Algorithmic stablecoins like UST are supposed to be automatically pegged to the price of another currency. By design, 1 UST can be redeemed or minted for exactly $1 worth of LUNA at any time, which in theory helps retain its value. The project, however, later added a bitcoin reserve as additional backing
UST, however, lost its peg and fell to as low as 66 cents on Monday. It regained 90 cents on Tuesday before slumping to lows of less than 35 cents during Asian trading hours on Wednesday. That was accompanied by a steep drop in the price of LUNA.
Kwon, who has been uncharacteristically silent on Twitter over the past few days, says there’s a plan to bring UST back to its peg.
“The price stabilization mechanism is absorbing UST supply (over 10% of total supply),” Kwon wrote in a tweet during European trading hours, explaining how UST works. “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.”
Arbs refers to arbitrage, or a trading strategy used by traders who buy and sell LUNA and UST to maintain the peg and make a profit by doing so.
“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, adding that Terra endorsed the community proposal “1164,” which proposes increasing the minting capacity of Terra’s LUNA from $293 million to over $1.2 billion.
That means additional LUNA would be minted and sold in the market to try to bring UST’s peg back to $1. That is in addition to a separate proposal that aims to offer lower yield to users of Anchor, a Terra product.
The proposal explains: “[By allowing] more efficient UST burning and LUNA minting, [which] will in the short term put pressure to LUNA price, but will be an effective way to bring UST back to peg, which will eventually stabilize LUNA price.”
Meanwhile, LUNA fell to $2.2 in the past hour as traders anticipated further supply increases to add to selling pressure on the token, CoinDesk data shows.
UPDATE (May 11, 11:45 UTC): Removes LUNA price from headline.
UPDATE (May 11, 12:55 UTC): Updates stablecoin definition in second graph.
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