We aren’t going anywhere until we have a sensible decision-making framework for people to evaluate the different proposals. This post seeks to drive attention to the fact that it will be fundamentally impossible to implement any proposal with community support because there is currently no framework for decision-making.
TLDR: Too much noise. Need leadership and decision-making structure immediately to evaluate proposals and relay information.
Why I made this post
I am a restructuring lawyer working at one of the top international law firms. I have worked on collapses and restructurings worth billions of dollars affecting both retail and institutional investors and have represented clients across the capital structure.
This LUNA-Terra debacle has obviously interested me and I am very excited to see how the first community-led restructuring on this scale plays out. But looking through the forums, I noticed that the current method of discussion saving the project is incredibly inefficient and will likely lead to the end result of nothing being agreed.
The Problems
(1) Stakeholder Groups with different interests
We currently have one massive forum for discussion which includes stakeholders with incredibly different circumstances.
The interests of a LUNA holder and a UST holder are obviously opposed. People holding LUNA bags want to drop the UST holders to save their own bags and the UST holders want LUNA holders to fulfil their end of the ‘bargain’ to secure the UST debt.
Similarly, the interests of a person who held LUNA from pre-attack to zero is vastly different from a person who bought LUNA at a discount while the dilution mechanism went into overdrive. And a person who rode UST to zero (believing it was a savings account) has interests vastly different from a person who was speculating on the UST peg returning to $1 (a distressed debt investor).
You simply cannot expect all these people to agree on a proposal together in an unmoderated unregulated forum.
(2) Difference in sophistication
To add to the mess, participants here possess very different levels of sophistication. There are some incredibly experienced and insightful sophisticated parties here with experience in finance, economics, math and related fields but there are also a lot of disgruntled retail investors who honestly just want their money back.
This is adding to the noise and from reading the forums, it is clear that most participants fundamentally do not understand most of the proposals and are most interested in what it means for their own bags (understandable) instead of looking at the big picture and the competing interests which need to be balanced in an effective resuscitation of the Terra ecosystem.
(3) Lack of Leadership
There is no leadership and more specifically, there is no leadership structure. There needs to be a way for certain persons to drive proposals with sufficient support forwards. In the tradfi space, we have a steering committee or coordinating committee which takes the lead in a restructuring with input from other holders. More on this later.
(4) Competing Proposals
There is a multitude of competing proposals, some of which are incredibly sensible and others which are based purely on pure speculation of what assets may or may not exist as backing or collateral. Add in all the clearly biased proposals to salvage bags in one’s personal circumstances and we get a situation where we will never reach a consensus.
The Solutions
We need to create a comprehensive and sensible decision-making framework to vote on and put in a leadership structure to implement a refined proposal to rescue whatever value is left for all the stakeholders. In order to do so, we need:
(1) Different forums for different stakeholders
Nobody has exactly the same situations but we should broadly categorize the stakeholders into different classes. At first glance, it is:
(a) LUNA holders pre-attack (Equity)
These are the holders that were not diluted by the out-of-control dilution mechanism. These are participants that are medium-high risk participants who participated in the equity upside knowing they will suffer on the downside (but probably not to the extent things actually played out).
(b) UST holders (Debt)
I have not split them into pre-attack and post-attack UST holders because no new UST has been minted. UST holders are effectively senior debtholders that took low-risk on their initial investment. The fact that they could have exited at a discount or bought at a discount probably does not justify splitting the classes.
(c) LUNA holders post-attack (now)
These are the holders that speculated on LUNA knowing the dilution mechanism was out of control. These are super high-risk participants buying effectively equity in a failing ecosystem hoping to make massive multiples on their investment.
Note that LUNA holders would not have had separate categories if not for the ridiculous dilution mechanism.
(d) Developers
These guys will drive value to the new platform.
Please note that I am not advocating for any economics here, I am simply dividing persons into groups that need to agree in order for any proposal to move forward.
Practical implementation: Snapshot to determine who belongs to which category (people may belong to multiple) and clearly display what sort of holdings each person has. Set up different forums to focus discussions (i.e. the UST forum evaluates proposals from the perspective of UST holders).
(2) Leadership
Each class should appoint their own representatives and all the representatives should collectively form a coordinating committee (CoCom). The CoCom should have the responsibility of discussing the proposals behind closed doors, each representing the concerns of their own class. This will allow the noise to be tuned out of discussions.
(3) Difference in sophistication
There are a lot of worried retail investors out here. With a leadership structure in place and different class forums, representatives of each class will be able to account to their respective class a TLDR of what is going on in discussions and how it will affect the class.
A less worried retail investor class should focus discussions more effectively - especially if they know what they are actually discussing.
(4) Competing Proposals
It is not all-or-nothing but it sure looks like it on the current forums. If each class appoints their own representatives, their representatives can actually review all of the sensible proposals and come up with one that makes sense for all stakeholder classes. Such a proposal can then form a starting point for discussions within each class
It does not have to be perfect - we just need to stop throwing rocks at each other’s glass houses and build something that works for everyone. It won’t be perfect but it will be better than nothing.
Implementation
- New forums should immediately be set up to focus discussions from the perspective of each stakeholder class
- Snapshot or some sort of mechanism should be used to determine each participant’s holdings and exposure
- The classes in the forums can determine among themselves whether it needs to be split into further sub-forums.
- The classes should all appoint representatives to form a CoCom
- The CoCom should discuss proposals with TFL and relay these discussions in easy-to-understand form to their own forums.
- Voting based on class to pass a proposal. Perhaps a 2/3 majority of persons voting?
Concluding thoughts
This needs to happen or we are actually going to go to zero. UST holders should accept that they may have to accept a haircut and LUNA holders need to stop dreaming that they are getting their Lambos back. LUNA speculators should also give up their dream of going 5000x. We need a compromise here.
Additionally, once we get a refined proposal on the table, we can actually start talking about getting interest from potential rescue financiers because there will finally be a project that is investible.
I have tweeted about all these a fair bit: https://twitter.com/wassielawyer
