UST founder Do Kwon shares a plan to save his stablecoin from mass destruction – TechCrunch

The last few days have been extremely volatile in the crypto economy, after one of the (supposed to be) largest stablecoins, TerraUSD (UST), de-pegged from its $1 value and fell as much as 70% to 29 pennies this morning. .

Do Kwon, the founder of Terraform Labs (TFL), the organization behind UST, the Terra cryptocurrency (LUNA), and the Luna Foundation Guard (LFG), shared an update on the situation in a tweet thread this morning, hoping to right the ship.

“I understand that the last 72 hours have been extremely difficult for all of you. Please know that I am determined to work with each of you to get through this crisis and we will build our way out,” Kwon said. “Together.”

UST is an algorithmic stablecoin that relies on a system of traders swapping between LUNA and UST when the value of UST rises or falls from its 1:1 ratio, so it could be held in the US dollar. Every time a $1 worth of UST token is bought, $1 worth of LUNA is burned, and vice versa.

If the UST exceeds $1, arbitrageurs are encouraged to burn LUNA to generate more UST and return it to its value of $1. If demand contracts and the UST falls below $1, as we have seen in the last couple of days, the UST could get burned for LUNA. (Burning is a common mechanism in cryptocurrencies to take tokens out of circulation to keep demand and supply healthy; in this case, burning reduces supply with the goal of making it more scarce and valuable, thus keeping algorithmic stable like UST. ) But in this most recent scenario, tons of capital was pumped out of UST after arbitrageurs sold LUNA, causing the “stablecoin” to crash drastically, putting massive pressure on its ecosystem.

Kwon acknowledged that due to the algorithmic nature of UST, there was a significant impact on the price of LUNA, which peaked at $119.18 in April, but has since crashed to 85 cents at press time. In the last 24 hours alone, LUNA fell more than 96%, according to data from CoinMarketCap. “The price of the Moon has drastically decreased absorbing the [arbitrage],” the saying.

LFG is also seeking to raise more than $1 billion from investment firms and market makers, according to a May 10 article from The Block, citing multiple anonymous sources.

The deal is not finalized; Negotiations are currently underway for investors to buy LUNA tokens at a 50% discount with a two-year vesting schedule, The Block reported. Since then, LUNA has been discounted well beyond that value, so it’s unclear whether investors will continue to consider the deal.

“First of all, the only way forward will be to soak up the stablecoin supply that wants out before $UST can start to repeat itself,” Kwon wrote. “There is no way to avoid it.”

The impact of this event may have broader market-wide implications, as seen earlier this week when the value of bitcoin fell below $30,000 and US Treasury Secretary Janet Yellen pushed for increased regulation of stablecoins during annual testimony before the Senate Banking Committee on May 10. right in the middle of when Terra’s algorithmic stablecoin UST struggled to hold its peg.

Responding to questions from Senators Pat Toomey and Catherine Cortez Masto, Yellen said it would be “very appropriate” for stablecoin regulation to happen by the end of 2022 because there are “a lot of risks associated with cryptocurrencies.”

“We really need a consistent federal framework,” Yellen said.

While some cryptocurrency and stablecoin holders (and non-believers) have already jumped ship, others who believe deeply in the project are willing to give it another go.

“Supporting the failure of $UST is supporting the failure of all stablecoins (and cryptocurrencies),” Sheldon Evans, a crypto-focused YouTuber with around 740,000 subscribers, tweeted. “Centralized [stablecoins] where the collateral is not fully public and transparent like $USDT (which [by the way] what most of the cryptocurrency market is built on) could destroy everything.”

Going forward, Kwon plans to back a Terra community proposal that will increase the amount of LUNA that can be minted by four times, so that holders can “absorb UST faster” or sell because only a certain amount of UST can be sold. . newspaper.

But by increasing the minting capacity, the price of LUNA will have the ability to fall further. As it stands, about 95,200,000 votes, which are based on the number of LUNA tokens, not per user, have been cast in favor of the proposal, with zero votes against.

“Naturally, this comes at a high cost to UST and LUNA holders, but we will continue to explore various options to bring more exogenous capital into the ecosystem. [and] reduce excess supply in UST,” Kwon said.

As Terraform Labs rebuilds UST, the team will adjust its stablecoin mechanism to ensure this, Kwon said.

In April, Kwon told TechCrunch that he planned to back UST with a “basket” of Layer 1 cryptocurrencies over time, in addition to the US dollar and bitcoin.

“Stablecoins are like the utility side and basically the money of cryptocurrencies,” Kwon said at the time. “Possibly aside from Bitcoin, stablecoins are the holy grail use case of cryptocurrencies.”

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