Do Kwon’s Terra and UST recovery plan — When’s the endgame?


UST Plunged to $0.25 today as Investors sells UST en masse.

At the time of writing, UST plunged to $0.25 as mass panic and selling continues. LUNA crashed further to sub $4 per token from $30 on tuesday.

You might be wondering that those who are holding UST can take on the arbitrage route to regain their UST losses. Traders are meant to be able to exchange $1 of UST for $1 of LUNA. However, this is not possible now as the spread is too high and price of LUNA token has tanked.

To put things in perspective, LUNA has a significantly lower market cap than UST now — about 8 billion less. This is extremely bad for the entire ecosystem as the algorithm is unable to sustain a dollar of UST to a dollar of LUNA.

The price stabilization mechanism is absorbing UST supply at an unprecedented pace as arbitrage is taking place. We will re-visit this again as Terra has announced a recovery plan.

Anchor Protocol deposits drops more than $12B. A classic case of ‘Bank Run’.

This is a classic case of ‘Bank Run’. A ‘Bank Run’ occurs when large groups of depositors withdraw their money from banks on fears that the bank or institution becomes insolvent. To put this into context, Anchor Protocol has lost more than $14B worth of UST deposits over 5 days and it is continuing to plunge. It is currently sitting at $2.67B TVL according to data from Defi Llama.

Anchor Protocol TVL. Adapted from Defi Llama.

With more people withdrawing UST, LUNA will use up their cash reserves, which is at this point already dwindling with LUNA crashing more than 85%. The end result will be Luna Foundation Guard (LFG) going bankrupt and insolvent.

What is going to happen now? — Terra Recovery Plan.

Do Kwon has updated his recovery plans as of Wednesday.

Do Kwon’s tweet on UST recovery plan on Wednesday.

The proposal is to increase estimated minting capacity to $1.2B from $293M. As Billions LUNA are expected to be minted from the arbitrage, speculators can push down LUNA price way ahead of the minting. You can read more about the proposal here.

This will then result in LUNA minting at a lower than expected price. The arbitrage will not work essentially as the difference between the de-peg and $1 worth of LUNA becomes significantly spread out.

As of now, the proposal is still in the process of passing. LUNA price continues to plunge with no end in sight. When investor loses confidence, it becomes a cascading effect. Whilst I have some faith in Luna and Do Kwon, the future seems quite uncertain at the moment. Even if UST regains its peg eventually, the trust is essentially gone.

For me, I still believe in a decentralised future and I will support Terra and Do Kwon’s vision. Unfortunately, progress will come with the costs of failure. It is how we move on from here.

I shall do my part and keep the community posted for any new updates.

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Disclaimer: I am not in any way a financial advisor. This is purely for education purposes. Always DYOR and invest safe!