Terra feels that the simplest approach to return the UST to a peg is to reduce the number of UST in circulation while raising the amount of accessible LUNA.
Terra argues that the downward pressure on the peg of UST is diluting Luna, impeding recovery for both while creating an oversupply of UST, and that the solution is to burn UST and increase the available pool of Luna.
“The primary obstacle is expelling the bad debt from UST circulation at a clip fast enough for the system to restore the health of on-chain spreads,” said Terra in a Tweet.
UST and other algorithmic stablecoins are designed to be automatically tied to the price of another currency. Traders can exchange LUNA for UST at $1 regardless of market pricing because the backend algorithms will manage the supply of LUNA, producing enough scarcity to warrant the $1.
A token burn is the act of removing cryptocurrency from circulation on the blockchain. It is a deflationary event in the sense that it raises the value of the surviving blockchain. It would be similar to a share repurchase for token holders.
Terra stated in a proposal to token holders that it wants to burn over 1 billion UST (about $690 million) in the community pool while expanding the Base Pool of LUNA accessible to 100 million, increasing minting capacity to over $1 billion. This will help to accelerate the drain of UST from the system, bringing it closer to its peg and driving down the price of Luna.
“Currently, the burning of UST is too slow to keep pace with the demand for excess UST to exit the system, which is hindered by the BasePool size,” reads the proposal. “Eliminating a significant chunk of the excess UST supply at once will alleviate much of the peg pressure on UST.”
Some comments on the proposal wondered if this was due to a defect in Terra’s coding or if it was simply the result of a broader market downturn caused by the drop in bitcoin’s price.
Validators on the network can vote on this proposition. A vote tracker shows that the Yes side received 50.47 percent of the vote, while the No side received 49.1 percent. The pass criterion is 50%, and 87.8 percent of eligible voters have already voted.