Do Kwon, co-founder of Terraforms Labs and the project’s leader, described LFG in a tweet as a “decentralized reserve” for UST.
“It is a psychological backstop, similar to FDIC, to comfort people that this in fact is not a house of cards.” FDIC stands for the Federal Deposit Insurance Corp., which insures U.S.
So questions have arisen about how sustainable UST’s growth might be, with a market capitalization that grew by $15 billion in five months.
“The proposal process on Agora is for eliciting feedback and calibrating the design before moving forward with the specs for the BTC Reserve.
Terra’s UST toppled Binance USD as the third-largest stablecoin behind Tether’s USDT and Circle’s USDC because its circulating supply has grown nearly tenfold over the past year to a whopping $17 billion.
In a research paper, Ryan Clements, chair in business law and regulation at the University of Calgary, argued that algorithmic stablecoins must generate a perpetual demand in the underlying ecosystem and the arbitrage mechanism to remain stable.
“Perpetual demand, and reliance on arbitrage, is not certain because of ‘step-back’ risk,” Clements told CoinDesk in email.
Beanstalk Farms, an Ethereum-based stablecoin protocol, was exploited for $182 million in a hack on April 17, and its BEAN token collapsed to $0.03 from the $1 peg after the attack.
Clements cited various potential threats to the stability of UST.
If only LUNA can absorb the price deviation of UST, selling LUNA for UST makes the situation worse.
“LFG’s backstop of BTC reserves turns UST into something closer to Celo’s model, which is a mix of seigniorage shares with crypto collateral,” Qureshi said.
“I see it like a parent having a child,” Alexander said.
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