The proposal of the scheme is based on the following background:
Just make the price of Ustc back to $1 and all the problems plaguing Terra will be solved and all the applications will start immediately;
Controlling debt is the key to starting over. As Terra’s debt, Ustc can return to $1 in three ways: either buy them all back, destroy them all, or lock them all. This section if you do not understand, please read my this article: A proposal about how to make Ustc re-pegged to $1
Each of these three methods has its advantages and disadvantages. The full repurchase of Ustc is the most effective, but requires a lot of capital; The complete destruction of Ustc requires not only the establishment of a destruction mechanism, but also a long time. Locking the Ustc is the most feasible option, but eventually it has to be released.
So: Is there a way to lock up all the Ustc, while at the same time gathering a large amount of capital to continuously repurchase and eventually destroy it all? Of course, this method can achieve this effect, so it is proposed and expected to be adopted by the community.
The logic of the proposal is to refer to the protocol of Lido on ETH, map Ustc on Terra network as the new stablecoin stUstc, and then re-peg it with Lunc. By mapping debt into a new stablecoin asset, we lock in debt without losing its liquidity, restart the peg, and generate a significant amount of tax revenue to recover the debt.
1、Establish an exclusive pledge protocol, denominated at the immediate market price of the Ustc, and pledge to generate a new stablecoin stUstc. For example, if the immediate market price of Ustc is $0.04, then 25 Ustc can be pledged to produce one stUstc.
2、In this way, 1stUSTC=1 $, and hook Lunc to stUstc, using Lunc’ value to stabilize the price of stUstc. Since stUstc is generated by Ustc pledge, there is no excess stUstc in the market before this, so Lunc can stabilize its price in the early stage. (Stress testing is needed here: How much stUstc can be allowed to be generated as a primary pledge? That is to say, how much stUstc’s drop pressure can Lunc handle when the coinage mechanism is reopened?)
3、Use Lunc to pay dividends for Ustc pledgers, set the dividend interest rate, and encourage Ustc holders to pledge their Ustc to generate stablecoin stUstc. (Why Lunc is used and how the finance covers the interest will be explained in detail later.)
4、When the market demand for stUstc expands and 1stUstc > 1$, Terra casts stUstc by destroying Lunc until 1stUstc=1$; On the contrary, when the market demand for stUstc decreases and 1stUstc < 1$, Terra destroys stUstc by casting Lunc until 1stUstc=1$; (Restarted Lunc’s algorithmic stablecoin mechanism)
5、Restart the Terra ecology based on stUstc. Since the price of stUstc is stable at $1, Dapps can restart to further stimulate the demand for stUstc, thus accelerating Lunc burning.
6、Impose a tax on miners’ arbitrage. 50% of the tax is used to buy back Ustc and destroy it until 1Ustc=1stUsct=1$. The remaining 50% will be returned to the Treasury to build an asset reserve. Seigniorage will become Terra’s main financial source after Ustc is fully converted to stUstc.
How does stUstc’s $1 price become stable?
Like Ustc, stUstc is still an algorithmic stablecoin, stabilized by Lunc’s $2.2 billion market capitalization. Since the stUstc can only be generated by pledge, there are no excess stUstc in the market before this time. StUstc can only be obtained in two ways: by pledge or by mint. To pledge is to lock in the debt Ustc, And to mint requires burning the Lunc.
How can stUstc’s applicability be maintained and expanded?
As a new algorithmic stablecoin, failure to expand its applicability, especially since Ustc has a history of crashes, could cause people to sell stUstc as soon as they complete the arbitrage, causing it to stay within a small range. We do this in three main ways.
The first: Try to keep its currency stable and try to keep the size of its issue tight until stUstc’s market value is equal to the total value of Terra’s reserves;
The second: Restart Terra ecology, such as Anchor, and expand the application and circulation of stUstc;
The third: Establish a perfect asset reserve mechanism, so that the total value of assets reserves is always greater than or equal to the total market value of stUstc (Excess collateral mechanism).
At what level should stUstc’s number of initial offerings be limited?
This is a critical question, including three parts.
First, based on the current market value of Lunc, how much stUstc (stablecoin) selling pressure can be carried if the minting mechanism is turned on? Due to capacity constraints, despite its current market cap of $2.2 billion, it is likely to withstand only a $500 million selloff and then a death spiral could have occured.
Second, at current market prices for Ustc, even if all Ustc participated in the pledge, less than $400 million of stUstc would be generated. Is this scale within Lunc’s maximum undertaking range? If so, don’t worry about it. If not, we need to limit the size of the Ustc pledge.
Third, the quant team need a stress test for Lunc. To test its stablecoin maximum capacity, and then keep the issuance size of stUstc below Lunc’s maximum capacity. To be conservative, I suggest 50% of maximum capacity.
Why Lunc is used to pay dividends to Ustc pledges and how does finance cover the interest cost?
Now there are two voices in the community, one is to directly burn the remaining 1.8 billion Ustc in the LFG wallet, the other is to issue new 1 trillion Lunc to buy back Ustc and destroy it. Both approaches are a bit extreme. Now there is a way to do both: convert 1.8 billion Ustc into Lunc in batches at immediate market prices and use this Lunc to pay dividends to Ustc pledges.
In this way, we not only realize the buyback and destruction of Ustc, but also reduce the pressure of Lunc issuance, and expand the use value of Lunc.
Why tax miners’ arbitrage? What percentage should be taxed?
After the new stablecoin stUstc is created by pledge, arbitrage will become the main trading method in the early stage of Terra. So the system needs to collect fees from a lot of arbitrages to generate finance. The jury is still out on how much is appropriate, and whether it is higher than the 1.2% on the chain.
StUstc is just expressing the mapping between it and Ustc. In fact, it is already a new stablecoin and can be named anything. The best suggestion is to rename it Ust.