TerraUSD (UST) crash: What’s Do Kwon’s plan?

By Raffaele Redi
• Updated

Terra halted the blockchain as the network is considering abandoning the UST project

Stacks of TerraUSD stablecoin tokens on black background                                 
The UST stablecoin is crashing on the market – Photo: Shutterstock

News on Terra’s CEO Do Kwon is fragmented as the Terra network is trying to save the Terra ecosystem from an around $20bn crash with the TerraUSD (UST) stablecoin hitting the penny level at the time of writing, according to CoinGecko.

Amid panic and desperation and rumours about the CEO multiplying, the network acknowledged that Do Kwon’s plan to repeg the UST stablecoin by burning USTs and reducing its supply is crashing alongside his creation.

The LUNA Go Forward proposal, aimed at relaunching Terra (LUNA) – Terra’s native token – while temporarily abandoning the algorithmic stablecoin UST, is receiving the likes of many users on the network’s blog.

Meanwhile, early on Friday, 13 May 2022, the Terra blockchain was officially halted at block 7607789 so Terra validators can “come up with a plan to reconstitute it”.

The LUNA Go Forward proposal

The proposal to save LUNA has come from the Terra Builders Alliance, the leading founders/builders on the Terra ecosystem.

“It doesn’t look like the peg stability mechanism is going to restore peg in the short period and UST as a stablecoin is likely going to be difficult to regain trust over a short period, but it is Terra’s rich ecosystem of builders and users that are worth saving,” said the Alliance in its proposal.

The aim is to mint new Luna and distribute them among Luna stakers, UST holders, marginal Luna holders and ecosystem developers.

“Once the UST has been swapped with Luna at the new network launch, it will cease to exist in its current form and will be relaunched after genesis in collateralised form,” added the Alliance.

Do Kwon’s initial plan on Wednesday 

On Wednesday 11 May 2022, Terra proposed a network upgrade to burn USTs while increasing minting capacity in the hope it will restore the stablecoin’s peg to the US dollar.

Terra CEO Do Kwon said the network is endorsing a community proposal to increase minting capacity from $293m to $1,200m allowing the network to burn UTSs at a faster rate.

Meanwhile, the Luna Foundation’s reserves – amounting to just less than $4bn before the depegging turmoil – were drained to a fraction of that, $87m, mostly in Avalanche (AVAX) and Terra (LUNA), with both the tokens linked to Do Kwon’s networks.

“With the current on-chain spread, peg pressure and UST burn rate, the supply overhang of UST (ie, bad debt) should continue to decrease until parity is reached and spreads begin healing,” said Kwon.

“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 and reduce supply overhang on UST,” he added.

The situation on Thursday 12 May

Earlier on Thursday, 12 May 2022, Terra developers published a post to explain their work on the network, claiming the aim was to reduce the UST supply (amounting to 12.6 billion at the time of writing) by around 8%.

The post said increasing the minting capacity “will help expedite the outflows of UST from the system, reducing swap spreads and pressure on the UST peg, but coming at the cost of the LUNA price”.

Another step to reduce the outstanding bad debt of the Terra economy – and help restore the UST peg with the dollar – is to burn the remainder of the Community Pool’s UST – around 8% of the current UST circulating supply.

“Eliminating a significant chunk of the excess UST supply at once will alleviate much of the peg pressure on UST,” explained the post. “This is advantageous relative to the slow burn rate and type of downstream effects that inflated on-chain swap spreads induce on the Terra economy over an extended period.”

The network has also proposed to burn the remainder of the cross-chain UST on Ethereum deployed as liquidity incentives from the Community Pool.

As of 12:20 BST (UTC +1), TerraUSD was trading at $0.4634, according to CoinMarketCap, down 15.6% over the past 24 hours and 54% lower over the past seven days. The UST market cap was at $5.7bn while its trading volume was at $7.3bn, 39% higher in the past 24 hours.

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