The prevailing peg pressure on UST is rendering severe dilution of Terra (LUNA)

Terra has officially spoken about the recent situation of the project. Accordingly, they argue that the prevailing peg pressure on UST from its current supply overhang is rendering severe dilution of LUNA.

What happened with Terra (LUNA)?

The primary obstacle is expelling the bad debt from UST circulation at a clip fast enough for the system to restore the health of on-chain spreads. Therefore, to expedite this goal, several measures are being taken. First, the current Prop 1164 will expand the base pool size and accelerate the burn rate of UST – helping deflate on-chain spreads.

TFL is also initiating three more emergency actions:

  1. Proposal to burn the remaining UST in the community pool.
  2. TFL will burn the remaining 371 million UST cross-chain on Ethereum.
  3. TFL just staked 240 million LUNA to defend from network governance attacks.

It is known that TFL will port the remainder of the UST deployed as liquidity incentives on Ethereum (371 million UST) over the past months back to Terra and burn it all using the burn module pending the result of the governance proposal.

TFL is currently exploring the best avenue to burn the remainder of its UST holdings, much of which has been accumulated in recent days to absorb the sell-offs of UST in various open markets. Overall, approximately 1,388,233,195 will be eliminated from the UST supply upon executing the three proposed items above. This equates to roughly 11% of the outstanding supply.

Expelling the system’s bad debt with the above items should help restore the on-chain swap spreads to a meaningful level where the peg pressure on UST is significantly alleviated. Once the new base pool proposal passes, this will also expedite the process.

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