Robert Steinadler, a year ago

Terra is adding Avalanche to its UST reserve

TerraUSD (UST) is the most important factor contributing to the success of Terra which became some sort of backbone in the Defi economy. The most recent moves of Terras founder Do Kwon and the Luna Foundation Guard have already turned some heads.

How is Terra adding AVAX to its UST reserve? How much did they buy? And what is going to be the impact of that decision?

TerraUSD is secured by a reserve

The UST reserve is under the wing of the non-profit organization called Luna Foundation Guard (LFG) situated in Singapore. Unlike other stablecoins UST is not backed by off-chain assets. Instead, the peg against the US Dollar is kept by burning LUNA for each new UST that is minted.

That makes TerraUSD an algorithmic stablecoin that carries different risks from those that are collateralized by other assets. To mitigate this risk, the LFG is using its funds to build up a Bitcoin reserve. Around $1,5 billion have already been invested into Bitcoin and theoretically, up to $10 billion could flow into BTC.

The idea is to collateralize UST partially with BTC to keep the peg between UST and USD stable even if the dynamics of the stablecoins protocol should create unfavorable conditions.

Terra swaps LUNA for AVAX

It is a strong signal that Terra Labs decided to swap $100 million worth of LUNA for AVAX. This move is mirrored by the Luna Foundation Guard which is buying AVAX for the reserve and the total volume of the whole deal is worth $200 million. This means that AVAX, the native token on the Avalanche blockchain, becomes the second asset to support the value of UST after Bitcoin.

But it seems that this is only the beginning of a cross-chain partnership between Terra and Avalanche. Native protocols from Terra will become a part of the Avalanche ecosystem and UST will play also an important role in the Avalanche Defi economy.

Aside from the partnership between both crypto ecosystems, this is also a significant move in terms of putting trust into Avalanche rather than into Ethereum. Backing the peg of TerraUSD with other crypto assets than Bitcoin seems to be a good idea. With this move, Terra is making a statement regarding the growth that is to be expected in the future favoring another Ethereum competitor over the value that has been created by the Ethereum ecosystem so far. It remains to be seen if the LFG will diversify its holdings further in the future. Holding $100 million worth of AVAX and $1,5 billion worth of Bitcoin doesn’t seem to be much diversified after all.

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