Terra believes that the bearish pressure that pulled the parity out of the TerraUSD stablecoin (UST) is helping to dilute its proprietary token (LUNA), preventing the recovery of both while creating an excess of UST, and the way to resolve this is by burning UST. and increasing Luna’s available pool.
“The main hurdle is getting debt out of the UST circulation quickly enough for the system to restore on-chain spreads to health,” Terra said on Twitter.
Read more: Terra (LUNA) plummets more than 90% amid the crisis with stablecoin; understand
Algorithmic stablecoins like UST should automatically be pegged to the price of another currency. In its original proposal, investors can exchange LUNA for UST at $1, regardless of the market price, because the algorithms on the backend (system structure) will manage the LUNA supply by creating enough scarcity to justify the $USD price. 1.
A token burn refers to taking the cryptocurrency out of circulation on the blockchain. It can be thought of as a deflationary event because it would increase the value of the remaining blockchain. For holders of the tokens, it would be an event similar to a share buyback.
In a proposal presented to token holders, Terra said it wants to burn the nearly 1 billion UST (approximately $690 million) in the community pool while increasing the available LUNA base pool to 100 million, which in turn, increases minting capacity to over $1 billion.
This will help expedite UST exits from the system and thus bring it closer to its par, while lowering the Luna price.
“Currently, UST burning is too slow to keep up with demand for excess UST to leave the system, which is hampered by the size of the BasePool,” the proposal reads. “Eliminating a significant portion of the UST oversupply in one go will alleviate much of the pressure on UST fixation.”
Some comments on the proposal on networks questioned whether this was because of an Earth encoding bug, or if it was also a result of a broader market downturn driven by the drop in the price of Bitcoin (BTC).
Network validators can vote on this proposal. According to a vote tracker, the yes side received 50.47% of the votes, while the abstention side got 49.1%. 87.8% of eligible voters have already voted and the approval threshold is 50%.
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