- LUNA creator Terraform Labs released an action plan to combat the current crisis
- The protocol will burn its UST holdings to reduce liabilities
- UST on the Ethereum network will also undergo a burn
- 240 Million LUNA will be staked to safeguard the Terra ecosystem
- The plan comes a few hours after CEO Do Kwon tweeted an initial recovery strategy.
Terraform Labs has unveiled a series of steps geared toward facilitating UST’s recovery after the algorithmic stablecoin lost its peg to the US Dollar.
In a Twitter thread published on Thursday (May 12, 2022), the network released three extra emergency actions as LUNA prices fell below $0.10. The plan also comes a few hours after CEO Do Kwon tweeted about proposal 1164.
Kwon explained that 1164 will trigger a new base pool for the protocol allowing UST holders to swap their stablecoins for LUNA. The process reportedly increases LUNA mint capacity by around 4x but also floods the market with more LUNA coins.
Terra’s Three-Step Plan
The latest action plan begins with burning some 1 Billion of Terra’s UST holdings in the community pool. Also, the network will cut out cross-chain liquidity incentives by burning an additional 371 million UST currently available on Ethereum.
After the process, about 11% of os UST’s liabilities should be wiped out with a total burn amount of over 1.3 billion of the stablecoin.
Expelling the system’s bad debt with the above items should help restore the on-chain swap spreads to a meaningful level where the peg pressure on UST is significantly alleviated. Once the new base pool proposal passes, this will also expedite the process.
Finally, Terra hopes to bolster network security and mitigate any attacks on the blockchain by staking 240 million LUNA.
As of press time, both LUNA and UST prices remain down. Although the stablecoin has recovered 14% in the last 24 hours, UST is still about 60 cents off from its $1 peg.