Terra Luna Crash - Recovery Plan Announced

What happened to LUNA and UST? People were withdrawing entirely from the Anchor Protocol with 20% APY, the main reason to hold UST, and UST kept losing its peg while LUNA was being minted at an insane rate and losing value to counteract the situation and try to pull back. With complete panic from investors, the massive sell-off began while the minting process continued, taking LUNA’s value to virtually zero while and continuous minting while UST remains trading at much lower than $1 dollar.

The Recovery Plan

• Expanding the base pool for UST
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• Staking 240 million LUNA
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• Expelling “bad debt”

Will it work? Community argues against plan: There are those who argue that the plan no longer makes sense as LUNA’s supply spiralled completely out of control - making it impossible to secure the network. But most argue that the UST stablecoin shouldn’t be rescued; instead, it should be dropped entirely so the project can start anew with a different path. From the looks of things, the issue is just getting started, but we look forward to the situation being resolved.

To say that the current scenario has been difficult for the Terra Foundation and its projects LUNA and UST would be a massive understatement. After rising concerns of UST losing its 1 : 1 algorithmic peg against the US dollar started surfacing in the first week of March, that’s precisely what has happened. On Monday 9th of May 2022, UST dropped from the perpetual $1 to 0.75 cents, reaching the lowest $0.30 cents mark two days later.

LUNA’s results of the same week, however, were much worse. In fact, monumentally worse than any drop ever seen in crypto history. In a matter of four days, from May 9th to May 12th, LUNA dropped from roughly $80 dollars to $0.02 cents - a 100% drop in price, eliminating $30 billion dollars from its market cap and leaving millions of investors and enthusiasts in absolute panic, wondering what would come next.

The Terra Foundation, along with its founder Do Kwon, promptly announced details of their recovery plans for the project. Therefore, in this piece, we summarize what has been discussed so far for Terra LUNA’s recovery plan.

What happened to LUNA and UST?

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Yearly chart of LUNA and its fatal May 2022 crash.Source: CoinGecko

In order to maintain UST’s stablecoin price of one dollar, the asset works in co-dependency to LUNA where $1 dollar of UST can always be used to mint $1 dollar of LUNA. Through complex mechanics of minting and burning frameworks, higher demand for UST would cause LUNA to burn supply and, therefore, raise its overall value per coin. Before this crash, UST quickly reached the top 3 stablecoin positions in the world while LUNA maintained its place in the top 10 global ranks.

But what made UST so attractive to hold? That’s because of Anchor Protocol, a platform accessible through Terra Station that allowed users to receive up to 20% APY for simply holding a stablecoin - a massive profit compared to what can usually be rewarded by simply holding fiat or other stables. Everything was working well for LUNA, UST and the Anchor Protocol; more people deposited UST for the APY and therefore more LUNA was being burned and rising in value.

However, critics of this structure argued that Anchor’s APY levels were extremely inflated and unsustainable. As it turns out, they were right. As the APY returns became lower, people withdrew from UST deposits at record speed, until the algorithmic stablecoin started losing its peg. Chaos ensued; in a nutshell, more and more people were withdrawing entirely from the protocol and UST kept losing its peg while LUNA was being minted at an insane rate and losing value to counteract the situation. With complete panic from investors, the massive sell-off began while the minting process continued, taking LUNA’s value to virtually zero while and continuous minting while UST remains trading at much lower than $1 dollar.

The Recovery Plan

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Terra Founder Do Kwon’s first tweet following the total LUNA/UST collapse:Source: Twitter

Announced on Twitter by both Terra founder Do Kwon and Terra’s official account, the recovery plan thus far will proceed as follows:

Expanding the base pool for UST

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By expanding the base pool for UST, the Terra Foundation hopes that it will provide a more balanced structure for the algorithmic stalecoin, burning it at a much more rapid speed in the hopes of deflating the asset and returning it to its $1 position or close to it. The project hopes to burn around $1.4 billion dollars in UST.

Staking 240 million LUNA

The following procedure is to stake 240 million LUNA in the protocol to defend from governance attacks, which many believe was the case for why the network crashed (evidence has yet to be provided). However, the amount might soon be updated. Due to its current minting loop, LUNA’s supply at the time was much lower than it currently stands at more than 95 billion coins and still growing rapidly. By the time you read this, it might even be in the trillions. Therefore, this step seems like a waste of time.

Expelling debt

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Through this method, the foundation and Do Kwon believe that the UST burn of roughly 11% of its supply and staking LUNA will be able to eliminate “bad debt” and return on-chain spreads.

Will it work? Community argues against plan

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The previously-described proposal, present in Terra’s Agora forum under the title Prop 1164, has been receiving plenty of feedback and voting over the past few days. Almost all feedback, however, is quite negative. There are those who argue that the plan no longer makes sense as LUNA’s supply spiralled completely out of control - making it impossible to secure the network.

But most argue that the UST stablecoin shouldn’t be rescued; instead, it should be dropped entirely so the project can start anew with a different path. From the looks of things, the issue is just getting started, but we look forward to the situation being resolved and that the community is able to find solace in a new future with the crypto ecosystem - whatever future that might be.



Author: Gate.io Researcher Victor Bastos
* This article represents only the views of the researcher and does not constitute any investment suggestions.
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