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Terra, Luna Resume Declines as Do Kwon's Recovery Plan Fails to Reassure

Published 05/11/2022, 08:21 AM
Updated 05/11/2022, 08:30 AM
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By Geoffrey Smith 

Investing.com -- TerraUSD and Luna both fell further on Wednesday, despite promises of support from Do Kwon, the cryptocurrency guru who co-founded the stablecoin.

By 10:05 ET (1405 GMT), TerraUSD was trading at 33 cents, still far below its notional peg at $1, after a thread on Twitter from Do Kwon acknowledged that he and the network's other backers needed time to restore the peg.

Kwon signaled his approval for what amounts to an effective recapitalization of the network underpinning Terra, by increasing the minting capacity for Luna tokens to around 1.2 billion from 293 million. Under the algorithm that governs the network,  Luna tokens have to be created for every UST redeemed.

"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 said. 

Kwon acknowledged that there would be a "high cost" to holders of UST and LUNA in the meantime. Luna tokens have been in freefall since Saturday, when the mechanism peggging UST to the dollar began to unravel. They were down 88% at 3.7c by 10:05 AM ET.

Kwon also hinted that more capital will be needed in future, saying that "we will continue to explore various options to bring in more exogenous capital to the ecosystem & reduce supply overhang on UST."

UST had been trading at around 47 cents before Kwon's thread went live. It briefly rose as high as 49c before reversing. 

The developments of the last three days have dealt a severe blow to Kwon's aspirations to create a widely-accepted stablecoin based on algorithmic programming, rather than actual reserves of fiat currency. Until the weekend, the Terra project had appeared to be one of the most spectacular successes in the crypto world, UST market capitalization topping out at over $40 billion, thanks to the ease with which it can be accessed from other crypto blockchains, notably Ethereum. At that point, the only two stablecoins with bigger market values were Tether and USD Coin, both of them backed - as far as can be ascertained - by dollar reserves. 

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