Understanding the bit-based UST
With the rise of Bitcoin, the movements of the alt markets are also becoming more active. The root of this is also the size of the Bitcoin that some Terra foundations are buying. Although the UST is gradually being created strategically, it is fundamentally watching the birth of the most successful algorithmic stablecoin to date. To understand the cycle of UST, we need to look at the following design.
◾️ L1’s Luna Blockchain Coin Issuance
◾️ Applying minting and burning system for pegging while issuing UST with LUNA as collateral
◾️ When the price of UST goes down, UST is burned, then the supply is reduced and LUNA is minted.
◾️ LUNA theoretically has unlimited expansion, so LUNA price increases and UST can be expanded unlimitedly.
◾️ Conversely, in the case of a drop in LUNA price, there is a risk of a down spiral in the price as the price of LUNA is also under pressure along with the risk of rapid UST unpacking (risk remnants of all algorithmic stablecoins)
◾️ In order to defend against price pegging of UST, in addition to LUNA, BTC is used as the primary and asset size is accumulated.
◾️ For this purpose, LUNA is burned and UST is issued in large quantities (additional increase in the scarcity value of Luna) and exchanged with pegging stables such as USDT or USDC along with providing UST liquidity to the stable coin DEX.
◾️ Purchase BTC in the market with USDT or USDC and use it as a pegging capital for UST
🔰 Personal thoughts
In fact, in a logical development, that strategy may make sense, but in order to actually implement it, a number of obstacles must be overcome. The idea of converting to stable through issuance and burning of assets with price volatility has already been tried in the Steem blockchain and Steem Dollar concept, which started in 2017. With the strong driving of the foundation and the continuous rise in the price of volatile assets, unpacking occurs very easily depending on the liquidity of the asset if it is not controlled. (Actual Steem Dollar is currently traded at about $4-5.) In the case of Hive Dollar (HBD) made as a chain hard fork, in order to maintain $1, whale users are forced to keep HBD through continuous HBD incineration. However, compared to the UST, the historical volatility is up to 130%, so it can be seen that there is virtually no trust as a stable.
In a situation where the price volatility of Luna coin was successfully used for UST expansion and fell to the late 40 USD in the early 2022 bear market, ATH is being renewed while implementing a pegging asset strategy through BTC bulk purchases.
Quoting from the provincial government, except for Satoshi, the Terra Foundation is moving toward a mid- to long-term plan of holding about $10B worth of bitcoins with the goal of becoming the holder of the largest number of bitcoins in the world. For reference, it is estimated that Micro Strategy currently owns about 5.9B (125K BTC), Tesla owns about 2B (43.2K BTC), and the Terra Foundation currently purchases about 31K BTC.