Ruholamin Haqshanas
Terra’s governance and staking token LUNA has crashed aggressively, losing more than 96% over the past 24 hours dropping below $1. The sharp decline came after the ecosystem’s algorithmic stablecoin UST lost its peg to the US Dollar after being hit by a massive wave of sell-off.
Meanwhile, TerraLabs CEO Do Kwon has recently voiced support for a community proposal that aims to help restore UST’s peg by increasing the ecosystem’s minting capacity.
LUNA’s Market cap Surpassed by UST’s Market cap
Starting May 8, Terra’s algorithmic stablecoin UST, which had recently surpassed Binance USD (BUSD) to become crypto’s third-largest stablecoin, lost its dollar peg. At the same time, a broad market sell-off pushed the LUNA market cap to drop below the UST market cap, meaning that traders were unable to redeem UST for LUNA, potentially throwing the foundation of UST’s entire mechanism into jeopardy.
This further escalated market concerns, resulting in a run on UST. Anchor Protocol, where more than 67% of UST tokens were locked, started seeing high-volume withdrawals. Over the last two days, more than $8 billion UST has been withdrawn from the protocol.
With investors withdrawing UST and minting LUNA continuously, traders and speculators were able to push down LUNA’s price. LUNA has lost more than 96% of its value over the past 24 hours, currently trading around $1, a far cry from its all-time high of $119, recorded just last month.
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Do Kwon Endorses Proposal that Can Save UST
Do Kwon took to Twitter earlier today to suggest how the algorithmic stablecoin UST can be saved. He noted that the on-chain swap spread has increased to 40% and LUNA’s price has diminished dramatically as the price stabilization mechanism tries to absorb all the selling pressure.
“Before anything else, 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.”
He suggested a community proposal that would increase minting capacity in an effort to “absorb the UST more quickly.” The proposal, which is currently being voted on, suggests increasing BasePool from 50m to 100m SDR and decreasing PoolRecoveryBlock from 36 to 18 blocks which would increase minting capacity from $293m to around $1200m.
“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.”
Do Kwon also warned that the proposal would come at a high cost to UST and LUNA holders. However, he said they will continue to explore various options to “bring in more exogenous capital to the ecosystem & reduce supply overhang on UST.”
At the time of writing, LUNA is resuming its downward movement, with no signs of bottoming. The coin is currently just over $1 having briefly dipped below it, on average down by over 96% over the past 24 hours. The ecosystem’s algorithmic stablecoin UST is trading at $0.39, down by 58% over the past day.
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About the author
Ruholamin Haqshanas is an accomplished crypto and finance journalist with over two years of experience writing in the field. He has a solid grasp of various segments of the FinTech space, including the decentralized iteration of financial systems (DeFi), and the emerging market for non-fungible tokens (NFTs). He is an active user of digital assets for remittances.
