Do Kwon Releases Plan for UST to Regain its $1 Peg

Terraform Labs Founder, Do Kwon released a series of 14 tweets via Twitter that could help TerraUSD (UST), a stablecoin pegged to the U.S. dollar, regain its peg. Terraform labs is the the organization behind UST, cryptocurrency Terra (LUNA) and Luna Foundation Guard (LFG), which bolsters a Bitcoin reserve of $3.5 billion to help stabilize UST. 

“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,” Kwon tweeted. 

This recovery plan comes as UST has dropped substantially from its $1 peg. On Monday, the stablecoin dropped to a low of $0.66 before recovering to the $0.90 mark and then again on Tuesday to $0.70  before recovering to $0.83. However, the scariest dive to date took place Wednesday when UST got down to $0.30 on two separate occasions. At the time of writing, it is being traded at $0.50 according to Bitpush Terminal data.

Algorithmic stablecoins like UST, Frax and FEI USD, are theoretically supposed to be pegged to the price of another currency. UST is pegged to the U.S. dollar, which allows holders to redeem or mint 1 UST for exactly $1 of LUNA at any time, which helps retain its value. 

However, UST lost its peg on Monday morning, accompanied by a steep price decrease in LUNA. At the time of writing, LUNA is being traded at $2.70, putting the cryptocurrency down 91.31% in the last 24 hours. The seven-day high for LUNA is $87.91 which shows you just how catastrophic the drop was. 

Kwon has been surprisingly silent on Twitter in the past few days, as he said he needed laser focus in order to come up with a plan. Well, now the plan to rescue UST is out, but first we must understand how stabilization works. 

“The price stabilization mechanism is absorbing UST supply (over 10% of total supply),” Kwon tweeted. “But the cost of absorbing so many stablecoins at the same time has stretched out the on-chain swap spread to 40%, and LUNA price has diminished dramatically absorbing the arbs.”

Here, “arbs” refers to arbitrage, or a trading strategy used by traders who buy and sell LUNA and UST while simultaneously making a profit and maintaining the peg. 

“The only path forward will be to absorb the stablecoin supply that wants to exit before $UST can start to repeg. There is no way around it,” Kwon said.

This means that additional LUNA would need to be minted and sold in the market to help UST recover its peg. This plan came via community proposal 1164, which also proposed increasing the minting capacity of Terra’s LUNA from $293 million to over $1.2 billion.  

Author: Tyler Irvin

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