The Terra community has used the governance system of the network to approve a proposal to burn TerraUSD (UST) held in the project’s community pool and tokens deployed to Ethereum in past liquidity incentives.
According to the proposal, a potential solution to Terra’s current problems could be to absorb some of the UST supply, which 99.3% of voters agreed to be the correct move forward. The burn — which is expected to remove 1.3 billion UST tokens, or roughly 11% of the existing supply — will hopefully help “reduce the outstanding bad debt of the Terra economy”, and potentially play a significant part in restoring the USD peg of the stablecoin. The proposal explained:
“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.”
The burn proposal was originally submitted on 12 May, but failed to execute after the seven day wait period due to a mismatch in the amount of UST in the community pool and proposal. Another proposal was created on 20 May, and passed with 153,644,852 community members voting in favor of burning the UST supply.
The burn process will be executed over two phases, with Terraform Labs — Terra’s core development firm — sending about 1 billion UST from Terra’s community pool to a burn module where they will be permanently removed. The team will then manually bridge 370 million UST to the Terra network from Ethereum, where they were deployed in the past as incentives.
Terra’s problems began at around 9 May, when its algorithmic stablecoin UST lost its peg to the U.S. dollar, crashing in price at an alarming rate. Only a couple of days after the incident UST was already changing hands for around $0.4, and at the time of writing its price has already gone down to $0.03. The value of its sister token LUNA, once a top-10 cryptocurrency, quickly followed suit and fell down by 98%.