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Crypto: Terra to conduct rescue plan after stablecoin falls to as low as 23 cents on the dollar; LUNA drops 98% in a day

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Backers of the so-called algorithmic stablecoin TerraUSD said they will be conducting a rescue plan after the coin fell to as low as 23 cents on the dollar on Wednesday, which demonstrated real-time the difficulties the cryptocurrency community will have in providing an alternative to the traditional financial system.

Do Kwon, founder of Terraform Labs, which powers the Terra blockchain, said on Twitter that the company is endorsing a community proposal that aims to speed up the reduction of TerraUSD supply, and it will rebuild the coin to be collateralized in the future.

TerraUSD, or UST, which is supposed to maintain a one-to-one peg against U.S. dollars, is trading at around 32 cents on Binance.

UST is backed by another crypto, called Luna, through algorithms. The way it’s supposed to work is that traders can exchange UST for the equivalent of $1 of Luna, and when UST trades below $1, holders have an incentive to burn it and mint LUNA.

Explained: What is an algorithmic stablecoin? Why is Terra in the news? Here’s what investors need to know.

But Luna LUNAUSD is also in freefall, as it plunges to 74 cents, down 97% over the past 24 hours, according to CoinDesk.

Kwon tweeted that the Terra community will raise the minting capacity from $293 million to $1200 million, which will increase the speed to burn UST and mint LUNA.

As LUNA’s supply increases, investors expect to see a further downturn in its price. 

“Before anything else, the only path forward will be to absorb the stablecoin supply that wants to exit before $UST can start to repeg. There is no way around it,” Kwon tweeted.

“This is at a high cost to UST and LUNA holders, but we will continue to explore various options to bring in more exogenous capital to the ecosystem & reduce supply overhang on UST,” Kwon wrote.

Bloomberg reported that the backers of UST are trying to raise about $1.5 billion to boost the coin’s price, citing Kumar Gaurav, the founder and chief executive of crypto liquidity provider Cashaa, who received a proposal.

The Luna Foundation Guard earlier this week said it lent $1.5 billion, half in bitcoin, to help protect the peg.

Treasury Secretary Janet Yellen on Tuesday warned about the threat to financial stability from the unregulated cryptocurrency markets. “A stablecoin known as TerraUSD experienced a run and declined in value,” Yellen said. “I think that simply illustrates that this is a rapidly growing product, and that there are risks to financial stability, and we need a framework that’s appropriate.”

The largest crypto by market cap, bitcoin
BTCUSD,
-3.04%
,
lost 5% over the past 24 hours to around $30,458, according to CoinDesk data. It is down more than 50% from its all-time high in November.

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