The idea aims to restore UST to its original $1 peg.
Do Kwon, the creator of Terraform Labs, stated on Wednesday that the company is backing a community proposal that could assist TerraUSD (UST), a stablecoin linked to the US dollar, restore its peg.
UST and other algorithmic stablecoins are designed to be automatically tied 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 should help keep its value stable. However, the project then incorporated a bitcoin reserve as extra backing.
UST, on the other hand, lost its peg and plummeted as low as 66 cents on Monday. It recovered 90 cents on Tuesday before falling to fewer than 35 cents during Asian trade hours on Wednesday. This was followed by a significant reduction in the price of LUNA.
Kwon, who has been unusually quiet on Twitter in recent days, claims there is a strategy in the works to return UST to its previous level.
“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.”
Arbitrage, or a trading method utilized by traders who purchase and sell LUNA and UST to maintain the peg and profit from it, is referred to as arbs.
“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 more LUNA would be produced and sold in the market to try to restore UST’s peg to $1. This is in addition to a separate proposal to provide lesser yield to Anchor users, a Terra product.