The Luna Foundation Guard (LFG), a Singapore-based non-profit that supports the Terra blockchain ecosystem, is looking to raise more than $1 billion to shore up the UST algorithmic stablecoin after it lost parity with the US dollar, according to three sources familiar with the situation.
Algorithmic stablecoins like UST are meant to stay pegged one-to-one to the price of an underlying fiat currency such as the dollar. But UST dropped as low as $0.61 on Monday amid a wider sell-off in crypto markets, before recovering to $0.91 at the time of writing.
The group is now looking to raise fresh capital from some of the industry’s largest investment firms and market makers, according to the sources. The deal, currently being negotiated, offers investors the opportunity to purchase LUNA tokens at a 50% discount, although those tokens would be subject to a two-year vesting schedule.
LFG didn't respond to The Block's request for comment.
The funding effort, which could help the project defend UST’s peg to the dollar moving forward, is the latest attempt by LFG to instill a fresh degree of confidence in the market. On Monday, LFG announced it had lent $1.5 billion worth of bitcoin and UST to third-party trading firms. LFG had originally sought out to purchase as much as $10 billion in bitcoin to support the stablecoin's peg.
UST attempts to keep parity with the dollar through its relationship with the LUNA token. A burning mechanism and the ability to always be able to sell $1 worth of LUNA for 1 UST are designed to keep it in check.
Yet critics say the success of this operation depends on the strength of LUNA's price and on its key DeFi platform, Anchor, continuing to produce an up to 20% yield to incentivize liquidity.
Anchor has seen its total deposits drop precipitously from a peak of $14 billion to below $10 billion.
Arbitrageurs are meant to step in during these moments of price dislocations, converting $100 in Terra's native token LUNA into $100 of UST and pocketing the price discrepancy between the two.
Over the past two days, however, large amounts of withdrawals of UST across decentralized finance protocols have put immense pressure on the system.
Both UST and the wider Terra ecosystem are supported by LFG. The non-profit's governing council includes Terraform Labs co-founder Do Kwon, Terraform Labs head of research Nicholas Platias and Jump Crypto president Kanav Kariya, among others.