Terra’s Do Kwon Proposes Recovery Plan for LUNA and UST Stablecoins After Crash

Do Kwon, the Terraform Labs founder, and CEO, has broken his Twitter silence to announce the Terra network’s next moves following the recent market disaster. As Terra’s UST is down more than $0.75 from its dollar peg, LUNA, the currency that holds it in place, is also in freefall. Do Kwon of Terraform Labs states a new proposal aimed at re-pegging the ecosystem’s native stablecoin UST.

Kwon said:

“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,”

With Terra’s native dollar-pegged stablecoin UST having plummeted to $0.30, Kwon’s immediate goal appears to be to restore the stablecoin above $1. The impact on LUNA, which has plunged by more than 90% in the last 24 hours, is still unknown. Kwon has proposed increasing the supply of LUNA on the market to absorb investors’ attempts to offload the flawed stablecoin.

“The price stabilization mechanism is absorbing UST supply (over 10% of total supply), but the cost of absorbing so much stablecoins at the same time has stretched out the on-chain swap spread to 40%,” he wrote. “Luna price has diminished dramatically absorbing the arbs.”

The proposal would rely on the network’s built-in mint-and-burn mechanism which Kwon referred to as the “price stabilization mechanism”.

Investors can always exchange one UST for one LUNA; however, doing so burns the UST and removes it from circulation. This method highlights arbitrage options: whenever UST goes below its peg, smart investors can buy the discounted UST and exchange it for $1 in LUNA.

The buying pressure from scooping up UST on the market, combined with the deflationary impact of limiting its supply, keeps the peg in place. Going forward with the proposal would come “at a high cost to UST and LUNA holders” according to Kwon, who also stated that other proposals would be addressed on the Terra forum.

Despite the bleak prospect for the Terra ecosystem and community, Kwon closed his statement on a hopeful note. He wrote,  “Terra’s return to form will be a sight to behold,” and “We’re here to stay. And we’re gonna keep making noise.

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