Terra-based decentralized financial protocol (DeFi) Anchor contributors have proposed lowering terraUSD (UST) interest rates to an average of 4% from the current 19.5%, as the broader Terra ecosystem seeks action to protect UST's peg to the U.S. dollar.
"Reduce the minimum interest rate to 3.5% and the maximum deposit rate to 5.5% with a target interest rate of 4%," the current proposal states.
About 244,000 Anchor (ANC) tokens were used to place "yes" votes. ANC is Anchor Protocol's governance token that users can deposit or deploy to create new governance votes or vote on existing pools started by users who have deployed ANC.
Anchor is a savings, lending, and borrowing platform built on the Terra that serves, which allows users to earn returns on UST deposits and borrow against stocks. Critics have called the "stable high interest rates" - as described on the website - unsustainable because of the large amounts of money required to maintain those rates.
In recent months, Anchor has functioned as intended, becoming the largest decentralized financial application (DeFi) on Terra. But UST's recent descent has derailed the protocol's grandiose plans.
UST fell as low as 22 cents on Wednesday as outflows from Anchor and LUNA's rapid decline triggered a downward spiral. The token has since recovered to 60 cents - still far from the $1 mark - but the long-term recovery remains unclear.
"A depegged UST can no longer sustain 18% APY," Anchor contributor Daniel Hong wrote in a related forum post. "Some may argue that higher interest rates help when there are fewer USTs in circulation, but if stablecoins have already lost public confidence due to a two-day depeg, people would try to get out anyway."
"A major factor for today's depeg was the release of the Stable Reserve from Terra into the Anchor Reserve every time it was depleted, which caused newly minted USTs that were not supposed to be there to circulate," Hong wrote, explaining the UST price plunge on Wednesday.
Hong added, however, that the "fairly aggressive" change would be rolled back if needed, meaning the 4% rate may be increased in the future if market conditions improve.