Tuesday, December 6, 2022

Do Kwon Outlined Terra’s Path After UST Stablecoin De-Pegging

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Do Kwon outlined Terra’s path after the UST stablecoin de-pegging and issued a proposal in hopes of re-pegging the ecosystem’s stablecoin so let’s have a closer look at today’s altcoin news.

The founder of Terraform Labs, Do Kwon outlined Terra’s path for the near future and what are the next steps in the wake of the coin’s crash:

“I understand the last 72 hours have been extremely tough on all of you – know that I am resolved to work with every one of you to weather this crisis, and we will build our way out of this.”

With Terra’s native dollar-pegged stablecoin UST crashing as low as $0.30, Kwon’s main objective at the moment seems to bring the stablecoin back to $1. As for LUNA, it dropped by over 90% in the past day and where it will head out to, we have to wait and see. However, in order to re-peg UST, Kwon proposed an increase of the supply of LUNA on the market in order to absorb the attempts of investors to offload the broken stable coin:

“The price stabilization mechanism is absorbing UST supply (over 10% of total supply), but the cost of absorbing so much stablecoins at the same time has stretched out the on-chain swap spread to 40%. Luna price has diminished dramatically absorbing the arbs.”

The proposal will lean into the network’s native mint and burn mechansim. The investors can trade 1 UST for $1 of LUNA and each time they do, they will destroy the UST and remove it from circulation. The mechanism put arbitrage opportunities in the center and whenever UST falls below the peg, savvy speculators can buy the discounted UST and can swap it for $1 in LUNA. The buying pressure from scooping UST on the market and the deflationary effects of reducing the supply keeps the peg normally. Right now, this mechansim turned into the consensus trade over the past 72 hours and can halt with many holders attempting to ditch their holdings:

“Starting from May 9th to May 10th, 2022, about $8B UST were withdrawn from Anchor Protocol. During the same period, only ~$1B UST were burned.”

Anchor Protocol was Terra’s popular DeFi app that hosted more than 70% of the UST in circulation thanks to the 19% interest rates. The proposal would increase the speed of the mechanism and will increase LUNA’s minting capacity from $293 million to $1.2 billion and if UST recovers its $1 peg, Kwon added that the team will adjust the mechansim to be collateralized.

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