the recovery plan announced by its developer

the recovery plan announced by its developer

Key facts:
  • An attempt will be made to absorb the supply of the cryptocurrency, which will become collateral.

  • This will entail a “high cost” for Terra USD and LUNA holders, Do Kwon said.

Do Kwon, development leader of Terra USD (UST), the stablecoin of the homonymous network, stated that the cryptocurrency will go from being based on an algorithmic method to being backed by another asset. The measure is part of a recovery plan due to the fall in the price of the cryptoactive.

By means of a twitter thread, Do Kwon provided in the early hours of the morning of Wednesday, May 11, more details about the announced contingency plan to save one of the main projects in Terra.

The most striking thing about the presented plan is the model change in the operation of UST. In the future, the stablecoin it will no longer be based on an algorithm to maintain its parity with the US dollar, but will be backed by another asset. This is something that Do Kwon himself he has criticized severely in the past.

“As we rebuild UST, we will adjust its mechanism so that it is collateralized,” says one of the messages in the developer thread. This reconstruction, he details, will begin with the absorption “of the gold supply” before the crypto asset can begin to equate its value with that of the US dollar, which constitutes the main purpose of this stable cryptocurrency or stablecoin.

This stabilization mechanism demands the absorption of 10% of the total supply of UST. In other words, the stablecoin development team would remove that 10% of issued tokens from circulation. Thus, the price of the cryptoactive could stabilize along with its supply, although the opposite would happen with terra (MOON). This other cryptoasset is used for the issuance of UST, but also for its burning. Therefore, the supply and demand of both cryptocurrencies are directly related.

Faced with this, Do Kwon pointed out that “the cost of absorbing so many stablecoins at the same time has extended the on-chain exchange margin to 40%, and the price of terra (LUNA) has drastically decreased.”

To absorb that supply of UST, the first thing Do Kwon proposes it is to increase the common fund from 50 million to 100 million in special drawing rights. These assets, also known as SDR or SDR for its acronym in Spanish and English, respectively, were created by the International Monetary Fund (IMF) to supplement the official reserves of the countries. According to the IMF, one SDR is equivalent to 1.33 US dollars.

Do Kwon introduced proposition 1164 to the Terra community to stabilize
the price of UST. Source: @stablekwon/ Twitter

This Terra proposal, number 1164, also proposes the reduction of the PoolRecoveryBlock from 36 to 18. Both decisions are aimed at increasing the creation capacity of the UST stablecoin from USD 293 million to approximately USD 1,200 million, which “will help absorb the supply more quickly.”

At the time of publication of this article, proposal 1164 on Terra had 86.5 million votes in favor (79%), 22.5 million abstentions (21%) and no votes against. Voting will end in seven days.

The current situation and what can be expected in the short term

Beyond announcing the future investment strategy, Do Kwon also made reference to the current scenario that cryptocurrency is experiencing. As Criptonews reported on Tuesday, May 10, the massive sales of UST overthrew the algorithm that was supposed to keep its value at USD 1. Instead, its price managed to fall to USD 0.68 on Tuesday and to USD 0.30 on Wednesday, according to data from CoinMarketCap.

terra usd price chart
The UST stablecoin lost 70% of its market value in a couple of days. Source: CoinMarketCap

Thus, Do Kwon stated that “with the current on-chain spread, parity pressure and UST consumption rate, UST oversupply (i.e. bad debt) should continue to decrease until parity is reached and spreads begin to heal.”

However, this will be “at a high cost for the holders of UST and terra (LUNA),” he admitted. In another message on his thread, Do Kwon assures to know that “the last 72 hours have been extremely hard” and says that he is “determined to work to overcome this crisis together”. Meanwhile, they circulate on social networks very harsh testimonials on the despair of the investors of LUNA and UST in the face of the collapse of part of its portfolio.

“We will continue to explore various options to add more external capital to the ecosystem and reduce the oversupply in UST,” added the development leader of the stablecoin, which at the time of its publication on the social network was trading at $0.50.