Terraform Labs CEO outlines plan to rescue UST as LUNA tumbles below $1

Terraform Labs chief Do Kwon unveiled a plan to restore the price of the algorithmic stablecoin UST. Against this backdrop, LUNA breached the $1 mark.

2/ 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.

Together.

— Do Kwon 🌕 (@stablekwon) May 11, 2022

As of writing, UST was trading around $0.50. In the last 24 hours it had fallen 46% (CoinGecko).

“The price-stabilising mechanism is absorbing UST supply (over 10% of the total supply), but absorbing such a volume of stablecoins has widened the swap spread on the network to 40%, and the price of LUNA has fallen sharply,” Kwon noted.

He said the necessary step before taking further measures would be to absorb the supply of UST holders who wish to exit the asset.

6/ 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.

We propose several remedial measures to aid the peg mechanism to absorb supply:

— Do Kwon 🌕 (@stablekwon) May 11, 2022

The plan envisages accelerating LUNA issuance. Under the mechanism, 1 UST should be exchangeable for $1 in LUNA at any moment. In Kwon’s view, this “will allow the system to absorb UST faster.”

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/aqNKzYK2xC

This should allow the system to absorb the UST more quickly.

— Do Kwon 🌕 (@stablekwon) May 11, 2022

“Of course, UST and LUNA holders will bear substantial costs, but we will continue to explore various options to attract external capital into the ecosystem and reduce UST’s oversupply,” he added.

After restoring the peg, Kwon pledged to use a collateralized mechanism.

12/ As we begin to rebuild UST, we will adjust its mechanism to be collateralized.

— Do Kwon 🌕 (@stablekwon) May 11, 2022

Against the plan’s publication, LUNA quotes plunged below $1. The price briefly hovered around $0.80; at the time of writing, the rate had moved to above $2 (Binance). According to CoinGecko, the asset had lost 97.5% over the past 24 hours.

The model for preserving parity with the dollar largely relies on arbitrageurs. If the stablecoin’s price falls below $1, traders can buy it and redeem it for $1 in LUNA, pocketing a profit.

For the mechanism to work, there must be demand for the target asset. In the case of UST, the platform is Terra’s largest protocol—Anchor. In the wake of the collapse of the stablecoin and LUNA, ANC’s price dropped 71.3% over the past 24 hours.

“ANC price plunged due to loss of trust in UST and the Terra ecosystem as a whole following the de-pegging of the stablecoin to the dollar,” Idan Au, Director of Research at The Block Research, said.

The sharp drop in LUNA prompted responses from several South Korean exchanges. Coinone, part of the “big four,” paused trading of the asset, while Korbit and Bithumb issued investor warnings.

According to Messari’s analysts, the first “fallen domino” in the UST saga was Luna Foundation Guard (LFG) 37 863 BTC for a total of about $1.5 billion on May 5. The deal was executed off the exchange, with Genesis Global Trading and Three Arrows Capital acting as intermediaries.

“Saturday [May 7] marked the start of the UST de-pegging cascade. Binance experienced a slight 25 basis-point depeg, likely because Three Arrows Capital and Genesis Global Trading dumped their UST from the LFG,” the thread says.

3/ Saturday marked the start of the $UST de-pegging cascade. @binance experienced a slight 25 bps depeg May 7, likely due to 3AC and @GenesisTrading unloading their @UST from the @LFG_org $BTC purchases.

— Messari (@MessariCrypto) May 11, 2022

Analysts noted that with such an outflow of supply, pressure would be exerted at critical peg-stabilisation points, notably at Curve Finance.

“In a broader market sell-off, a large and sudden appearance of UST supply created reflexive selling pressure on LUNA, culminating in the loss of the peg to the dollar,” Messari added.

On May 11, a Twitter user drew attention to a memo to Arca’s investors, apparently drafted before May 11. It disclosed recent investments in LUNA.

“LUNA was and remains a core position in our digital assets fund. UST is our main stablecoin, which we continue to use in the Digital Yield Fund,” said Arca CEO Rain Steinberg.

According to him, over the past weekend analysts conducted a study and concluded that UST should recover. On Monday, May 9, the firm’s Risk and Investment Committee decided to continue to adhere to this view.

“We firmly believe that the price-support mechanisms are functioning as planned and can withstand periods of extreme stress,” the letter states.

Earlier, The Block sources reported plans by LFG to raise $1 billion to stabilise the peg. According to Miki Honkasalo, the publication’s analyst, this attempt failed.

As ForkLog reported in a recent exclusive, Anchor’s problems could undermine Terra’s economy and the cryptocurrency markets.

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