“Blossoming” Terra/Avalanche Collaboration a Boost to DeFi

Key Points

• Terra bought $200M in AVAX tokens to diversify their UST reserve and kickstart “blossoming collaboration” between Terra/Avalanche blockchains.
• Cross-chain collaboration between the Terra and Avalanche ecosystems is likely to accelerate the already rapid growth of DeFi applications.
• It also bolsters the LUNA and AVAX bull case, while UST reserve diversification boosts confidence in the stablecoin.

Terra Buys $200M In AVAX Tokens For Its Reserve

Terraform Labs, the company behind the development of the Terra blockchain announced on Thursday that it had agreed to swap $100M worth of LUNA tokens for the same value in AVAX, the native currency of the Avalanche blockchain. LUNA is the native currency of the Terra blockchain.

The swap comes after the Luna Foundation Group, a nonprofit organisation that supports the development of Terra’s development, bought $100M in AVAX with Terra’s UST stablecoin.

The total of $200M in newly acquired AVAX tokens will be added to reserves that Terra has been building up to bolster UST’s ability to maintain its 1:1 peg to the US dollar.

So far, UST, an algorithmic stablecoin, has been able to maintain its peg without the backing of fiat currency or traditional assets with the minting and burning of Luna tokens. But in recent weeks Terra has been in the headlines after its co-founder Do Kwon committed to buy $10B in Bitcoin for its UST reserve.

The Luna Foundation Group and Terraform Labs said they chose to purchase AVAX rather than other cryptocurrencies because of the rapid growth of the Avalanche blockchain and dedicated fanbase.

Meanwhile, the CEO of The Ava Labs Emin Gün Sirer, which is the developer of the Avalanche blockchain and now holds $100M in Terra’s LUNA token plus $100M of Terra’s UST stablecoin, said that Terra’s ability to scale their stablecoin is one of the key reasons that drew Avalanche to the Terra platform.

“Blossoming Collaboration” Between Avalanche and Terra Ecosystems

The $200M in total of token swaps between Terra and Avalanche marks much more than just a diversification of Terra’s UST reserve.

Terra tweeted that the token swap revealed a “blossoming collaboration” between the two layer one blockchains and is designed to “strategically align” their ecosystem incentives.

Terra said its developer group Terraform Labs is “committed to building & supporting new $UST-native protocols within the Avalanche ecosystem to maximize its cross-chain footprint”.

“The partnership will also provide distinct benefits to the Avalanche ecosystem at large, by connecting the #LUNAtics & Terra builders with the vibrant Avalanche ecosystem, ushering in an immersive cross-chain experience,” Terra said.

“Avalanche’s subnets are a powerful method for building the next generation of scalable Web3 applications within niche use cases”, Terra noted, before announcing that the two blockchains will now be collaborating on a new gaming subnet.

The Ava Labs CEO and Avalanche founder Sirer said that he was anticipating more native Terra applications to expand onto the Avalanche blockchain as a result of the collaboration.

“This is just the beginning for these two communities together,” said Ava Labs President Jon Wu. “We’ll see more assets, applications, and novel subnet collaborations flourish out of this new connection.”

Collaboration To Accelerate DeFi Growth, Bolster LUNA & AVAX Bull Case

Cross-chain collaboration between the Terra and Avalanche ecosystems is likely to accelerate the already rapid growth of Decentralised Finance (DeFi) applications on their respective platforms by further improving scalability/usability.

As existing DeFi applications such as the already popular Terra-based saving/lending Anchor Protocol expand and new, attractive protocols emerge, further inflows into the space are likely, adding to the bull case for both AVAX and LUNA.

That bull case for LUNA is further strengthened by the recent announcements of a diversified UST reserve. Whilst UST is already one of the top stablecoins in terms of market capitalisation (behind on USDT, USDC and BUSD), its adoption has been hampered by concerns that it is not backed 1:1 with USD-denominated assets, but is instead backed by LUNA.

Even though the mint/burn mechanism between LUNA and UST is designed to create a strong incentive for market participants to maintain the peg, some worried that a collapse in value of LUNA could result in UST losing its peg.

Terra’s decision to diversify its UST reserves away from just LUNA, thus bolstering confidence that even in the case of a LUNA crash, UST could maintain its peg, assuming BTC and AVAX don’t also collapse.

LUNA currently trades more than 130% up versus its 2022 lows in the $43.00s and is currently changing hands close to record highs just above $100 per token. A major driver of recent strong performance has been the move to start buying Bitcoin for the UST reserve.