What happened
Terra's Luna (LUNC 0.85%) popped on Wednesday after the creator, Terraform Labs, made a big announcement. It's raised $1 billion to buy Bitcoin (BTC -0.31%). The Bitcoin will be used to ensure Terra's stablecoin TerraUSD (USTC -0.35%) will be able to endure some unforeseen outlier event. That's a lot to unpack, but this is good news for Luna's long-term adoption, which is why it's risen 9% over the previous 24 hours, according to CoinMarkCap.
So what
Terraform Labs created an algorithmic stablecoin (a coin whose value is supposed to be pegged to the U.S. dollar) called TerraUSD. Unlike some other stablecoins, it's not backed by reserves. Rather, it exists in a symbiotic relationship with Luna. To briefly summarize, if TerraUSD's value deviates from a dollar, people can make money on an arbitrage opportunity by going back and forth from Luna to TerraUSD. But because of people exploiting the arbitrage opportunity, TerraUSD's supply is brought back in line with demand, maintaining its value at $1.
Image source: Getty Images.
This system counts on people making easy money, and so far it's worked splendidly. But there are theoretically outlier events that could cause people not to want to exploit the arbitrage opportunity. If one of these rare events happened, TerraUSD could lose its peg to the dollar and the whole system could crumble. Not good.
Terraform Labs has created something called the Luna Foundation Guard -- a purpose-built branch of the organization set to protect the system from falling apart. Yesterday, it announced that it had sold $1 billion in Luna tokens to private investors. It intends to use the proceeds to buy Bitcoin -- a currency uncorrelated with the dollar. It may also purchase altcoins to diversify. Now, should something bad happen to the Terra system, it will have Bitcoin backup to step in and help TerraUSD maintain its peg with the dollar.
Now what
An additional layer to help preserve the system is a good thing in my opinion. This is why Luna tokens are rising today. And according to the official press release, the Luna tokens sold to private investors will be locked up over a four-year vesting period. That gives the ecosystem plenty of time to grow. All told, this looks like a well-thought-out decision.
I'd say that Luna's bull case strengthened with this news. However, to truly be a good investment, it's important for TerraUSD to be increasingly used for real-life financial transactions. If that doesn't happen, it won't matter that Terraform Labs has a well-laid plan. The most important thing to watch is real-world usage of TerraUSD and Terra's other stablecoins.
