Terra USD will be collateralized: the recovery plan announced by its developer

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Key facts:
  • An attempt will be made to absorb the offer of the cryptocurrency, which will have a collateral.

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

Do Kwon, lead developer of Terra USD (UST), the eponymous network’s stablecoin, stated that the cryptocurrency will move 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.

Through 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 on Terra.

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

“As we rebuild UST, we will adjust its mechanism to make it collateralized,” reads one of the posts in the developer thread. This reconstruction, he details, will begin with the absorption “of the UST offer” before the cryptoactive can begin to equalize its value with that of the US dollar, which is 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 crypto asset could stabilize along with its supply, although the opposite would happen with terra (LUNA). This other cryptoactive is used for the issuance of UST, but also for its burning. Therefore, the supply and demand of both cryptocurrencies are directly related.

Confronted with this, Do Kwon noted that “the cost of absorbing so many stablecoins at the same time has extended the on-chain swap margin to 40%, and the price of terra (LUNA) has dropped dramatically.”

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Terra USD will be collateralized: the recovery plan announced by its developer

To absorb that offer from UST, the first thing Do Kwon proposes 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 complement the official reserves of the countries. According to the IMF, one SDR is equal to US$1.33.

Terra USD will be collateralized: the recovery plan announced by its developer
Do Kwon introduced Proposal 1164 to the Terra community to stabilize
the price of UST. Source: @stablekwon/Twitter

This proposal from Terra, the number 1164, it also proposes lowering the PoolRecoveryBlock from 36 to 18. Both decisions are intended to increase the creation capacity of the UST stablecoin from $293 million to approximately $1.2 billion, which “will help absorb supply more quickly.”

At the time of publication of this article, proposal 1164 on Terra had 86.5 million photos 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 UST’s strategy for the future, Do Kwon also made reference to the current scenario that the cryptocurrency is experiencing. As CriptoNoticias 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 was able to drop to USD 0.68 on Tuesday and to USD 0.30 on Wednesday, according to CoinMarketCap data.

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

As such, 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 decline until it reaches parity and spreads start to heal.”

However, this will be “at a high cost to UST and terra (LUNA) holders,” he admitted. In another thread message from him, Do Kwon claims to know that “the last 72 hours have been extremely tough” and says that he is “determined to work through this crisis together.” In the meantime, circulate on social media very harsh testimonials on the desperation of LUNA and UST investors before 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 excess supply in UST,” added the development leader of the stablecoin, which at the time of its publication on the social network was trading at USD 0.50.

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