TFL Proposes Contingency Response to Respond to Recent Collapse of Terra Ecosystem

Terra and its ecosystem have had some pretty tough times over the past few days. As UST loses peg and LUNA freefalls, Terra is under pressure to quickly settle its “bad debt” and restore community trust on its own.

TFL’s Proposed Solution for Terra

According to a series of tweets shared on Terra’s official page, TFL is proposal Incineration of the remaining UST stablecoin holdings. More specifically, the team wants to burn a total of 371 million UST stablecoins distributed on Ethereum for liquidity.

Just yesterday, Terra co-founder Kwon Do supported a similar proposal. The reasoning behind it was to burn UST, which would effectively issue more LUNA tokens. Crypto Potatoes previously explained.

In theory, UST’s parity against the dollar will eventually recover along this path. But all of this happens at the expense of LUNA. Tokens are heavily diluted, allowing them to do more damage to the price they have already been beaten and hit.

At reporting time, LUNA was trading at $0.023 on CoinGecko, down 99.1% in the past day alone. data show. Just six days ago, crypto assets were trading above $80. The fact that LUNA has an infinite supply doesn’t help either. Even if the price becomes more stable, it is highly likely to settle at a lower level than before, Kwon explained.

The final solution proposed by TFL is to stake 240 million LUNA tokens to harden the Terra network against governance vulnerabilities.

Please note that the above emergency measures are currently awaiting community votes. If they passed, Terra would have burned about $1.4 billion (UST), or about 11% of the total supply.

Terra added:

“Bying the system’s bad debt with the above items will help restore on-chain swap spreads to a meaningful level, which will significantly ease the pinning pressure on the UST.”

Different types of stablecoins

Since its founding nearly two years ago, Terra has been proud of the stablecoin’s unique algorithmic system as it has been able to maintain a dollar peg without statutory collateral. Earlier this year, the network took another approach to collateralize UST with Bitcoin (BTC).

Terra recently bought $100 million worth of BTC to shop for Bitcoin, raising their total holdings to over 42,000 BTC. However, the Luna Foundation Guard was desperate to deploy this stash to rescue the recently fallen UST.

At the time of writing, UST was trading at $0.48, a more than 50% discount off the level required by stablecoin status.

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