In an extended Twitter thread on May 11, Do Kwon, the co-founder of Terraform Labs, the group that backs both TerraUSD (UST) and Terra (LUNA), announced a long-awaited recovery strategy.
“Before anything else, the only path forward will be to absorb the stablecoin supply that wants to exit before $UST can start to repeg,” Kwon said after nearly half a day of silence. There’s no avoiding it.”
The LUNA Value is Plummeting due to the De-Peg Fiasco
Terra USD (UST), an algorithmic stablecoin, has been de-pegged from the dollar. The disaster, which upset the ecosystem’s burning and minting mechanisms, wiped out over 90% of LUNA’s worth.
While the price stabilization mechanism is absorbing over 10% of total UST supply, the rate of absorption has stretched out the on-chain swap spread to 40%, according to the co-founder. This pressure has reduced the price of LUNA down to $0.36 at the time of writing, while UST remains de-pegged at $0.69.
Kwon also backed a community suggestion to increase the ecosystem’s minting capacity to $1.2 billion as part of “remedial actions to enable the pegging mechanism to absorb supply.” The suggestion is designed to address the issue of huge UST withdrawals in the face of a delayed UST burning mechanism.
‘The plan will boost BasePool from 50M to 100M SDR and lower PoolRecoveryBlock from 36 to 18 Blocks,’ according to Terra Research Forum. This will boost minting capacity from $293 million to $1200 million.’
“With the present on-chain spread, peg pressure, and UST burn rate,” Kwon predicts, “the supply overhang of UST (i.e., bad debt) should continue to diminish until parity is achieved and spreads begin to heal.”
While a recovery plan is being put in place to modify the UST supply, TFL’s recent liquidity withdrawal has already caused a wider crypto market breakdown.
A collateralized technique replaces algorithmic stability
The organization has now indicated that it will change its collateralization procedure. Similar to the techniques used by USDC and USDT stablecoins, a “collateralized stablecoin” is backed by collateral reserves. Rather than employing an algorithmic process, Singapore-based LFG is trying to raise more than $1 billion to collateralize the UST stablecoin.
Meanwhile, in his words, Kwon expressed optimism for Terra’s future, saying, “Terra’s return to form will be a sight to witness.”
Alameda Research, Celsius, Galaxy Digital Holdings Ltd., Jane Street, Jump Crypto, and Nexo are among the companies included in the report, according to sources. Potential investors are said to be offered discounted token prices.
As the destiny of LUNA and UST unfolds in the following days, it is being speculated that this will not be Do Kwon’s first stablecoin disaster.
Kwon was one of the pseudonymous co-founders of Basis Cash, a failed decentralized algorithmic stablecoin.
Also Read: The Luna Foundation Guard has Announced that it will Finance $1.5 B in BTC and UST to Protect the Stablecoin Peg
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