Terra's BTC Reserve: Will It Turn Out to Be a Game Changer?

[Xangle Digest] 
By Moon Bit
Translated by elcreto

Summary

• Terraform Labs CEO Do Kwon announced that Luna Foundation Guard (LFG) has created a US$10B BTC reserve, buying a total of 27,784 BTC.
• According to the proposed Bitcoin reserve model, the reserve is expected to prevent the UST price from falling below $0.98 as well as a subsequent bank run.
• While the creation of the BTC reserve has helped enhance both stability and value of the Terra ecosystem, the fundamental question over sustainability remains unaddressed.

BTC Reserve, Terra's Game-Changing Move

On Mar 14, Terraform Labs CEO Do Kwon revealed a plan to grow its BTC reserve to US$10B. In a move towards its planned reserve, LFG has been purchasing BTC and on Mar 28 alone, it bought 2,830 BTC, raising the total to 27,784 BTC. It is expected to keep purchasing up to US$3 billion in the short run until the reserve reaches US$10B. As of Mar 30, LFG's BTC wallet is the 32nd largest among all BTC wallets.

The fundamental value of the Terra ecosystem depends on the stablecoin UST, which is the foundation of the ecosystem. Simply put, the higher the demand for UST is, the bigger the Terra ecosystem will be. In the early days of the project, the Terra Alliance helped facilitate the initial demand whereas the UST deposit pool on Anchor Protocol with an APY of nearly 20% came as the second momentum.

In its quest for the third momentum, issues have been raised over Anchor Protocol’s depleting yield reserve, UST depeg caused by the growing market volatility and limited demand for UST—all of which could potentially pose a risk to the entire ecosystem. Addressing such concerns, Terra is taking steps, including an increase in its yield reserve and creation of the BTC reserve.

Oftentimes, Layer 1 is likened to a country while dapps built on it to companies. The value of UST-LUNA, the currency used by the 'country' called 'Terra,’ can plummet at any time due to external factors. For example, if an external factor sets off a trigger and holders start to dump UST and LUNA, there may be a mass withdrawal of UST. In this context, Terra’s introduction of the BTC reserve is interpreted as an attempt to stabilize UST and the Terra ecosystem and prevent such ‘bank run’—which looks much like a country that increases its U.S. dollar reserve and enters into a currency swap. Moreover, Terra may also be able to expand the Bitcoin ecosystem with the BTC reserve. With the arrival of a link between BTC and UST, Terra is poised to broaden its ecosystem to involve the Bitcoin ecosystem and positive relationship with the Bitcoin community.

Currently, at Terra’s public forum Agora, a governance proposal for a reserve model that utilizes the BTC reserve is under discussion. The model centers around the idea of using the reserve temporarily at a time when UST fails to keep its dollar peg, allowing 1UST to be exchanged for $0.98 worth of Bitcoin. According to this model, the reserve is designed to prevent UST from falling below $0.98 unless the BTC reserve is depleted by inducing arbitrage trading upon a sudden bank run or UST price slump.

Persisting Problems that Remain Unaddressed

Still, Terra remains grappling with the recurring issue of its yield reserve. Concerns have been raised over the sustainability of the high yield of Anchor Protocol and the demand for UST biased towards Anchor Protocol, which remain unresolved. (This was covered in “Will Terra’s Anchor Protocol Continue to Cruise Ahead Despite the Yield Reserve Issue?”) Only when a higher UST demand arises other than from Anchor Protocol or when Terra’s income surpasses the amount of yield payable, will Terra be able to shake off the underlying concerns about its ecosystem.