Terraform Labs founder Do Kwon said Wednesday that the company supports a community proposal that could help TerraUSD (UST), a stablecoin pegged to the U.S. dollar, restore its peg.
Algorithmic stablecoins like UST are backed by a basket of assets, such as Terra's LUNA and Bitcoin (BTC). Thus, a UST can be redeemed or minted for exactly $1 worth of LUNA at any time, which helps preserve its value.
UST lost its peg, however, falling as low as $0.66 on Monday. It recovered to $0.90 on Tuesday before falling to a low below $0.35 in Asian trading on Wednesday. This was accompanied by a steep decline in LUNA.
Kwon, who has been uncharacteristically quiet on Twitter in recent days, said there is a plan to tie the UST back to its peg.
"The price stabilization mechanism absorbs the UST supply (over 10% of the total supply)," Kwon said in a tweet in the European hours, explaining how the UST works. "But the cost of absorbing so many stablecoins at the same time has widened the on-chain swap spread to 40%, and the LUNA price has narrowed dramatically due to the absorption of Arbs."
Arbs refers to arbitrage, or a trading strategy used by traders who buy and sell LUNA and UST to maintain the peg while making a profit.
"The only way forward will be to absorb the stablecoin supply that wants to get out before $UST can start repeg. There's no way around that," Kwon said, adding that Terra supports community proposal "1164," which proposes to increase the minting capacity of Terra's LUNA from $293 million to more than $1.2 billion.
This means that additional LUNA would be minted and sold on the market to try to bring the UST exchange rate back to $1. This is in addition to a separate proposal to offer a lower yield to users of Anchor, a Terra product.
The proposal states, "[By enabling] more efficient UST burning and LUNA minting, [which] will put pressure on the LUNA price in the short term, but will be an effective way to bring UST back to the Peg, which will ultimately stabilize the LUNA price."
Meanwhile, LUNA fell to $2.2 in the last hour as traders anticipated further supply increases to increase selling pressure on the token, CoinDesk data show.