Terraform Labs CEO and founder Do Kwon has shared an action plan to rescue the Terra USD (UST) stablecoin, which, in recent days, has been struggling to maintain its peg to the US dollar.
Kwon took to Twitter on Wednesday to report on the plans amid a crash that has seen LUNA, the project’s other native cryptocurrency, slide more than 90%.
“I understand that the last 72 hours have been extremely difficult for all of you. Know that I am determined to work with each of you to get through this crisis, and we will build our way out ,” he wrote.
As VOC has been reporting, UST was volatile over the weekend after losing its 1:1 peg to the dollar, a phenomenon that coincided with massive liquidations on various DEXs. The incident repeated itself again on Monday, when the stablecoin fell as low as $0.6, prompting the Luna Guard Foundation (LFG) to deploy part of its Bitcoin reserves.
Despite the different efforts of the organization that supports the Terra ecosystem to rescue UST, the stablecoin has not managed to return to its expected level of 1 dollar. At the time of publication, it is trading well below, at USD $0.6.
Action Plan To Rescue UST
To return parity to UST, Kwon indicated that he was supporting a community proposal that will increase the amount of LUNA minted per day by four times. This would allow the ecosystem to cope with the high demand for LUNA from investors looking to offload UST due to its recent collapse.
“First of all, the only way forward will be to absorb the supply of stablecoins that [are looking to liquidate] before UST can start repegging. There is no way around it,” the founder explained.
It should be noted that UST relies on LUNA to maintain its 1:1 peg to the US dollar through a set of mint and burn mechanisms. Users can always trade 1 UST for $1 of LUNA; every time they do this, they also destroy that UST and take it out of circulation. However, only a limited amount of UST can be sold per day.
Selling pressure has risen amid UST’s untying, which seems to have affected the normal functioning of the burn and mint mechanism, affecting LUNA prices, which have plunged more than 95% in the last 24 hours.
LUNA price evolution in the last 24 hours
“The price stabilization mechanism is absorbing the supply of UST (more than 10% of the total supply), but the cost of absorbing so many stablecoins at the same time has stretched the exchange spread on the chain up to 40%, and Luna’s price has dropped dramatically absorbing the arbs,” Kwon said.
LUNA Could Suffer Collateral Effects
Specifically, Kwon showed his support for proposal 1164, which was presented at the Terra government forum, and seeks to increase LUNA’s minting capacity from USD $293 million to USD $1.2 billion.
Increasing the amount of UST that can be redeemed for LUNA will increase the rate at which investors can exit their UST positions through LUNA. The theory is that while this could increase the amount of LUNA minted in the short term, it could decrease it over a longer period of time and help restore parity with the dollar.
“Allowing more efficient UST burning and LUNA minting will put pressure on the LUNA price in the short term, but it will be an effective way to get UST re-pegged, eventually stabilizing the LUNA price, ” the statement reads.
The proposal, adds:
Yes, billions of UST will be burned and LUNA will be significantly diluted. However, there is no limit on the supply of LUNA, this market mechanism will actually work to bring stable UST and stable LUNA price (although probably at a lower price for LUNA)
Kwon admitted that the move could come at a ” high cost ” for UST and LUNA holders, but vowed to continue exploring options to reduce the stablecoin’s oversupply and stabilize the market. He added that going forward, and once the $1 level is recovered, the stablecoin will be redesigned so that its mechanism is collateralized.
11/ Naturally, this is at a high cost to UST and LUNA holders, but we will continue to explore various options to bring in more exogenous capital to the ecosystem & reduce supply overhang on UST.
— Do Kwon 🌕 (@stablekwon) May 11, 2022
So far, 101 million LUNAs have voted in favor of the proposal and not a single LUNA has been used to vote against it, which represents 63% of the participants in favor.