- Do Kwon has proposed some remedial measures to aid UST’s peg mechanism.
- According to the UST backer, an increase in basepool and a decrease in PoolRecoveryBlock should help.
- UST price decline will continue “until parity is reached and spreads begin healing.”
The recovery plan that the Terra community has been waiting for has been revealed as TerraUSD’s (UST’s) primary backer Do Kwon breaks his silence, proposing remedial measures to aid the stablecoin’s peg mechanism.
Kwon proposed to increase the “basepool from 50M to 100M SDR and decrease PoolRecoveryBlock” from 36 down to 18. As also seen on the proposal details page, this measure will boost minting capacity to “$1200M” from the current $293M.
The UST backer assured that “this should allow the system to absorb the UST more quickly.”
7/ First, we endorse the community proposal 1164 to Increase basepool from 50M to 100M SDR *) Decrease PoolRecoveryBlock from 36 to 18 This will increase minting capacity from $293M to ~$1200M. https://t.co/aqNKzYK2xCThis should allow the system to absorb the UST more quickly.— Do Kwon (@stablekwon) May 11, 2022
Circling back to what caused the de-pegging, Kwon said that UST’s price stabilization mechanism is absorbing 10% of the stabecoin’s total supply. He explained that the cost of absorbing huge amounts of stablecoins all at the same time “stretched out the on-chain swap spread to 40%.” This has caused the sudden Luna price collapse, “absorbing the arbs.”
He said that UST can only start to repeg when the outgoing stablecoin supply is absorbed. “There is no way around it,” stressed Kwon.
According to Kwon, the bleeding will only end once two conditions are met:
With the current on-chain spread, peg pressure, and UST burn rate, the supply overhang of UST (i.e., bad debt) should continue to decrease until parity is reached and spreads begin healing.
Terra USD (UST) price has gone down by 46.6%, trading below 50 cents, at the time of writing. The algorithmic stablecoin is now 54.8% down from its all-time high of $1.09.