There's been a lot of money flowing into crypto recently, with $100 million+ funding rounds becoming relatively commonplace. But a recent over-the-counter token sale has taken it to another level.
Terra and the Luna Foundation Guard (LFG), a nonprofit organization designed to support the Terra network, today announced a $1 billion token sale of LUNA led by Three Arrows Capital—headed by sometimes-Ethereum critic Su Zhu—and Jump Crypto—the same trading group that made Solana cross-chain bridge Wormhole whole after a $320 million hack.
The foundation did not respond to Decrypt's questions about the specifics of the raise, including whether the funds were raised directly in Bitcoin. Given the market downturn, the value of the raise could be less than $1 billion, depending on when the raise occurred.
LFG will use the funds to create what it calls a UST Forex Reserve. To understand why, you have to understand a bit about the Terra ecosystem, which includes both the native LUNA token and fiat-based stablecoins.
1/ The long awaited [REDACTED] 💎3 is here!
📣 The Luna Foundation Guard (LFG) has closed a $1 billion private token sale to establish a decentralized $UST Forex Reserve denominated in $BTC! 📣
— Terra (UST) 🌍 Powered by LUNA 🌕 (@terra_money) February 22, 2022
TerraUSD (UST) isn't backed by greenbacks but instead is tied to LUNA. Whenever someone mints UST, they must burn LUNA. A whole tokenomic structure is designed to keep the price steady. If the price of UST dips below $1, users can purchase that UST at a discount and trade it for $1 of LUNA. The arbitrage play means the UST gets burned, helping bring the stablecoin's price back to normal.
But stablecoins not backed by fiat have lost their peg before when the algorithms haven't matched up with the short-term needs of traders, as was arguably the case with Iron Finance last June.
"One of the common criticisms of algorithmic stablecoins is their reflexive nature during extreme volatility, where the arbitrage incentives to bring the peg back to parity can potentially deteriorate," writes LFG in a press release. "The UST Forex Reserve provides an additional avenue to maintain the stability of the peg in contractionary cycles that reduces the reflexivity of the system."
The reserve, denominated in Bitcoin, diversifies the ecosystem away from Terra assets and provides what LFG calls "a release valve for the redemptions of UST" into LUNA. LFG says it can dip into the Bitcoin reserves to stabilize the market in cases of sell-offs. It adds that it plans to include other "major non-correlated assets" to the reserve in the future.
According to the organization, Jump Crypto, Three Arrows, and other buyers in the $1 billion sale will be subjected to a four-year vesting period for the LUNA tokens, meaning they can't all be dumped on the open market right away. Further details about the vesting schedule have not yet been given.
The Luna Foundation Guard was founded by Terra co-creator Do Kwon and Terraform Labs head of research Nicholas Platias. The governing council includes Jump Crypto President Kanav Kariya, Real Vision co-founder Remi Tetot, Levana Protocol communication lead Jonathan Caras, and Delphi Labs leader José Maria Macedo.