Article contributed by Tin Money
The most powerful force on this planet is human cooperation, a force for construction and destruction
— Jonathan Haidt
Bottom Line Up Front (aka TL;DR)
- Terraform Labs (TFL) announcement of AVAX purchase raised eyebrows.
- Negative speculation regarding AVAX reserve status overlooks a strong potential utility for Luna Foundation Guard (LFG).
- Terraform Labs (TFL) treasury swap appears to be a sound, future revenue-generating strategy for the LUNA ecosystem.
- If this strategy prediction holds true, expect acquisitions such as this to expand to other L1s.
- Net-effect will likely raise confidence in UST peg significantly due to increased revenue generation and reserve stability.
Terraform Labs Announcement
On April 7, 2022, TFL released a Twitter thread announcing a $200 million dollar purchase of the Avalanche native token AVAX. The purchase was in two sets, with $100 million going to the LFG as a reserve asset. The other $100 million was part of a treasury swap.
The reaction from the Twitter sphere was decidedly mixed. Many questioned the wisdom of using AVAX over other candidates like Ethereum. Most of the positive reviews focussed on exposure to the well-developed Avalanche ecosystem. Others still saw a possible hype / marketing overreach, bolstered by the attention the Bitcoin reserve announcements attracted.
For context, I recently dumped the entirety of my LUNA holdings after a fat 2x on my investment. With this announcement, I’m questioning the wisdom of that decision.
I don’t know the inner workings of Terraform Labs, but if their strategy plays out like I think it will, the AVAX acquisition looks pretty epic to me.
AVAX as a reserve asset?
In isolation, this looks absolutely bonkers. Using Bitcoin as a reserve asset makes strong intuitive sense. As Do Kwon has often said, Bitcoin is easily the most “neutral” crypto asset in the space.
Regardless if you’re a Solana fan, or an AVAX fan, or an Ethereum fan, BTC is pretty universally recognized as a solid crypto asset. Thus, it makes sense to use BTC as a reserve, especially if your goal is to boost confidence in a very clearly flawed seignorage protocol such as LUNA.
So, why AVAX?
AVAX makes perfect sense if — and this is a big IF — the strategy is to buy more and more L1 tokens to hold in reserve. Why is this?
Allow me to introduce to you the Rainy Day Fund (RDF) stable coin strategy, as envisioned by Klages-Mundt, et.al. (pg.13).
The details are dense, but the short version is:
A rainy day fund RDF stablecoin…holds a basket of assets that accrues value to a safety buffer over time through arbitrage, fees, and other collateral uses. The collateral basket aims to target 1 USD, whereas the accrued buffer aims to smooth any asset failures/deviations over time.
Viewed through this lens, Terra buying AVAX starts to make sense. It’s pure speculation on my part, of course. But if the end goal really is to transform LUNA/UST to RDF/UST, then Do Kwon may well be more genius than maverick after all.
Another chain token added to the basket in the coming days or weeks would be a pretty strong confirmation of where TFL might be headed. And if they are, it is potentially giga-bull for the future of the Terra ecosystem, because an RDF design took first place at the IC3 Blockchain Camp back in 2020.
In other words, it’s plausible. Do Kwon may well be transforming a hopelessly flawed “magical unicorn” protocol into an award-winning stablecoin mechanism right before our eyes.
AVAX & Terra sitting in a tree…
Remember, the goal of a RDF is to create a safety buffer through arbitrage, fee collection and “other collateral uses.” In this, I think it bears mentioning Terra highlighted a new “gaming subnet” in collaboration with Avalanche.
And now that Terra owns $100 million worth of deployable AVAX, they can potentially use that as protocol owned liquidity, likely on their own swap, and clearly on their own gaming subnet. Not to mention the legions of DeFi users on Avalanche that can now convert all those fat degen rewards into UST.
All of this can be parked on — or routed as fees — to Anchor, which I don’t think is coincidental. Put together, it looks to me like this could translate into huge transaction volume in UST from just one additional chain.
Not to mention, Terra is still able to rely on LUNA as a primary reserve. All that potential volume seems pretty likely to drive a ton of value to LUNA holders. And God help us if they hop on Solana and Fantom as well.
In fact, I think I need to get back into the LUNA game sooner rather than later.
Next on Survivor: Stablecoin Island
If my thesis on the future of Terra holds true, this is the evolution I’ve seen, and now see developing:
- Terra UST was a “magical unicorn” protocol with great marketing and zero use outside of Anchor.
- Terra became a partial reserve with BTC before it imploded.
- Terra forms an alliance with FRAX, USDT and USDC to create 4pool on Curve.
- Terra is likely becoming a Rainy Day Fund reserve with massive revenue potential.
- Terra, FRAX, and USDC (or USDT) make it to the final three on Stablecoin Island.
- USDC or USDT are the “goats”, because they’re far less decentralized and far less capital efficient.
- Terra and FRAX duke it out at the top of the stablecoin charts for the foreseeable future.
While Terra’s AVAX news might seem perplexing, I think there may be method to the madness. I don’t know Do Kwon and can’t say for sure. But as I parse the public information, it makes sense to me.
I might also be way off base. There could easily be something else entirely at play here. All I can say is, based on what I think is happening, I’m waiting for a nice entry price for LUNA. I’m pretty sure they just turned a “magical unicorn” into hard money.
Guess I’m a LUNAtic after all.
Of course, these are just my opinions. I’m not a financial advisor, this isn’t financial advice, and always DYOR. Following any of these ideas might cause you to lose all of your money. I am 100% serious about that. I like tinkering with this stuff, but I’m on record acting like a total baboon. Invest accordingly.
Until next time, be safe, be smart and be sure to tie the camel.