#880 The $10 Billion Stablecoin Bet on The Bitcoin Standard w/ Do Kwon
3/24/2022 · 25 min · transcript via mlx
Tags
Key topics
— Terra's algorithmic stablecoin model uses Luna token supply expansion and contraction to maintain UST's $1 peg through arbitrage incentives rather than centralized collateral.
— Algorithmic stablecoins offer decentralization and scalability but are more vulnerable to demand shocks than fully collateralized alternatives like USDC or Tether.
— Previous failures of algorithmic stablecoins (Basis Cash, Iron Finance, etc.) stemmed from unsustainable yield offerings and lack of real-world use case demand; Terra addressed this by building payment infrastructure in Korea, Vietnam, and Thailand.
— The Luna Foundation announced a $10 billion Bitcoin reserve strategy: converting $3 billion in existing reserves to Bitcoin and diverting a governance-set percentage of new UST issuance (100–200 million daily) to purchase additional Bitcoin.
— As UST supply grows, Bitcoin purchases funded by new UST minting could exceed daily Bitcoin mining output, creating persistent buy pressure comparable to Grayscale's historical GBTC arbitrage effect.
— The Bitcoin reserve will function as a special AMM allowing redemptions of UST for Bitcoin at a slight spread, preventing permanent lock-up while providing a stability backstop during demand shocks.
Market & price signals
— Approximately 100–200 million in new UST demand occurs daily. Daily Bitcoin mining output is roughly $40 million. If Terra diverts even a minority percentage of UST issuance to Bitcoin purchases, it could absorb more than 100% of daily Bitcoin supply on a relative basis. Current Luna Foundation reserves total $3 billion, held as Bitcoin (under $1 billion), Tether ($1.6 billion), and other Terra stablecoins ($1 billion). No specific Bitcoin price targets or near-term price movements were discussed.
Actionable insights
— If Terra executes the Bitcoin reserve plan successfully, it establishes a template for other projects and institutions to back digital currencies or treasury assets with Bitcoin, potentially creating cascading demand for Bitcoin across crypto ecosystems.
— The redemption mechanism (UST-for-Bitcoin swap via AMM at ~1% spread) ensures reserves are accessible during crises but creates friction that discourages casual redemptions, resembling GBTC's one-way capital trap that historically drove Bitcoin price appreciation.
Episode sponsorships
Paid placements mentioned in this episode. BTC Pods is not sponsored by or affiliated with these advertisers. Links are included so you can find offers mentioned on the show.
— Copper has been at the forefront of institutional digital asset development since 2018, offering award-winning custody solutions and the first truly off-exchange settlement function. Copper pioneers technology and services across more assets, exchanges, and with greater speed and security than any other infrastructure provider. To learn how Copper helps the world's largest institutional investors secure their digital assets, visit copper.co.
— Compass Mining is the world's first online marketplace for bitcoin mining hardware and hosting, making it easy for everyone to mine Bitcoin. Visit compassmining.io to start mining Bitcoin today.
— Bullish is a powerful new digital asset exchange built for institutions that delivers the innovations of DeFi in a regulated environment. The Bullish Hybrid Order Book pairs high performance of a traditional central limit order book with automated market making, powered by deep Bullish liquidity pools backed by a multi-billion dollar treasury. Learn more at bullish.com/legal or follow @Bullish on Twitter.