Terra believes that downward pressure on the UST share dilutes Luna, hindering recovery for both while creating a surplus of UST. The way to solve this problem is to burn UST and increase the available Luna pool.
"The main obstacle is to remove bad debt from UST circulation fast enough for the system to restore the health of on-chain spreads," Terra said in a tweet.
Algorithmic stablecoins like UST should be automatically pegged to the price of another currency. As explained in a previous CoinDesk Learn article, traders can exchange LUNA for UST at a price of $1, regardless of the market price, because algorithms on the backend manage the supply of LUNA, creating sufficient scarcity to justify the $1 price.
A token burn refers to withdrawing cryptocurrencies from circulation on the blockchain. It can be considered a deflationary event because it would increase the value of the remaining blockchain. For token holders, it would be an event similar to a stock buyback.
In a proposal made to token holders, Terra said it wants to burn the nearly 1 billion UST (about $690 million) in the community pool while increasing LUNA's base pool to 100 million, which in turn will increase the coin capacity to over $1 billion. This will help accelerate UST outflows from the system, bringing it back closer to its limit as the price of Luna declines.
"Currently, UST combustion is too slow to keep up with the demand for excess UST leaving the system, which is hampered by the size of the base pool," the proposal states. "If a significant portion of the excess UST supply is eliminated at one time, the pressure on USTs can be largely alleviated.
Some comments on the proposal questioned whether this happened because of an error in Terra's coding, or whether it was also a product of a broader market downturn caused by the decline in the bitcoin price.
Validators on the network can vote for this proposal. According to a vote tracker, the Yes side received 50.47% of the vote, while the Abstain side garnered 49.1% of the vote. 87.8% of eligible voters have already cast their ballots, and the approval rate is 50%.