The supply of UST stablecoin has more than doubled in the past nine days to reach $6.4B. That places the coin $2B behind DAI, the leading stablecoin produced by the Maker protocol, as of Nov. 18.
Fans of the Terra ecosystem, which produces the UST stablecoin, may need to hold off rejoicing though because the increase doesn’t stem from user demand but rather a governance proposal.
LUNA Gets Burned
Here’s what happened: The governance voted to burn 88.68M LUNA tokens, worth over $3.5B at the Nov. 18 price of $40.21. Those LUNA tokens came from “seigniorage rewards,” which were deposited in Terra’s treasury when users swapped them for UST tokens when demand pushed the stablecoin’s value above $1.
The swaps will continue for two weeks total, according to the proposal.
As demand for Terra’s 19 stablecoins rises, the price of those stablecoins increases. Terra provides a module which allows users to exchange LUNA for their intended price. So if demand pushes UST to $1.01, Terra provides a module that allows users to exchange LUNA for UST at $1.00. Users can then sell UST on the open market at $1.01, arbitraging the stablecoin down to the peg of $1.00
When users made that swap, their LUNA accumulated in the treasury. An upgrade called Columbus-5, which shipped on Sep. 30, changed it so that LUNA now gets burned, but still left the treasury with billions of dollars of LUNA.
Now the question is what to do with all that UST. “Initially, the plan was signalled in prop 44 was to use $1 billion to bootstrap Ozone,” wrote Terra co-founder Do Kwon in the proposal to burn the 88.68 LUNA.
Ozone is an insurance protocol that has yet to launch, but will offer coverage of technical failures in the Terra DeFi ecosystem. Risk Harbor, a risk management marketplace for decentralized finance with backers like AngelList co-founder Naval Ravikant, recently took charge of Ozone.
Another effect of the burned LUNA is that staking rewards are likely to increase to above 10%, according to Kwon’s proposal. This is because under changes implemented in Columbus-5 swap fees on Terra, like the LUNA to UST ones done en masse right now, go into a pool that rewards stakers.
Indeed, staking has crawled up to 7.94% a year. Almost doubling since Terra started exchanging LUNA for UST.
In all, UST supply is headed for the moon, though demand hasn’t directed the trajectory. Still, with an insurance protocol on the way and boosted staking rewards, things are looking up in Terra land.
Read the original post on The Defiant.