Terra blockchain has proposed to burn 1,388, 233,195 UST worth $690 million in the community pool and increase the Base Pool of LUNA to restore the USD peg.
The proposal adds that the burning of UST is currently slow to maintain the demand for the excess UST to be removed from the system, hindered by BasePool size.
The blockchain notes that the challenge is removing the bad debt from UST circulation faster for the system to restore on-chain spreads.
Algorithmic stablecoins are automatically pegged to the USD, and traders can swap LUNA tokens for UST at $1 despite the market price. The algorithm oversees the supply of LUNA by creating adequate scarcity to justify the $1.
A token burn is expected to reduce the circulating tokens as a deflationary event and boost the value of the remaining tokens in the blockchain.
Source: Twitter
1/ The prevailing peg pressure on $UST from its current supply overhang is rendering severe dilution of $LUNA.
— Terra (UST) 🌍 Powered by LUNA 🌕 (@terra_money) May 12, 2022
The primary obstacle is expelling the bad debt from UST circulation at a clip fast enough for the system to restore the health of on-chain spreads.