On Thursday, Terraform Labs, the team behind the Terra ecosystem, outlined three emergency measures aimed at saving LUNA and its native stablecoin UST from collapse.
The three measures include burning the remaining UST in the community pool, burning any UST that still exists on Ethereum, and staking $240 million LUNA to protect the project from a governance attack.
With a current market capitalization of roughly $143 million, there is not nearly enough liquidity in LUNA to support Terra’s mint-and-burn mechanism and bring UST’s market cap of $7.2 billion back to parity (or below).
Thus the Terraform team is suggesting destroying the UST without swapping it for LUNA.
LUNA acts as an arbitrage cushion for UST to help keep its dollar peg. Investors can always swap one UST for $1 of LUNA and vice versa. If UST falls below $1, investors can buy the discounted token, swap it for $1 in LUNA and then sell the newly-minted LUNA on the market for a profit. Each time this swap is made, the sold-token is burned (crypto speak for destroyed).
First, Terraform Labs suggests burning roughly 1 billion UST in the project’s community pool. The community pool is a special fund designated for funding different projects built on top of the Terra blockchain. Any community member can create a governance proposal to spend the tokens in the community pool.
The current circulating supply of UST is 12.12 billion, according to data from CoinMarketCap. By burning the tokens from this pool, the move would reduce the supply by roughly 8.05%.
The second measure seeks to bridge back 371 million UST from Ethereum to Terra and burn that as well. This would reduce the UST supply by another 3%.
In total, the first two emergency measures would reduce UST’s circulating supply by just over 11%.
“TFL (Terraform Labs) is currently exploring the best avenue to burn the remainder of its UST holdings,” tweeted Terraform Labs. “Much of which has been accrued in recent days to absorb the sell-offs of UST in various open markets.”
Terraform to block governance attacks
The third proposal also outlines that an additional 240 million LUNA tokens would be staked to protect the network from governance attacks.
LUNA is Terra’s governance token, which means it can be used to vote on proposals within the ecosystem. And due to a massive uptick in the amount of LUNA available on the open market, passing harmful proposals is a key risk.
The circulating supply of LUNA increased to 13.72 billion over the past week due to proposal 1164, which essentially increased the amount of LUNA that could be minted per block.
It remains to be seen, however, whether these measures will save UST's peg or the price of LUNA.