSD is not pegged against the US dollar despite its name.
According to a statement from the Luna Foundation Guard, terraUSD and other stablecoins created by Terra are maintained through a series of open-market operations, arbitrage incentives, as well as dynamic protocols. In doing so, Terra can keep its peg stability robust and can easily scale its supply up or down sans centralized control mechanisms.
To go into specifics, terraUSD is referred to as an algorithmic stable coin that uses a swap mechanism to keep its value at $1. This algorithm systematically burns or destroys luna tokens to create new terraUSD coins. Those who hold luna coins can swap $1 in luna for $1 terraUSD.
In principle, this would hike up the scarcity of luna tokens to keep the value of terraUSD at $1. Consequently, if the value of terraUSD dips below a dollar, the opposite happens. Either way, the value of the stablecoin stays at $1.
TerraUSD is the fourth largest stablecoin by market value, close on the heels of tether, USDC, and Binance USD.
The luna coin itself has been performing well of late. Last week, the value of the cryptocurrency hit an all-time high of around $119. While its performance has slowed somewhat in the past several days, it is still up by 4.34% and is trading at $109.67 per token.