Terra Founder Puts Forward a Proposal to Solve UST & LUNA Collapse

To curb the de-pegging problem, Do Kwon proposed a mint-and-burn mechanism to stabilize Terra UST prices.

Do Kwon, the founder and ‘Master’ of Terraform Labs, proposed a solution to overcome the de-pegging problem created in UST. Yesterday, UST and its parent currency Terra (LUNA) suffered a catastrophic shock that plunged their market caps.

Kwon has prepared a proposal to re-peg UST by increasing the supply of LUNA on the market and will also dilute the investments from good wishers of stablecoin.

“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%,” he wrote. “Luna price has diminished dramatically absorbing the arbs.”

The proposal mentioned the implementation of the network’s native mint-and-burn mechanism for the stabilization of UST price.

As investors can trade 1 UST for $1 worth of LUNA. Every time when anyone does this, they destroy that UST and kick it out from circulation. By doing so, it will create arbitrage opportunities for investors whenever UST drops below its pegging value. They will be able to buy UST at a discounted price and can swap for $1 in LUNA.

Ultimately, a great buying force will enable UST on the market plus the deflationary effects of reducing its supply normally keep the peg.

“Starting from May 9th to May 10th, 2022, about $8B UST were withdrawn from Anchor Protocol,” reads the proposal.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

According to the proposal, it will increase the speed of the burning mechanism and increase LUNA’s minting capacity from $293 million to $1.2 billion.

If at any point in the future, UST recovers its peg with $1 then Terraform Labs team would “adjust its mechanism to be collateralized.”

Collateralized stablecoins are those backed entirely by other financial assets. Tether’s USDT and Circle’s USDC are backed by cash, treasury bonds, commercial paper and other similar assets.