Following the collapse of the Terra ecosystem, Avalanche found itself in a difficult situation. The Luna Foundation Guard (LFG) was using AVAX as collateral to support the reserve of its stable corner UST.
This situation was communicated by both parties in early April. This nascent collaboration was inevitably impacted by the UST’s inability to hold its peg to the dollar.
Indeed, the AVAX were to be burned through the stable coin mint process. Now that the UST is close to $0.07, the community has been wondering about the consequences for the AVAX held by the Terra ecosystem.
Avalanche Foundation transparent about LFG reserves
In a series of tweets, the Avalanche Foundation was keen to respect the transparency demanded by the community. Thus, it detailed the AVAX reserves held by the Terra ecosystem in concrete terms.
First of all, Terraform Labs (TFL) has purchased a total of 1.09 million AVAX which are locked for a period of one year. In fact, they are inaccessible for the time being as they are locked up.
Secondly, LFG has 1.09 million AVAX dedicated to the above-mentioned reserve. However, the proposal by Luna’s creator, Do Kwon, to create a fork of the Terra Luna blockchain does not include the use of AVAX held by the LFG.
The Avalanche Foundation obviously did not miss this information. In response, it considers that LFG may find it appropriate to sell the AVAX it holds. Should this scenario come to pass, the foundation proposes that LFG work closely with them on an exchange strategy to presumably recover these tokens.
The AVAX reserve held by LFG in particular would not represent a systemic risk
In this thread, Avalanche provides an important clarification on the potential impact of the sale of these AVAX on the market. The AVAX held by TFL represent 0.5% of the volume of AVAX traded last week while those held by LFG only represent 0.9%.
Without really asserting it, this clarification allows Avalanche to reassure the community on the absence of systemic risk represented by the holding of these AVAX by the Terra ecosystem. Indeed, the sale of less than 1.5% of AVAX volume should not represent a significant earthquake in the crypto-currency market.
The debacle of the Terra ecosystem and UST impacts the entire market. At a time like this, transparency from the various parties involved is a necessity that the Avalanche Foundation seems to have in mind.
While the Terra blockchain Fork vote is underway, the announcement made by Avalanche could offer some respite to the AVAX crypto which has seen its price drop by 50% following the UST depeg.