• Terra's LUNA witnessed a 89% decline in its price overnight, dropping to levels not seen since early 2021. 
  • Do Kwon, CEO of Terraform Labs, went missing but then reappeared with  a recovery plan for LUNA, followed up by Proposal 1164. 
  • Analysts predict a further decline in Terra's tokens LUNA and UST after the collapse of the algorithmic stablecoin. 

Terra's LUNA has continued its downward spiral following the colossal crash of the algorithmic stablecoin UST. Do Kwon, CEO of Terraform Labs, who disappeared during UST’s debacle has reappeared and announced a recovery plan, known as Proposal 1164. 

Terra bleeds amid market-wide crash, holders await a plan of recovery

Terra's algorithmic stablecoin UST collapsed after losing its $1 peg. This happened despite Terraform Labs employing a dual token mechanism to stabilize UST's peg to $1. 

By design, if the UST price exceeded $1, Terra users burned $1 in LUNA to mint 1 UST and increase the supply of UST. An increase in supply allowed the stablecoin to return to its peg, theoretically.

The converse held true when UST slipped below $1, and burning UST reduced its supply to stabilize the peg. 

While Terraform Labs' dual token mechanism fared well through early 2022, the Luna Foundation Guard, the organization that ensures the stability of UST, acquired billions of dollars worth of Bitcoin and created a reserve for Terra as a further safeguard. 

Experts warned investors of the risk associated with algorithmic stablecoin and previous failures like Iron Finance's IRON's collapse, considered the "world's first crypto bank run."

The pressure on Terra's tokens increased with rising market volatility, and UST lost its peg on May 8, 2022. Proponents observed a recovery within hours, with the help of a Curve Finance user's move to deploy $146 million in a pool in exchange for UST, increasing its price. 

Do Kwon, the Terraform Lab's CEO revealed Luna Foundation Guard's plan to loan out $1.5 billion in Bitcoin and UST reserves to protect the stablecoin's peg; however, these attempts failed, and the token collapsed. 

The CEO told his 495,700 Twitter followers that he is working on an updated plan to promote Terra tokens recovery and disappeared. Kwon’s reappearance was accompanied with a review of the current situation and a proposal to mint more UST. 

Proposal 1164 addresses the slow burn of UST, the leading cause of the stablecoin’s high supply and unstable peg. The proposal elaborates on the loss of confidence in the UST peg and coordinated attacks with the goal of UST de-peg and pushing LUNA prices down aggressively. 

Kwon believes speculators in the crypto market have taken advantage of the news around UST peg restoration and burned more UST to mint billions more LUNA. This has increased LUNA supply and pushed UST below its peg consistently. The front running and selling activities of traders are pushing LUNA down. 

Since there is more than the necessary quantity of LUNA being minted, Kwon proposes to increase the size of the BasePool and decrease the recovery block. This would increase daily minting capacity fourfold and aid the recovery of the Terra/ LUNA ecosystem. 

Kwon's big idea is a proposal for the community and has received over 86 million "YES" votes, a nod from the community that awaits Terra's token recovery. 

The collapse of Terra's stablecoin has garnered attention from critics and analysts in the crypto community, which predicts further decline in LUNA and UST, in the absence of concrete measures for the tokens' revival. 

Miles Duetscher, a host on Crypto Banter, believes UST’s collapse is the biggest threat to crypto, and the algorithmic stablecoin's crash could have massive ramifications on the entire ecosystem. 

Duetscher highlighted the money market Anchor Protocol's role in the collapse of Terra's UST, acknowledging its dominance over UST. 57.8% of the protocol's total value locked was wiped out this week. UST is leaving Anchor, swapping for other assets, and the total selling pressure on the algorithmic stablecoin is rising. 

The analyst predicts a further negative impact on UST. 

 

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