Takeaways
- The Terra Participants voted to raise the maximum value for printable LUNA to $1,2 billion
- Arbitrage traders will be able to take advantage of this move to reduce the pressure on the UST and revert it to its original one-to-one tracker with US dollars.
A proposal aimed at halting — or at least slowing — the death spiral of Terra’s algorithmic stablecoin UST is expected to be passed. There are still doubts about whether the proposal will work.
UST fell dramatically during this past week. It reached a minimum of $0.298 today according to CoinGecko. Stablecoins had maintained their one-to-1 peg with the US dollar, barring a few hiccups, since October 2020.
The token’s adjacent cryptocurrency, LUNA, has crashed even harder over the past week – from $82 to a little over $2 at press time, a stunning, historic 97% collapse. The fallout has weighed heavily on the entire Terra ecosystem — and digital assets writ large.
Terra Governance proposal #1161 now allows for the printing of LUNA tokens up to $1.2 Billion, an increase from $293 M.
Why? It is a good idea to print more LUNA tokens that traders can sell in exchange for UST. “absorb the stablecoin supply that wants to exit before UST can start to re-peg,” tweeted Terraform Labs founder Do Kwon — who has been ostracized by Twitter investors by brushing off the extent of the problem, promising his “lunatics,” LUNA is a group of investors. “rescue plan” The project is underway.
VanEck and other Wall Street titans, including retail giants like Walmart have also been hit hard. Matthew Sigel is the head of VanEck’s digital asset research. He said Terra tokens were held by VanEck’s cryptocurrency-focused Smart Contract Leaders funds as UST’s peg was unmoored.
The fund is designed to match or exceed an index. “layer one” Terra, which rose in value from $10 up to $100 within the last 12 months, was one of those cryptocurrencies that benefited. The share price of Terra has declined by around 20% over the last week, even though crypto markets have been down everywhere.
VanEck was faced with a decision: sell and cut losses or purchase more and dollar-cost-average a rebound.
Sigel explained to Blockworks that by selling the fund at $0.90 the fund avoided a bigger catastrophe.
During the collapse, Terra’s decentralized flagship applications built using Anchor have lost more than 15 billion dollars in collateral. Now, just $2.39 billion is locked – proof that confidence in UST and LUNA has evaporated in tandem with buying interest.
UST can be traded for 1 LUNA. Arbitrageurs are those who buy and sell tokens to make a profit. They use overlapping transactions in order to maintain the UST price.
Anchor’s Native Token has also suffered a lot of damage. It is down by nearly 85% in value since Monday.
Anchor’s complimentary proposal, submitted this week, seeks to lower its interest rate minimum from 18% down to 3.5%. This will ensure Anchor has enough reserves to continue distributing a return. The protocol defended the sky-high payout as necessary to attract users in its early days — akin to tech startups burning money on marketing to corner market share — but critics have long argued it’s unsustainable and, for the most part, no longer needed.
The widespread selling pressure led to rumors about a bailout funded by institutional investors and large traders, including Alameda Research, Jump Capital, and others.
Terraform Labs’ early investors Binance Labs Arca and BlockTower declined to comment if bailout talks took place.
VanEck’s Sigel, however, said Terra’s $1.2 billion coining cap would not cut it considering the lingering and large disparity in UST deposit rates and Anchor loan rates.
Sigel says that the large OTC participants have not publicly supported Terra’s ecosystem bailout because of this gap. “obvious that previous allies have turned enemies.”
Terra’s alliance with Avalanche, as well as its diversification into Bitcoin, had raised hopes that consolidation among layer-1 blockchains would help fortify interoperabile blockchains for market downturns — albeit perhaps not one of historic proportions.
Sigel, in addition to heavily collateralizing Terra’s assets with tangible ones, floated a more general escape route for Do Kwon as well as Terra: a merger of full force with Avalanche.
Avalanche might have applauded a merger months ago. However, given Terra’s recent sell-off it is unclear whether Terra could gain any capital from a possible merger.
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