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Terraform Labs Unveils Emergency Plan to Prevent Terra Ecosystem Collapse

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The crypto market is looking worse on Thursday, with many assets virtually in freefall. An extended bearish wave has seen the majority of cryptocurrencies record heavy losses. Bitcoin holders have witnessed the price of the coin pull back from roughly $38,000 at the start of the month to $27,950 at the time of writing.

Ether, which slipped below $2,000 today, has dumped almost $1,000 during this period and is currently struggling to remain above $1,900 as the sell-off continues. The picture is worse for Terra crypto assets, particularly its native token LUNA.

LUNA has shed as much as 99% of its value in the last 48 hours and is now trading at less than two cents. Coinglass data shows that positions of more than 290,000 traders have been wiped off in the last 24 hours. The liquidation volume during this period stands at over $900 million – LUNA contributing to $39.50 million.

Remedial actions by Terraforms Labs to save the token have so far been unable even to slow down the bleeding of value.

New plan initiated

In the latest play to save the debilitated token and its related algorithmic stable coin TerraUSD, the firm behind Terra has set forth a series of moves to keep the ecosystem afloat.

“The prevailing peg pressure on $UST from its current supply overhang is rendering severe dilution of $LUNA. 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,” Terraform Labs wrote on Twitter.

The first two initiatives look to destroy the UST supply on Ethereum and in the community pool. The final one proposes staking 240 million in LUNA to block a governance attack.  LUNA’s market capital has melted down to $60 million at the time of writing, meaning Terra can’t sustain the mint-and-burn pegging mechanism for TerraUSD.

Being the case, Terraform Labs wants to burn UST, whose market capital stands at around $7.3 billion, without swapping it for LUNA. The Terraform team proposes destroying approximately 1 billion UST in the community pool that funds Terra projects. To further reduce the UST supply, the team also suggests bridging back the 371 million UST acting as liquidity incentives on Ethereum to Terra and destroying it.

Protecting against governance attacks

While the first proposals two address the market situation, the last one is more of a precautionary play. There are concerns that with too much LUNA floating in the market, holders may take it as an opportunity to pass proposals working against the ecosystem. To prevent such an occurrence, Terraform staked up to 240 million LUNA.

These initiatives will remove about 1.388 billion UST from the supply, which will help alleviate the situation in the market.

“Expelling the system’s bad debt with the above items should help restore the on-chain swap spreads to a meaningful level where the peg pressure on UST is significantly alleviated. Once the new base pool proposal passes, this will also expedite the process.”

Crypto entities clarify their exposure to Terra assets

The rapid crash of LUNA and UST assets has triggered many reactions on social platforms over the last few days. A number of crypto entities such as venture capital firms and DAOs have come out to declare their lack of exposure in the affected assets in the last few hours. Some of those that have thus far clarified that they had zero exposure in LUNA are OnJuno, DragonFly, Multicoin Capital, Framework and 6th Man Ventures.

Sam is a financial content specialist with a keen interest in the blockchain space. He has worked with several firms and media outlets in the Finance and Cybersecurity fields.

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