Terra, the blockchain platform known for its stablecoin UST, is moving on plans for a new mechanism to improve the stability of the UST’s peg to the US dollar. The mechanism, dubbed USTC Incremental Repeg Buybacks, staking Swaps, was presented to the Terra community on the Agora forum on April 11, 2023.
What Does the Agora Proposal Entail?
Based on the plan, the USTC mechanism will use some transaction fees collected from the Terra ecosystem to buy back UST from the market whenever its price deviates from the $1 peg. The bought UST will then be burned, reducing the circulating supply and increasing the demand for UST, which will then help bring the price back to the peg.
Additionally, the mechanism will be incremental, which means that the amount of UST bought back will be proportional to the size of the deviation from the peg. For instance, if UST trades at $0.98, the buyback will be smaller than if UST is trading at $0.90.
In addition, the proposal also incorporates a staking swap mechanism, which will then allow UST holders to stake their UST in exchange for USTC tokens. The USTC tokens will be redeemable for UST at any time. However, they will have a lower value than UST as they are subject to a vesting period. The determination of the vesting period relies on the amount of USTC tokens issued, with more significant issuances having longer vesting periods.
Another proposal is the swap mechanism, designed to encourage UST holders to stake their UST instead of selling it on the market. By staking their UST, holders will earn rewards through USTC tokens, which they can later redeem for UST once the vesting period is over. This helps reduce selling pressure on the UST market, helping maintain the peg to the dollar.
How Important is the USTC Proposal?
The USTC mechanism will be implemented on the Terra network in the coming weeks, pending approval from the Terra community. If approved, it will be the latest in a series of innovations aimed at improving the stability and utility of UST.
The USTC seems significant, given the recent volatility in the crypto markets. Maintaining pegs for most cryptocurrencies seems vital as it mitigates the risk of price fluctuations on other cryptocurrencies. As such, improving the stability of the UST peg, the mechanism could deem important to the Terra ecosystem, making it more attractive for users and investors alike.
The proposal is currently open for discussion on the Agora forum, and it will be interesting to see how the Terra community responds in the coming weeks, and the effect on the LUNC’s price.
Vincent Munene is a freelance writer and a great blockchain enthusiast. Blockchain has changed his life in terms of financial freedom and in return, he likes to educate people and keep them up to date on everything blockchain. He is a Biochemist by profession and also loves to play the piano.