Proposer : Duncan Day
Author : Duncan Day
0. Disclaimers and Declared Biases
Duncan does not have personal investments. All funds publicly visible on-chain are part of a private investment fund called Lotus. The total amount of capital allocated to LUNC or USTC at-time-of-writing is roughly valued at $1.08.
Duncan does not have any personal investments, but is paid on a performance-basis for investment management through a private fund called Lotus – no fees are taken if trailing 12mo AUM is lower than the previous year, and no fees are taken if the high-water mark hasn’t been outperformed in a 3mo trailing period. The fee split is 1.5%/28.5% respectively. Lotus took 0 fees this year.
0a. Preface
These proposals are written as separate proposals in the interest of generating value-add for both LUNC and USTC. They require code changes, and consequently, development labor, incurring costs to the community unless someone does it for free. This proposal will be split into three separate votes – initially as signals. If the signal(s) pass, then a community spend proposal will be put forward to cover costs.
This proposal is not related to Ziggy, which is being done as time allows on my end. These proposals are primarily focused on improving burn efficacy and a stable method of remittance.
1. Summary of Proposals
Below are three separate proposals: Coinage Swaps (Weighted Index Swaps), the Tax Reader Module, and Consolidated Conversions.
Coinage Swaps: Coinage is the right or process of making coins, which are generally constructed of alloys, like nickel, gold, and copper. This proposal asks to incorporate cross-chain assets to back a one-way swap from LUNC to USTC, burning LUNC and improving the value of USTC in the process. This proposal is geared towards CEXs, who do not currently benefit from LUNC burns and higher taxes.
Tax Reader (Tariff) Module: IBC-connected blockchains like Osmosis and Injective do not pay taxes for the use of currency on their chain. This proposal requests application for Osmosis Grants Program, who offered to assist with building this after the IBC channel was reopened. The proposal suggests using TaxPolicy and RewardPolicy abstract functionalities to allow other IBC chains with mutual channels to incorporate a demurrage fee whenever the IBC token is traded – allowing that chain to benefit from burning. Previous discussion.
Consolidated Conversions: Terra Classic does not have a stable method of sending money from Party A to Party B. We suggest the integration of other stable-tokens, such as USDC, USDT, FRAX, DAI, or or stable-token metapools, such as 2pool, 3pool, 4pool, or algorithmic-stable-tokens such as RAI. The proposal suggests using these as routers for sending money at a rate of 1 * price of USTC.
1a. Results of Voting
Below are the results of a Yes/No/Veto vote for each proposal, separately.
Coinage Swaps
Yes = The community agrees to integrate diversified backing for LUNC → USTC swaps in the form of digital coinage, beginning with CEXs. Whenever LUNC is exchanged to USTC on a CEX, a burn fee automatically swaps to the CEX’s native token, such as BNB, USDC, MX, or preferred Store of Value (SOV), such as USDT, BTC, ETH, MATIC, or any combination of the priors.
No = The community does not agree to integrate diversified backing for LUNC → USTC swaps, and will not field CEXs for this proposal.
Veto = The results of No, and additionally burning all depositors’ LUNC used to put forth this proposal.
Tax Reader (Tariff) Module
Yes = The community agrees to field other Cosmos developers or Cosmos grants programs, such as Osmosis Grants Program or ATOM Accelerator, in order to develop a Module (ie, x/tariff), or alternative solution, to allow them to integrate the burn tax and the reward policy; and the community agrees to subsidize this development with available funding from the Community Pool in the event a grant is not received from third parties.
No = The community does not agree to field other Cosmos developers or grant programs to subsidize development of a module, or similar solution, that allows them to integrate the burn tax and reward policy on other chains; and the community does not agree to subsidize this development with funds from the community pool if a grant is not received, or otherwise free or subsidized labor by third-party volition.
Veto = The results of No, and additionally burning all depositors’ LUNC used to put forth this proposal.
Consolidated Conversions
Yes = The community agrees to integrate routers that allow the stable conversion of USTC (or other Terra fiats, like KRTC) to a stable variant, using direct conversions of USTC to UST based on the value of USTC, or via a metapool router such as 2pool, 3pool, or 4pool, and subsidize the development integration on Terra Classic, either by third-party funding or labor volition, or via the Community Pool’s available funds.
No = The community does not agree to integrate conversions or routers for USTC or other Terra fiats like KRTC to their stable counterparts, either directly or via metapools, and they do not agree to subsidize the development using the Community Pool’s available funds, or field third parties for development or funding of development.
Veto = The results of No, and additionally burning all depositors’ LUNC used to put forth this proposal.
2. Motivation
In short, there are several core themes that affect the longevity of LUNC:
- Lack of stable remittance (
USTC != UST) - No meaningful reasons for non-Terra Classic chains to integrate burn taxes aside from goodwill
- Inability to sustain LUNC value uptrend (accretion of value through use)
Each proposal addresses one or more of these themes in its own way:
- Coinage (Weighted Index) Swaps: creates a one-way trade route that is circular and benefits CEXs by way of accreting value back to the facilitating party and their token-holders.
- Tax Reader (Tariff) Module (
x/tariff): allows other chains to “see” how Terra Classic is conducting its monetary policy, and willingly integrate part of or the entire policy on their own chain, such asTaxPolicyandRewardPolicy, to generate mutual economic benefit for their constituents. Read more about Tariffs. - Consolidated Conversions: leverage the one-way trade route (
LUNC --> USTC --> UST) to create stability on the network through money velocity, and routine conversion-to-goods or commodities in the reverse process. (UST --> LUNC, orUST --> [coin, commodity, NFT, etc.] --> LUNC)
3. Explanation of Proposal Functionalities
Each proposal has a moderate amount of technical know-how required to implement it. It is recommended to subsidize developers in lieu of developers committing to this work of their own volition, time, and resources.
3a. Coinage Swaps
There are roughly 15 different coinage metals that have been used as alloys for coin production. Read more about Coinage Metals.
These include the likes of: Aluminum, Antimony, Carbon, Chromium, Copper, Silver, Gold, Iron, Lead, Manganese, Magnesium, Nickel, Platinum, Tin, and Zinc.
In the same spirit, we can do the same for LUNC, by allowing the DAO to choose which “cryptometals” are qualified for use of committing a one-way swap from LUNC --> USTC (or other Terra fiat). This is the most obvious route to incentivizing CEXs to integrate the monetary policies enacted by the chain, such as TaxPolicy (used for burns) and RewardPolicy (generally used for seigniorage, but can be repurposed as a conversion).
An example of how this can be used for three major CEXs that have supported the burn tax to-date at a loss, instead working to their benefit:
3a(1): Binance
- Binance uses
BNBas a Store of Value (SOV).- Whenever
LUNCis exchanged toUSTC(or another Terra fiat, likeHKTC), a small portion is burned. This is theTaxPolicyrate.- Whenever a burn occurs in this way, a small portion is earmarked for conversion to their SOV token choice(s), in this case,
BNB.- If the exchange of
LUNC --> USTCexceeds its reverse,USTC --> LUNC, the supply ofLUNCwill contract by virtue of money velocity.
3a(2): Coinbase
- Coinbase uses
USDCand/orcbETHas a Store of Value (SOV).- Whenever
LUNCis exchanged toUSTC(or another Terra fiat, likeHKTC), a small portion is burned. This is theTaxPolicyrate.- Whenever a burn occurs in this way, a small portion is earmarked for conversion to their SOV token choice(s) based on their preferred weighting (hence, “weighted index”), in this case,
USDCandETH.- An example of how this applies to virtual coinage is that, if Coinbase decides to weigh one conversion to
USDC-cbETHas80-20(for example), of the rate set byRewardPolicy(such as 10% of all burns), 80% of theRewardPolicyallocations will be earmarked for conversion to USDC, and 20% will be earmarked for conversion tocbETH.- As Coinbase maintains prerogative on what is the SOV coins or tokens, they may opt to facilitate conversions to whitelisted, tokenized versions of their stock (for example), such as
mCOIN.- If the exchange of
LUNC --> USTCexceeds its reverse,USTC --> LUNC, the supply ofLUNCwill contract by virtue of money velocity.
3a(3): Kraken
- Kraken uses their own Store of Value (SOV) parameters. This is nominally
BTC, but they can choose any number of assets that they hold.- Whenever
LUNAis exchanged toUST(or another Terra fiat, likeCATC), a small portion is burned. This is theTaxPolicyrate.- Note that Kraken uses
LUNAfor Terra ClassicLUNCandLUNA2for Terra PhoenixLUNA.- This methodology matters for institutions – government or business – who opt out of the proposed Coinage Swap.
- Instead, these institutions, government or business, burn
LUNAto the preferred SOV coin(s) or token(s).- In this manner, the money route is:
LUNA --> UST or SOV coin(s).- Whenever a burn occurs on their platform, a small portion is earmarked for conversion to their SOV token choice(s) based on their preferred weighting (hence, “weighted index”), in this case,
BTC.- An example of how this applies to virtual coinage is that, if Kraken decides to weigh one conversion to
BTCof the rate set byRewardPolicy(such as 10% of all burns), 100% of theRewardPolicyallocations will be earmarked for conversion to BTC.- They may opt to re-weigh this such that arbitrary coins or tokens, such as
ATOM,DOT, orTRXare shared. For example, they may decide to split their conversion-to-SOV as 10/25/50/15 ofBTC/ATOM/DOT/TRXon every qualifying swap.- If the exchange of
LUNA --> USTexceeds its reverse,UST --> LUNA, the supply ofLUNAwill contract by virtue of money velocity.
3b: Tax Reader (Tariff) Module
A Tariff is “a tax imposed by one country on the goods and services imported from another country to influence it, raise revenues, or protect competitive advantages.” Read more about Tariffs.
After the Terraport exploit, a reflexive governance response was to deny opening the IBC channel between Terra Classic and Injective, even though this action was separate in proposal nature, in order to prevent “funds escaping.” (These were later caught at the CEX-level.)
We can consider an analogy of this event like shutting down the borders of an individual Eurozone member country hyper-adjacent to another. This action is analogous to disabling trading of the Euro between Germany and France because someone smuggled $5m of goods out of Germany to France. This has drastic economic consequences from the DAO level – all imports and exports between Germany to France was stopped, forcing the smuggler to instead traverse the allowable path of Germany → Portugal → France without punishment. If the total number of imports/exports are $20b, does this action make sense?
The Tariff Module is a proposal to allow two chains to share mutual monetary policy. This can be considered either a separate development or an addition to Terraform Lab’s Alliance Module, which allows a user to bridge a currency unit, such as USTC, to an Allied chain, such as EUTC. This allows the individual DAOs to establish what’s called the Take Rate, which allows that DAO to enforce an annualized tax on the Alliance asset via staking. In this case, the Take Rate is akin to carrying costs between global banks under regional fiat zones – like lending USTC to the Eurozone, and the EU charges the US for such an action.
In some ways, the Tariff Module is Alliance by a different name. The core difference is the nominal implementation of abstract inheritance. For example:
abstract class MonetaryPolicy_Chain {
public abstract float TaxPolicy();
public abstract float RewardPolicy();
}
class MonetaryPolicy_Osmosis : MonetaryPolicy_Chain {
private float _TaxRate;
private float _RewardRate;
// assign public MonetaryPolicy for Osmosis via lambda as (_TaxRate, _RewardRate)
// then override MonetaryPolicy rates and methods set by {Chain}
}
This implementation is slightly different from Alliance as it imposes a forceful tariff on a chain that isn’t Allied. If the Terra Classic DAO wants to enforce a burn tax on another country’s trade of their now-exported goods, they can use this module to override that chain’s “non-compliance.”
Realistically speaking, this has a number of ramifications that extend beyond this snippet, and as such, it is recommended to instead integrate the Alliance Module or at minimum borrow from the Coinage Swap schema.
3c. Consolidated Conversions
This is a simple integration of routers to allow users to remit a stable version of USTC, by converting the value 1:1 (minus gas and/or router fees) to a stable version, like UST or USDC, at a rate of 1 * price of USTC.
Let us take an examples to see how this works:
Using 4pool(USDC,USDT,USTC,FRAX) as the stable-metapool router (Pool#679 on Osmosis)
- User has 1500 USTC, which is valued at a rate of $0.015 / USTC.
- If the User were to convert this 1:1, they would receive 1500 * 0.015 units of UST, or $22.50.
- This remittance routes via
4pool(USDC,USDT,wUST,FRAX), meaning that fees are charged in the form ofSender(USTC) > [USDC, USDT, or FRAX] > Receiver(USDC, USDT, or FRAX).4poolon Osmosis charges 0.04% for this, or 4 basis points.- In Terra’s Market Module, this is traditionally done as
USTC > SDT > UST.- In either case, the
Sendersends $22.50 ofUSTC, and theReceiverreceives $22.50 ofUST, minus fees levied through4pool,SDT, or similar.
If the value of USTC is $0.06, then 1500 units is equal to $90.00. The value is retained during the remittance despite volatility by committing these on a per-block basis. Ideally, this is also done using the BTC mining standard, with functional abstractions as supra-layers, such as through the use of Directed Acyclic Graphs (DAGs) – some examples include Fantom (FTM) and Constellation (DAG) to facilitate Ethereum trading and Cosmos trading respectively. We might otherwise call this functional slippage, just on a fully-chain form.
4. Pros and Cons
The Pros and Cons for each can be summarize as follows:
Coinage Swaps
[Pros]
- allows healthy one-way velocity routes for algorithmic money: Luna Coin > Terra Coin > Terra Note > [non-Terra, non-Luna Coin or Note] > Luna Note > Luna Coin || non-Terra, non-Luna Coin
- CEXs much more likely to incorporate burns by acting as the Coin or Note endpoint for trades by converting Coins or Notes to their functional counterparts, either on Terra or on another chain
- functional supply contraction of LUNC through high-velocity burns
[Cons]
- CEXs and other institutions are not required to participate in this process, or to act as a Coin or Note endpoint
Tariff Module
[Pros]
- Enables functional taxing of other chains if non-compliant with DAO’s monetary policy
- Burns can be forced through functional override
- functional supply contraction of LUNC through high-velocity burns
[Cons]
- Consensus infringement of other chains (non-consensual taxation)
- Direct economic harm if misapplied to the taxed chain
- Users opt out of taxation in discreet ways, causing a plethora of deferred work
- Not necessarily functionally better than Alliance Module
Consolidated Swaps
[Pros]
- Enables stable remittance no matter what the price of USTC is
- If the coin’s backing is greater than its lowest possible value or denomination (e.g., USTC >$0.01), its parent Note can see value accretion greater than its face value (e.g., UST > 100*USTC)
- Volatility is maintained to the amount of USTC the chain owns at any time (likely some function, expansion, derivative, or form of
log_c(a+b))[Cons]
- Requires some amount of illiquid money supply to go untouched (Read more about Money Supply.)
- Illiquid supply can be removed via conversion or withdrawal
- Trade router rates can differ based on the floor liquidity of M(N) money supplies
- If the userbase loses faith in the money supply backing, then an extremely volatile risk is prone to occurrence
5. Conclusion and Notes
By integrating Coinage Swaps with CEXs, they can burn at a faster rate than the users of the base chain can (at least, at this time). They can enact a Coinage Swap to any form of backing coin or token as-preferred – BNB, USDC, USDT, BTC, DOT, KSM, TRX, MIR, mCOIN, etc. With enough global money velocity, this system is self-sustaining.
It is recommended to integrate the Alliance Module to allow cross-chain lending of these fiats using the take rates. The Tariff Module is written here to display how to enforce cross-chain taxation, but is a dangerous precedent to enforce, and so should be considered with heavy discretion due to the economic consequences associated with its non-consensual nature.
Lastly, Consolidated Swaps allow stable remittance in spite of volatility. For example, PayPal (and its subsidiary services like Venmo) can leverage Coinage on-chain (“cryptocoinage”) to facilitate stable cryptocurrency remittance between two parties, effectively burning LUNC and providing an illiquid money supply that’s discretely measurable.
This proposal will have a deposit created by 5/15/2023, 11:59:59 PM PST, from the address terra1ld979rgsh2p5tfxx5rl5cp5r9kd4ke570xc9uf, at a deposit value of 0.000001 LUNC. Please use this deposit address as a way to track the proposal from this author. Remember that if the 1m LUNC deposit is not reached, then the proposal will not go to vote – additionally, these are signals, and arguably are enforceable at any point in time by the L1 team or CEXs.
