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Do Kwon’s UST and Luna rescue plan requires the absorption of both assets before their exit before the dollar parity process begins.
Terra founder Do Kwon has revealed that Terra will save Luna and algorithmic stablecoin UST via a community proposal. Kwon explained the new rescue plan in a lengthy Twitter thread for the de-pegged UST. He began with:
“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. Together.”
According to the stablecoin creator, the only recourse is that before UST can begin to re-peg, the stablecoin supply scheduled for exit should be absorbed.
“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%, and Luna price has diminished dramatically absorbing the arbs,” said he.
Do Kwon also suggested that there is no other remedial measure besides the arbitrage opportunity presented. As mentioned in the Terra founder’s tweet thread, this means that Kwon and his team will increase the base pool to 100 million special drawing rights (SDR) from 50 million. In addition, they will also decrease PoolRecoveryBlock from 36 to 18. The resulting effect from this move will be an increase in mining capacity to $1200 million from $293 million.
Interplay between Terra’s UST and Luna amid Community Proposal
The Terra community proposal also states that burning more efficient UST and Luna minting will put pressure on Luna’s price short term. However, it will also ultimately prove to be an effective way of achieving dollar parity for UST. In addition, such a mechanism will also eventually stabilize the price of the UST sister token Luna. The proposal provides that the limitless supply of Luna will handle the initial substantial dilution from the burning of countless UST. A statement contained therein which touched on this idea read:
“Nevertheless, there is no limit in LUNA supply, this market mechanism will actually work to bring stable UST and stable LUNA price (although likely at a lower price point for LUNA).”
Terra’s efforts essentially involve minting four times more UST than normal. The team’s process of creating value out of nothing has already earned the term ‘Kwontative easing.”
Already, the perceived action of Terra creating value out of nothing has earned the new term “Kwontative easing.”
UST Looks towards Assets Collateralization
As Terra plans to rebuild UST, Kwon stated that the team would tweak its mechanism towards collateralization. This simply implies that the controversial UST will now have the backing of other financial assets, both traditional and crypto.
UST is currently down around 75% below the dollar parity, while Luna is down 90% from its record highs.
Following the slump in both assets, several crypto-centric firms scrambled to announce zero exposure to the duo on Wednesday. This was part of efforts to allay investor fears and stave off market panic.