BigONE Insights: Will The Terra Ecosystem Stablecoin UST Ever Re-peg?

It’s been over 8 months since the untimely demise of the Terra ecosystem, after the bank run that ensued on its algorithmic stablecoin $UST. The Terra ecosystem is a decentralized platform that runs on a stablecoin called UST. The UST stablecoin’s value is pegged to the US dollar and is intended to maintain a stable value relative to a basket of fiat currencies. The stability of UST is critical for the Terra ecosystem’s operation because it allows for the use of a stable medium of exchange and store of value.

The unprecedented decline of Terra’s native token and algorithmic stablecoin protocol $LUNA in May shook the entire cryptocurrency space to its core. The Luna crash caught everyone off guard, wiping nearly $50 billion off its market cap in less than 48 hours, dropping from around $80 to less than $1 in hours. Many theories have contributed to the $LUNA’s overnight price drop. While the most obvious reason was that $UST, the algorithmic stablecoin pegged by $LUNA, lost its peg and traded below $1, there were rumors of third-party influence, most notably Citadel and the involvement of some cryptocurrency exchanges.There are also rumors that Do Kwon, the founder of $LUNA’s parent company Terraform Labs, may have exited with as much as $9 million and then “rug pulled” the Terra project. In this article, we will examine recent developments in the Terra ecosystem and whether or not UST will ever be pegged to $1.

Peg Mechanism of $UST

At present, the Terra ecosystem is designed to maintain the stability of UST through a combination of algorithmic and decentralized mechanisms. The algorithmic mechanisms include a dynamic collateral system that adjusts the supply of UST based on market demand. Additionally, the Terra ecosystem employs a decentralized governance model that allows stakeholders to vote on changes to the system, including changes to the peg.

However, it is possible that the Terra ecosystem may face unforeseen challenges that could cause UST to deviate from its peg. In such a scenario, the Terra community may consider re-pegging UST to restore its stability. The decision to re-peg would likely be made through a decentralized governance process, where stakeholders would vote on the proposal.

It is important to note that re-pegging is not a common occurrence in the world of stablecoins, as the goal is to maintain a stable peg over the long-term. Nevertheless, the ability to re-peg if necessary demonstrates the flexibility and adaptability of the Terra ecosystem.

Current Developments Regarding $UST

There is currently a live proposal referred to as the “Ziggy USTC re-peg action plan” on the Terra governance forum, outlining plans on how the Terra ecosystem would work its way back to being an algorithmic stablecoin protocol. To help rebuild the ecosystem, the tokens were renamed LUNA Classic (LUNC) and USTC.

Several proposals have been considered by the LUNC community in efforts to restore USTC to peg. Meanwhile, the proposal to relink USTC and LUNC has been approved by governance.

The community proposal seeks to restore USTC to peg status through a variety of strategies, including:

• Having reserves in a variety of assets and currencies.
• Implementing a buyback and burn mechanism to control USTC supply and demand.
• Paying interest in US dollars to encourage holders to keep USTC when the price is below the peg and charging interest when the price is above the peg.
• To reduce the risk of manipulation by a single oracle, multiple oracle systems that provide exchange rate data are integrated.

More on this proposal can be read here: https://classic-agora.terra.money/t/ustc-re-peg-ziggy-final/49849

UST was reported to surge by over 66% after this proposal was passed, with the core Terra community believing in the possibility of a comeback for the much-maligned ecosystem.

Final Thoughts

While the re-peg of $UST appears improbable at the moment, BigONE believes that pulling it off would spark a wave of resurgence and boost investor confidence in the cryptocurrency market. With the approval of the most recent proposal, we can expect more from the Terra ecosystem in the coming weeks/months. BigONE, as always, does not consider this investment advice and urges our users to conduct all necessary due diligence before investing in a token.