Terra Founder Reveals What Will Happen To UST If Bitcoin Price Crashes
Terraform Labs CEO Do Kwon conceded that a Bitcoin price crash would be “negative” for the stability of the UST stablecoin, but he expects Bitcoin to rise.
Terraform Labs is the entity behind the Terra (LUNA) blockchain platform which plans to purchase a total of $3 billion worth of Bitcoin as a reserve for the UST stablecoin.
Kwon made the comments in an interview on the Unchained podcast on March 29. Host Laura Shin demand Kwon what the short-term implications of holding so much BTC will be for the stability of UST.
Kwon said that “the worst case scenario would be if we buy Bitcoin and a crash occurs six months later, and that correlates to a massive drop in demand for UST,” which would be, as he said it modestly, “negative”. However, this scenario does not prevent him from sleeping at night:
“I kind of bet that the long-term scenario of Bitcoin rising and reserves being strong enough to withstand UST demand dips is the most likely scenario.”
Kwon bought Bitcoin (BTC) to hold in Terra Treasury 40% collateral for the UST stablecoin. So far, Terra has acquired 30727.9 BTC, and most recently bought 2,943 BTC on March 29. This makes Terra the third-largest single-wallet BTC holder.
Crypto YouTuber danku_r argued to its 54,000 followers in a March 30 tweet that adding BTC to Terra’s treasury would help mitigate the impact of a sudden contraction in UST demand. He said Terra’s move would help avoid a “death spiral due to market uncertainty” by helping the Treasury “swallow the contraction in UST supply.”
One of Kwon’s stated goals for the Treasury, known as the Luna Foundation Guard (LFG), is to make Terra “the largest single wallet holder of BTC.” In order to dethrone the current leader, Michael Saylor’s MicroStrategy, Kwon will need to amass over 125,051 BTC according to the Bitcon Wallet tracker Bitcoin cash.
— Laura Shin (@laurashin) March 31, 2022
Later in the interview, Kwon lived up to his reputation as a provocateur by proclaiming that Terra is a layer 2 solution for the Bitcoin network. He argued that with Terra, Bitcoin has a bridge that allows it to be used “in a multitude of applications, from DAOs to NFTs to DeFi.”
“And in terms of expressiveness, transaction capabilities, throughput, all of these things can happen on Terra.”
Related: “Hold My Beer” – Terra Has Already Made $165M Buying Bitcoin as BTC Reserve Closes in on Tesla’s
Kwon’s comment caught the attention of the crypto community. In one TweeterEthereum (ETH) developer Antiprosynthetic responded by asking if all entities that use BTC to back a stablecoin should be considered Layer 2 solutions. He said, “Even I don’t believe standards of Bitcoin have fallen to this point.”
A Layer 2 solution helps a Layer 1 blockchain scale its operations by moving many transactions to another network to reduce congestion.
BTC is trading at $44,463, down 5.61% in the past 24 hours according to the Cointelegraph Price Index.