Lunc has made amazing progress since Proposals 4095 and 3568 were submitted, and the new team of Terra Rebels is leading the community out of the darkness one step at a time, and they deserve everyone’s praise for their efforts. Although there is still a long way to go, one fact is now certain: Lunc has taken the first step of its rebirth, and it will never return to its original starting point.
This belief should be emphasized to everyone who cares about Lunc in the community. There is an irreversible concept in the blockchain world, that is, once it happens, it is impossible to go back to the past. Just like the birth of Btc, no one will question its value anymore. We have to say DK made the biggest mistake of his life by giving up Lunc.
In fact, in the Lunc white paper, the DK team did a major stress test, and the stress test showed that Lunc is a typical cyclical curve, with booms and downturns. But the recession is not irreversible, and Lunc will prosper again as long as it does not overexpand and buy back its debts.
Although we have now passed Proposal 3568, our debt to Terra—Ustc, remains on the back burner. I know that debt restructuring has been mentioned in EK’s new proposal, but more details have not been disclosed. Therefore, this proposal is devoted to how Terra can fully recover its debt Ustc, thereby restoring Ustc to its value of $1.
Only in this way can we re-open the hook of Lunc and Ustc, and use the hook mechanism to cooperate with the on-chain combustion of 3568 to generate helix, so as to truly open the road of Lunc rebirth!
Several concepts need to be clarified: Bank, Asset and Debt
Before we can get Ustc back to $1, we need to define a few things: Bank, Asset and Debt.
Terra Network is essentially a bank that issues the stablecoin Ustc, so it has to have its own balance sheet. The issued Ustc represents its own debt, and the holder of the Ustc represents a claim against Terra, which can be redeemed. Lunc, on the other hand, represents the bank’s reserve of assets, which underpins the issuance value of Ustc.
Given that Terra has issued $10 billion of Ustc, each worth $1, representing $10 billion of foreign debt, Terra should have $10 billion of assets to support Ustc’s $1 value. After Terra’s death spiral, the price of Ustc is now $0.04 and the price of Lunc is $0.00047.
Price multiplied by the number of issues, Ustc total market value = $400 million, Lunc total market value = $3.1 billion. Numerically, Lunc is enough to cover the debt of $400 million. If the community can operate as a whole banking institution and can mobilize funds at will, Lunc can completely recover Ustc, and there is a rich surplus of assets.
But the key problem is that Terra is now a decentralized community. The $3.1 billion Lunc is distributed among the holders. It is the wealth of each individual in the community, not communal or collective, so Terra has no right to invoke it.
In addition, although the current market value of Ustc is $400 million, it is impossible to recover it completely at the cost of $400 million. In the process of recovery, its price will continue to increase.
So the core solution now becomes how to create a mechanism to collect community wealth to recover the Ustc and destroy it until it is worth $1 again. If we can break this sentence down carefully, the following effective solution comes into being.
Namely: How to concentrate? Where to concentrate? How to buy back? Therefore, this proposal is around these three issues to launch a discussion.
How to concentrate community wealth?
The first thing we have to see is the brilliance of Proposal 3568, which shines through in the current bear market environment. When it was first proposed, a lot of people were not optimistic, including me. Because it is built at the expense of Lunc trading liquidity, this is very bad for ecological growth in the long run. But bear market conditions have changed its role.
The bear market of cryptocurrency means that there is no liquidity, but the market has accumulated a lot of money, the so-called money never sleeps, if it is silent for too long, it will become restless, so it must find a new wealth effect. The burning of Lunc clearly plays that role, and the thought of its rebirth after a death spiral is thrilling.
So people flock and look forward to the return of Luna, the original star of hope. And it is enough to make anyone excited seeing Lunc burning from 6.9 trillion to 10 billion. So we saw the power of Proposal 3568, which increased Lunc’s market value nearly fivefold in less than a week.
However, we are all missing the most important point, since there is no tax, Lunc’s price increase does not generate a penny of revenue for Terra’s Treasury. The benefits of price increases are still reflected only in the wealth of individuals in the community, and the skyrocketing prices and expanded transactions are being squandered, to the point where there is now discussion in the team about minting 10% of the new Lunc supply to recover Ustc.
For now, the strategy of recycling Ustc through seigniorage is a bad idea. It defeats the original intention of Proposal 3568: never to issue more and eventually limit Lunc supply to $10 billion. Moreover, seigniorage has a great possibility to bring Lunc into the death spiral again. Seigniorage can only be started after Ustc is controlled.
But don’t be discouraged. There are still three ways to concentrate community wealth without seigniorage:
The first is debt restructuring. There are a number of ways we could restructure the debt, such as packaging Terra’s debt and selling it to VC as community benefits. These community benefits can be the granting of executive seats, transaction fees, distribution of Lunc, or other welfare policies. The Ustc is then repurchased and destroyed in the secondary market using VC capital.
（Note: This venture capital institution could be an exchange. The logic of debt restructuring is similar to that of a country in crisis getting a loan from the International Monetary Fund.）
For another example, call on Ustc holders to lock up their Ustc, promising them 20% annualized returns. We can imagine an extreme lock-in in which any holder of the Ustc can eventually redeem their Ustc for $1 after locking up for three years. This is based on the fact that the team is extremely confident in the restoration, in fact, unlocking all Ustc in 3 years is not too difficult, or even earlier.
In today’s market price to calculate, 3 years yields 25 times, this will attract a lot of people buy Ustc to lock up, we can give deposit in ways similar to the Lido stUstc to exchange certificates, can also through the limitation on the wallet to stop the whale sweeps Ustc, through the lock positions can also judge the rest of the number of Ustc in the market. Of course, there are a lot of details to be worked out.
The purpose of debt restructuring is mainly to reduce the circulation of Ustc in the market. When it is reduced to a small enough level and the remaining circulation value can be supported by community reserve funds, the intrinsic value of Ustc will naturally be equal to $1. The stability of the value of $1 is the prerequisite for the re-linkage of Lunc. After the opening of the coinage mechanism, Lunc will face a spiral upward, thus further supporting the value of Ustc, and then the lock of Ustc can be unlocked and the circulation of Ustc can be expanded.
The second is burning tax. The burning way of trading is something we are implementing, which is divided into on-chain burning and off-chain burning.
Due to the decentralized nature of blockchain, we cannot write combustion programs off-chain, and most transactions in centralized exchanges take place off-chain, which leads to the limited role of on-chain combustion and even destroy the long-term ecology of Lunc, because the combustion tax will force transactions off-chain.
However, we still need not be discouraged, because if Lunc’s reconstruction can only be carried out by requesting the exchange’s off-chain support, then Lunc’s fate is fragile, which means it will always be dominated by the exchange. It is laughable to think that the fate of a decentralized public chain is dominated by a centralized exchange.
Strictly speaking, trade burning is too idealistic, and it makes sense that it would use all the burning tax it receives to destroy Lunc. But we need some of the cost to feed into the Treasury. As I will describe in detail the establishment and mission of the Treasury Department in the next subsection, no bank is complete without financial functioning.
Why is there talk in the community of minting new Lunc supplies to buy back Ustc? The bottom line is that we have no finances and no money in the finances, so we have to find a way to raise money to collect Terra’s debts.
The mission of Terra Network is to build a public chain ecosystem based on the decentralized stablecoin Ustc. For on-chain transactions to really play a role, the above Dapp applications must be rich and mature. Now we have to do this because we want to reduce the excess Lunc, but it needs to be accompanied by the creation of the exclusive finance ministry of Terra Network.
Moreover, we can still have confidence in the off-chain combustion of exchanges. For exchanges, while supporting offchain burning is equivalent to making trading fees easier, it is not all bad. The flow effect of Lunc will bring considerable prestige to the exchange and even obtain a large number of new users. In the current pattern of solidified exchange, this is a breakthrough opportunity for the second and third tier exchanges.
It’s not all bad for big exchanges like CB and BN. The increase in Lunc volume will lead to the spread of related trading pairs and contracts, especially Busd, as evidenced by the new Lunc contracts now available on exchanges. In any case, growth in trading volume will always be most important to exchanges.
With Proposal 3568 on the table, prodding the exchanges to support off-chain burning is feasible, and surely some exchanges will agree that it is a mutually beneficial thing to do. But it is not realistic to place all our hopes on them. We must have more plans.
The Third is floating exchange rate. In my previous article, I discussed in detail why Lunc should abandon fixed exchange rate and adopt floating exchange rate. Because Terra is now bankrupt and has zero reserves, it cannot cover its debts. Therefore, the fixed exchange rate of $1 should be fixed according to the reasonable market price, and then the coinage mechanism should be reopened to slowly raise the exchange rate of Ustc.
Setting up a floating exchange rate is complicated because it involves changing the system’s parameters and preventing black swan attacks. However, I still planned a feasible algorithm, which was originally proposed by kayserirum—a member of the community, but only with spiral-up parameters, not spiral-down parameters, and I refined it to some extent here.
Its specific contents are:
Fix the minimum exchange rate level at 0.05 U, and when it floats upwards, it rises at a rate of 0.0015 U every day;
Start coinage, set the maximum destruction rate of Lunc to 0.1% of its market value every day, and stop coinage after reaching this value;
If the day stop coinage, the second day still maintain the previous day’s exchange rate level; If coinage does not stop, the exchange rate will automatically rise by 0.0015u the next day;
When miners arbitrage through the coinage mechanism, they will be charged a commission fee by the system. The commission rate is 1.2%, which is the same as that of on-chain transactions. This part of the tax will be used to recover Ustc and destroy it.
Fix the minimum exchange rate level at 0.05 U, and when it fluctuates downward, it decreases at a rate of 0.0015 U every day;
Start coinage and set the maximum destruction rate of Ustc to 0.1% of its market value every day, and stop coinage after reaching this value;
If the day stop coinage, the second day still maintain the previous day’s exchange rate level; If coinage does not stop, the exchange rate will automatically decrease by 0.0015u the next day;
When miners arbitrage through the coinage mechanism, they will be charged a commission fee by the system. The commission rate is 1.2%, which is the same as that of on-chain transactions. This part of the tax will be used to recover Lunc and destroy it.
Why is the minimum exchange rate fixed at 0.05U? This is based on the current market price.
Why does the exchange rate rise or fall by 0.0015 every day? Because the exchange rate is floating, in order to ensure that the system of coinage and miners arbitrage play a role, and by the market supply and demand disturbance, it must also be floating; The exchange rate is controlled at 0.0015 because it is controllable and steady.
Can this algorithm bring Ustc back to $1? The final outcome depends on the market.
How does the algorithm make Ustc exchange rate rise and fall?
When the exchange rate level of Ustc is fixed at 0.05U, it means that an internal price is set for Ustc in Terra system. Due to the disturbance of the supply and demand of the secondary market or the external market, the actual exchange rate will fluctuate, which will be quite drastic in the early stage of Terra reconstruction.
If the external price is significantly higher than the internal price of 0.05U, let’s assume that it is 0.1U, then there is a huge arbitrage space in the middle of the internal and external market. The Ustc of the internal system can be sold to 0.1U in the external market at the price of 0.05U, and 100% arbitrage space will make miners stamped-in.
Since miners can only obtain Ustc through the coinage system, this will make them buy Lunc at a large scale, replace Lunc with Ustc through the coinage system, and then sell Ustc in the trading market to obtain the arbitrage value. The Terra system mints the Ustc by destroying the Lunc and automatically closes the coin once the daily destruction limit is reached.
Since mining arbitrage is not cost-free, the system imposes a 1.2% fee, which is used to destroy the Ustc. In addition, the system has set the upper limit of Lunc daily destruction and the floating range of exchange rate, which will not cause large fluctuations of Ustc exchange rate in the internal system, so that it can rise steadily.
If the external price is significantly lower than the internal price of 0.05U, let’s assume that it is 0.03U. It is not excluded that when the minimum exchange rate is fixed, the secondary market may sell Ustc. This also creates a huge arbitrage space between the internal and external market. The Ustc of the external marke can be exchanged for the Lunc of 0.05U in the internal system at the price of 0.03U. A 60% arbitrage would also send miners rushing in.
Since miners can only obtain Lunc through the coinage system, this will make them buy Ustc at a large scale, replace Ustc with Lunc through the coinage system, and then sell Lunc in the exchange market to obtain the arbitrage value. The Terra system mints the Lunc by destroying the Ustc and automatically closes the minting once the daily destruction limit is reached.
It should be noted that this may be contrary to Lunc’s proposal 3568 that no more issuance.
Since mining arbitrage is not cost-free, the system imposes a 1.2% commission fee, which will be used to destroy the additional Lunc. In addition, the system has set the daily destruction limit and exchange rate fluctuation range of Ustc, which will not cause the death spiral of Lunc again, so that it can steadily decline.
The result of arbitrage will make the price of the internal and external market quickly wiped out, and finally make the market value of Lunc equal to that of Ustc. (This requires stress testing by the quantitative team).
What is the black swan attack that the algorithm is prone to?
The algorithm itself is not flawed, but when the chips are too concentrated, it can spiral. Just like the Lunc crash, if someone mastered a large number of Ustc and Lunc in the secondary market, then the algorithm can be used to artificially create the spread. It can spiral upward or downward, so matching intervention policies are needed to prevent unexpected spirals.
Our goal is to use the algorithm to get the Ustc back to $1, and when that’s done, we have to rely on asset reserves to defend against malicious attacks. Moreover, the starting point of the algorithm is important. If the fixed exchange rate is too high at the beginning, the algorithm will spiral downward. Exchange rates get too low and they spiral upwards.
If there is no matching intervention policy, relying solely on market regulation, then the Ustc exchange rate is likely to stay below $1 forever. So from the beginning, how can we make sure that it spirals all the way up to $1 and doesn’t reverse down in the middle?
It should be noted that if the algorithm is to operate, an emergency circuit breaker must be established. In the event of an abnormal situation, the team has the authority to suspend coinage until the algorithm is restored to normal order.
Where to concentrate community wealth?
So far, the new team has not set up Terra’s own finance department. Before it collapsed, a group called LFG managed Terra’s finance. But we must consider the creation of a dedicated Treasury to aggregate Lunc’s ecological wealth. The significance of the Treasury is very important. It has two functions, one is to implement community incentives, the other is to make monetary policy.
The traditional and common way is to enrich the Treasury through a transaction tax, which can be supplemented by seigniorage when the Ustc is restored to $1. The Ministry of Finance must be open and transparent, subject to community supervision. Detailed rules can be discussed by the community later.
How to buy back Ustc and destroy it ？
Adopt different ways, have different principles of action. If we are going to adopt debt restructuring, direct recycling in the secondary market, then it can not be carried out in a big way, otherwise there will be a large number of people hoarding Ustc to sell at a higher price, which will cause recovery pressure. But it should not be bought back too slowly, otherwise it will also lead to high prices.
We can also reduce Ustc circulation by lock-in, with no guarantee that Ustc will eventually return to $1, and see how many Ustc holders can be recalled for lock-in at an annualized rate of 20%. If only $2 billion of the $10 billion is locked up and the remaining $8 billion is not, it’s not working well, and you also have to think about how to cover that 20% interest cost.
Perhaps we can test the aforementioned extreme lock-in: for 3 years, any stUstc holder can redeem Ustc unconditionally for $1 and see how many Ustc can be summoned. The beauty of this approach is that we can substantially lock in Ustc holdings in the market, regardless of whether there are whales among them.
In addition, due to the expectation of earnings, there will be large-scale scanning in the market, and eventually the market price of Ustc will be locked in an equilibrium position, which indicates the market is willing to accept the 3-year lock-in at what price or yield. It may be 0.5U, 0.8U or 0.9U. We only need to judge how much residual Ustc there is in the market according to the amount of lock-up.
If they are small, we will have accomplished two important objectives: controlling debt circulation and raising the Ustc exchange rate. With $200 million in debt and $10 billion in debt, it’s very different. On the premise of sufficient coverage of the remaining debt, we can reopen the coinage mechanism and issue a new Ustc.
Issuing new Ustc means that the Ministry of Finance has collected seigniorage Lunc, and when the Ministry of Finance has a financial surplus, it can repurchase Ustc in the lock-up pool in advance, so as to achieve a positive cycle. We could even have a discount rule for early unlocking, so that if someone applied for early unlocking, they would have to pay a discount, thereby reducing the pressure on the Treasury to redeem it.
Under the floating exchange rate algorithm, it is also necessary to build up asset reserves to deal with mid-course decoupling. Moreover, the floating exchange rate algorithm requires changing system parameters and stress testing, which is complicated to implement. Here I only provide a general algorithm process, if the community has different views on the hook proposal I put forward, welcome to leave a message to discuss.
This post is also considered as a solicitation. If there is a plan that is recognized and corresponding by most people in the community, then we can refine it into an executable proposal for the community to vote on.
In short, a single spark can start a prairie fire. Under the leadership of our new team, we have come out of the darkest hour, and there must be a brighter road ahead!