Terra Updates | Completes $1 Billion Token Sale, Establishes Bitcoin Reserve, Anchor Dynamic Interest Rates, veANC Proposal

Terra faced concerns from the community about the insufficiency of the 20% interest on the fixed-rate protocol Anchor Protocol ANC, leading to a potential exchange rate crisis for the stablecoin UST and a rapid decline in the token LUNA used for minting UST. However, Terra quickly completed a $1 billion token sale to bolster its foreign exchange reserves. Anchor also implemented tokenization and a dynamic interest rate proposal, resulting in an 80% and 200% price increase for LUNA and ANC since February.

This article highlights the key players in recent events and the current developments:

UST Demand Hub: Fixed Rate Protocol Anchor

Anchor is a fixed-rate savings protocol created by the Terra Luna team Terra Money. It can be easily understood as a DeFi lending protocol that combines a pledging mechanism, providing Terra stablecoin UST depositors with a 20% annual return.

This creates demand for UST and also removes a significant amount of LUNA from circulation, reducing selling pressure. According to DeFi Llama data, Anchor's liquidity alone accounts for nearly 50% of Terra TVL, exceeding $11.6 billion.

How to Mint Stablecoin UST and Stability Mechanism

Users can burn LUNA and mint the corresponding value of UST in Terra Station's mint/burn feature.

If the UST price deviates, premium to $1.1, users can mint UST with LUNA and sell it, arbitraging $0.1 until the market eliminates the arbitrage opportunity.

If UST falls to $0.99 on other trading platforms, users can buy 1 UST at a discount of $0.99, exchange it for $1 worth of LUNA in Terra Station, and arbitrage will continue until UST returns to $1.

Raising $1 Billion from Institutions to Establish Bitcoin Reserve for UST

The Luna Foundation Guard LFG, a non-profit foundation, recently announced the completion of a $1 billion private token sale to establish a Bitcoin-denominated forex reserve for UST. Participating institutions include:

• Jump Crypto
• Three Arrows Capital 3AC
• DeFiance Capital
• Republic Capital
• Tribe Capital

The official did not disclose many details of the token sale, only a four-year lock-up period for LUNA tokens. Terra's founder also challenged Michael Saylor, founder of MicroStrategy, which holds the most Bitcoin reserves of 125,051 BTC, on Twitter saying:

Terra Protocol will become one of the largest holders of Bitcoin, watch out Michael Saylor.

LFG stated that details of the Bitcoin reserve measures will be announced in the coming weeks. Terra co-founder Nicholas Platias also explained the reasons for choosing Bitcoin as a forex reserve:

1. Main functions of forex reserves: absorb UST demand shocks and complement LUNA.
2. Reserve assets should be low-correlated with the Terra ecosystem, decentralized/anti-censorship.
3. Bitcoin can better meet the above requirements than any other asset.

In addition to the positive news for Terra, the Anchor community has also proposed governance proposals for veANC and dynamic interest rates.

veANC: Establishing a Long-term Lock-up Mechanism

The veANC Vote-Escrowed ANC proposal roughly follows veCRV, where users pledge ANC to receive the voting-escrowed token "veANC." A longer lock-up period of 1-4 years grants more voting power with veANC, and veANC holders will receive protocol income and ANC rewards.

In short, the veToken model effectively reduces selling pressure behind a large liquidity mining reward by increasing user willingness to lock up for the long term. Many protocols have followed suit, but former Paradigm researcher Hasu has raised related concerns.

Dynamic Interest Rate Proposal: Reducing Fixed Rate Pressure

Previously reported, in cases of imbalance between income and expenses, the Anchor protocol uses funds from the income reserve Yield Reserve to supplement interest rate differentials. As of 2/9, the balance of the income reserve was less than 15 million UST, and at the current consumption rate over the past few weeks, it may run out in less than two weeks.

As a result, LFG conducted a $1 billion financing at the end of February, and Terra ecosystem researcher bitN8 also proposed a semi-dynamic interest rate governance proposal on 3/2, hoping that Anchor can create the highest stable yield in the DeFi field while moving towards a prudent and sustainable direction.

He suggested linking the interest rate to changes in the income reserve over a period, such that if the Yield Reserve funds increase by 5% in a month, the yield will increase by 1.5%, and vice versa.

Currently, both proposals are still in the discussion stage, but the massive $1 billion financing has undoubtedly injected confidence into the Terra ecosystem, and LUNA and ANC have seen significant gains compared to Bitcoin since February.