Do Kwon Reveals Terra’s Proposed Rescue Plan to Save LUNA and UST

Do Kwon Reveals Terra’s Proposed Rescue Plan to Save LUNA and UST

The outspoken Terraform Labs founder Do Kwon finally broke his silence and detailed the new rescue plan he has to re-peg the ecosystem’s flagship stablecoin, UST.

In the latest Twitter thread, Kwon said that the only path forward is to absorb the stablecoin supply that intends to exit before UST can start to re-peg.

  • The exec added that there is no other way out after accepting the community proposal. He further explained,

“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.”

  • The main idea is to focus on the arbitrage opportunity.
  • The proposal stated that allowing more efficient UST to burn and LUNA mint will put pressure on the latter’s price in the short term. But this mechanism will be an effective way to bring UST back from deviating to its intended peg and will eventually stabilize LUNA’s price.
  • The burning of billions of UST will trigger a significant dilution of LUNA. It further added,

“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).”

  • The devs will essentially increase the base pool from 50 million to 100 million special drawing rights (SDR) and decrease PoolRecoveryBlock from 36 to 18. This, in turn, will ramp up minting capacity from $293 million to nearly $1.2 billion, thereby minting 4x of the stablecoin than usual.
  • As the team starts to rebuild UST,  Kwon said that the team will adjust its mechanism to be collateralized, meaning UST will be backed by other financial assets, including traditional and cryptocurrencies.
  • Despite publishing this proposal several hours ago, it has failed to bring any trust back. LUNA plummeted below $1 earlier today, losing around 99% of its value in less than a week.
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