Terra (LUNA), a public blockchain protocol that powers a number of non-collateralized stablecoins, has finally awakened to the substantial front-running that takes place ahead of its periodic Bitcoin purchases. The Terra protocol runs on a Delegated Proof of Stake (DPoS) mechanism, where network participants elect delegates to validate the next block of transactions that is then incorporated into the Terra blockchain. The TerraUSD (UST) is a stablecoin pegged to the US Dollar. Terra maintains this peg by algorithmically adjusting the supply of UST and LUNA. If the price of UST falls below $1, the supply of UST is burnt by minting LUNA, thereby restoring the peg. On the other hand, if the price of UST exceeds $1, LUNA is burnt to mint more UST, thus increasing the stablecoin’s supply and reducing its price. Of course, a small portion of LUNA that is burnt to mint UST and other stablecoins is redirected toward the network treasury in a process known as seigniorage, which makes minting stablecoins a profitable enterprise for the Terra network. While this system works, it does introduce volatility into the overall Terra ecosystem, particularly during market crashes when the incentive to mint LUNA or the stablecoins is reduced. To counter this, the Luna Foundation Guard recently announced that it has raised $1 billion – via private sales of the LUNA token that will be locked for four years – to constitute a Bitcoin reserve for the UST stablecoin. During stressful times, as UST’s peg falls below $1, arbitrageurs can swap (that is, burn) UST to acquire Bitcoins from the reserve instead of LUNA. Since Bitcoin’s correlation with the Terra’s LUNA coin is quite low, this mechanism should theoretically help in stabilizing the UST peg. Terra plans to acquire at least $3 billion worth of Bitcoins in the near future to augment its reserves.
Purchasing has become sporadic, occurring every 3, 4 or 7 days so far.
The last buy was 7 days ago for $130M.
Next one is likely due very soon. https://t.co/eUYtGqMRsG pic.twitter.com/JCRP55UBlW
— Charles Edwards (@caprioleio) April 21, 2022
This brings us to the crux of the matter. As is evident from the tweet by the founder of Capriole crypto fund, Charles Edwards, Terra has now introduced randomization to its erstwhile fairly predictable purchases of Bitcoin, thereby reducing the efficacy of front-running these highly lucrative episodes of binge buying.
As Terra is one of the largest regular buyers of Bitcoin currently, it makes sense to discourage front-running, which causes detrimental price slippage and adds a needless cost layer.
Terra had purchased $130 million worth of Bitcoin over a week ago. This means that the next bid from Terra for the world’s largest cryptocurrency should land any time in the next few days.
Bear in mind that Terra’s LUNA coin is currently one of only a handful of cryptocurrencies that are in the green so far in 2022. As an illustration, LUNA is currently up around 8 percent year to date, while Bitcoin is actually down over 13 percent during the same period.
