Lately we’ve learned that Terra buying Bitcoin in order to back UST stablecoin reserve. Do Kwon, the CEO of Terraform Labs, has acknowledged that a collapse in the price of Bitcoin would be negative for the UST stablecoin’s stability, but he believes that Bitcoin will rise.
Terraform Labs is the organization behind the Terra (LUNA) blockchain platform that intends to acquire around $3 billion in Bitcoin as a reserve for the UST stablecoin.
Why Terra buying Bitcoin?
On Mar. 29, Kwon made the statements in an interview for the podcast Unchained. Host Laura Shin asked Kwon about the short-term consequences of holding so much Bitcoin on UST’s stability.
“The worst case would be if we were buying Bitcoin and a crash happens six months later, and it’s correlated with a massive fall in demand for UST,” Kwon said. A collapse in the price of Bitcoin would be “negative” for the UST he added.
“I’m sort of betting that the long term scenario of Bitcoin going up and the reserves being strong enough to withstand UST demand drops is the more likely scenario.”
As Kwon explained, he is using Bitcoin (BTC) to store in the treasury of Terra since 40% of the collateral for the UST stablecoin is comprised of Bitcoin. To date, Terra has acquired over 30727.9 BTC, with 2,943 BTC being purchased last week on March 29th. This makes the organization the third largest Bitcoin holder. To take down the current leader, Michael Saylor’s MicroStrategy, Kwon will need to gather more than 125,051 BTC according to Bitcoin Treasuries. If we hear more “Terra buying Bitcoin” news in the upcoming weeks, we won’t be surprised.
According to @stablekwon, @terra_money is a Layer 2 solution for BTC where “Bitcoin only needs to be good at being one thing, being an asset.” What do you think – will Terra be the layer 2 for bitcoin?
— Laura Shin (@laurashin) March 31, 2022
In the second part of the conversation, Kwon made yet another contentious remark by claiming that Terra is a Layer-2 solution for the Bitcoin network. He said that with Terra, Bitcoin has a bridge that lets it connect to “across a multitude of applications from DAOs to NFTs to DeFi.”
“And in terms of the expressivity, the transaction capabilities, the throughput, all those things can happen on Terra.”
Kwon’s comment drew the attention of the crypto community. In a tweet, Ethereum (ETH) developer antiprosynthesis 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 that Bitcoin’s standards have plummeted to such extent.”
Kwon’s statement piqued the interest of the crypto sector. Ethereum (ETH) developer antimprosynthesis inquired if all entities that utilize BTC to back a stablecoin should be classified as Layer-2 solutions in a tweet. “Even I don’t believe that Bitcoin’s standards have plummeted to such extent,” he added.
Do we classify a centralized party holding BTC to backstop a wonky algorithmic stablecoin an L2 these days?
Even I don't believe that Bitcoin's standards have plummeted to such extent.
— antiprosynthesis.eth ⟠ (@antiprosynth) March 31, 2022
By shifting many transactions to an additional network to decrease congestion, a Layer-2 solution aids a Layer-1 blockchain scale up.
At the time of writing Bitcoin is valued at $45.256.