Following the material and ongoing UST peg deviation over the past several days, inflated swap spreads via the Terra protocol’s market module to absorb the overhang of the UST supply have created extreme pressure on LUNA’s price.
Currently, the burning of UST is too slow to keep pace with the demand for excess UST to exit the system, which is hindered by the BasePool size. Prop 1164, currently live on Terra Station, helps resolve the bottleneck issue of burning UST by:
- Increasing the BasePool from 50M to 100M SDR.
- Decreasing PoolRecoveryBlock from 36 to 18 Blocks.
Subsequently, minting capacity will increase from $293M to ~$1200M. The result will help expedite the outflows of UST from the system, reducing swap spreads and pressure on the UST peg but coming at the cost of the LUNA price.
We propose several further actions to reduce the outstanding bad debt of the Terra economy and help restore the UST peg by burning the remainder of the Community Pool’s UST.
Currently, 1,017,233,195 UST remains in the Community Pool. The current UST circulating supply is 12,623,445,466 at the time of writing. As a result, burning the remainder of the Community Pool’s UST will reduce the circulation of UST by roughly 8.05%, based on the current supply figures at the time of writing.
Eliminating a significant chunk of the excess UST supply at once will alleviate much of the peg pressure on UST. This is advantageous relative to the slow burn rate and type of downstream effects that inflated on-chain swap spreads induce on the Terra economy over an extended period.
Additionally, we propose burning the remainder of the cross-chain UST on Ethereum deployed as liquidity incentives from the community pool. You can find the address with the funds below:
In total, this equates to 371.29 million UST – making the total burn 1,388,233,195.
This is ~11% of the outstanding UST liabilities.
If this proposal passes, the 1,017,233,195 UST from the Community Pool will be sent to the Community Core Burn module address below, where it will be immediately burned. Additionally, the 371 million cross-chain UST will be bridged back to Terra and burned by TFL upon the results of the pending governance vote.
Considering the urgency of the prevailing issues with Terra, this proposal will be immediately initiated as an on-chain vote.