QUESTIONS:
After reading the proposal this far, some of you may have the following questions. Thought to provide more clarity as to why I believe the above proposal will age well with time.
1. Why should we utilize burn tax funds and not create new tax for funding the AFT?
Utilizing the burn tax is the best and viable approach without tax increase. Funds that are sent to burn will support for AFT creation and to support volatile control. This process is more like staking. The only difference is that in staking, user will have the option to unstake and these coins will come into circulation. However, the funds sent for AFT will act more like staking and cannot come into circulation unless we have a dire situation where we are forced to withdraw funds and reimburse the AFT holders in extreme situation, which, in my view is unlikely to happen. If we add another tax just for this purpose, it will once again increase the tax % which may not be a welcome approach to the new dapp / project developers. Effective utilization of funds with the current tax is the best solution to long term growth. As the current burn tax funds (LUNC) which are proposed to be utilized for AFTs will remain out of circulation it will serve the same purpose as that of burn tax. The only funds that will come to circulation supply is the existing 10% community pool, 10% for Reserves (for LUNC buy back and burn later) and the mint & create AFTs which will be distributed from community pool for all stakers.
2. Why should we not do a fund raising and keep it away from USTC?
Fund raising is not going to work as we need constant inflow of funds to increase CUST circulation. Fund raising on massive level will create the initial circulation, however, pools like volatile control funds and LUNC collateral funds require constant inflow of funds. Without the regular inflow of funds (from tax), this proposal will not see a sunrise and we will be back to the start for repegging USTC or to work on alternate options on new AFT. Creating CUST with burn tax amount doesn’t mean that we abolish USTC. USTC will be left aside for legal process and or until we have new ideas to repeg. It will remain in the ecosystem, but CUST will gain larger attraction if that becomes a success.
3. Is it possible to mint CUST by Terra Classic community members?
No, it is should not be allowed to manually mint CUST like the option we had for LUNA-UST. Existence of CUST should happen from the transaction volume. Higher the transaction volume, higher the circulation of CUST. Transaction volume is very much important from tax perspective and for funding projects through community pool. As long as transactions are done, the chain will remain alive and so does the AFT. Hence the circulation supply is also dependent on the transaction volume. What is the point in having large circulation supply if the chain is not alive (low transactions)? This way minting is limited, automated based on market conditions and remains decentralized.
4. Why is LUNC preferred over BTC as the backup asset for AFT?
Undoubtedly, BTC is the top asset class and is preferred coin over any asset to be set-up as backup funds. However, LUNC (formerly LUNA) was primarily created with the idea to create decentralized money through mint and is the native asset. If our community doesn’t support LUNC as backup, then who are we expecting support LUNC. Moreover, LUNC this as backup asset creates more value and we are increasing the scope for usage of LUNC. If we are to use BTC as backup asset, we have to sell LUNC (42%+ of burn tax value with the current proposal of VCF in addition to the LUNC sold to stack Reserve Funds) in open market where price of LUNC will be pulled down. Also, the amount of LUNC circulation will not reduce as per the current burn tax. If we use LUNC as the asset to backup AFT, then we don’t have to worry about utilizing the burn tax funds as these are locked and will never be released in circulation, except for a situation where we are forced to buy back AFT and burn which may not be required in the foreseeable future.
5. If we stop the burn process, will CEX still support for LUNC burn or redirecting funds (esp. Binance)?
If we stop the burn process, there are higher chances that CEX will not be interested to support us with the burn tax. Large portion of the burn tax is done by the top exchanges like Binance, Mexc Global and few others. However, if CEX initiated the burn tax to support LUNC community there will be a consideration for supporting the new proposal (I am purely speculating). We can request Binance and other CEX to redirect the funds to VCF instead of burn address. More the funds accumulated in VCF less the chances of losing the peg even if the price decreases more than 3X instantly. IF, and only IF, exchanges support this we can gain additional support in increasing CUST circulation and keep the peg intact during extreme situations. If CEX decide not to support, yes, we will lose the current privilege of large burn when CUST goes live.
6. How to list CUST in top CEX like Binance and other exchanges?
Honestly, listing in CEX will be a challenging process and CEX have their own listing process. Not sure if we as the community will be able to complete the listing process successfully. May be few experts on this matter can advise on it. However, my take is that when we are building decentralized money, we should not worry about CEX listings. We will have DEX platforms built on Terra Classic chain which will definitely support CUST, if we are able to launch it successfully. We can brainstorm on FIAT withdrawal options directly from Terra Station. We can also work on few DEX listings in long run. Eventually when this becomes a successful run, I hope CEX like Binance and others will support listing CUST.
7. What is the assurance that there will not be another death spiral?
While I cannot assure that death spiral will not occur with this approach, I am pretty much CONFIDENT that such situation will not arise. LUNA Death Spiral happened due to the mint mechanism where users tried to force mint to defend the peg. As the supply was unlimited, back-to-back mint caused the death spiral increasing huge volume of LUNC and USTC. This is one of the reasons why I am confident that a death spiral will not happen in this new approach. We currently have a hard cap of LUNC total supply to be 10B, which cuts down the possibility on indefinite minting. Even if the LUNC hard cap of 10B is removed in future, I am still confident that death spiral will not happen. CUST mint will happen only on these 2 occasions. 1. There are funds inflow and LUNC Collateral Funds value is equal to the CUST value. 2. Increase in LUNC price will increase the LCF value which will then be greater than CUST value. To balance the situation, VCF will start burning the LUNC and mint the deficient amount of CUST. I am not ruling out the possibility of de-peg if the VCF are exhausted. There are chances that it may happen due to extreme market conditions. However this will be only for a temporary period until the VCF is refilled from the inflow of tax funds. There will be no minting of CUST if de-peg happens and CUST falls below 1$. This is the very same reason why I mentioned that instead of burning lets send funds to VCF. There should be a provision made available for anyone to send LUNC to VCF instead of burn. Higher the funds in VCF, lower the chances of de-peg. As I am no financial or tech expert, I leave this to the financial expert’s opinion to identify the flaw in the logics while techies can create a simulation based on the proposal to check how the logic will work during extreme market conditions and revert if in case, I have missed out anything critical.
8. Why should funds be directed to Reserve pool?
We can still have these funds burnt, but, creating a reserve pool and backing up with top 3 coins like BTC, ETH, BNB will back up LUNC in not going down drastically. This reserve pool is different from AFT pool. The objective of this reserve pool is to create backup for LUNC. When LUNC is weak and other coins have higher value, we can buy back LUNC and burn in large scale. In-case of extreme volatility, these reserve pool funds can also be used to buy back CUST from panic sellers in market and be burnt to reduce circulation as well as to repeg the 1$ value.
9. Does it mean that Terra will have CUST as the only AFT in ecosystem?
No, not necessarily. CUST will be born out of burn tax whereas USTC and the newly proposed USTN are based out of market swap. There can be multiple AFTs in LUNC ecosystem (as long as they don’t have the same logic) and community will decide which one to use based on their preference and requirements.
10. What is the use case of CUST if it cannot be swapped to LUNC?
The use case for CUST is decentralized money and is distributed to all the stakers who protect the terra classic ecosystem. This proposal is not based on market swap, but, CUST can be traded on DEX for Fiat withdrawals or day to day trading against other coins. The idea of stable coins came into existence only to address the volatility. Arbitrary traders who had the opportunity to gain during de-peg are the only ones who will not gain much with this proposal as this proposal tries to keep away the volatility during normal market conditions. If CUST can address the volatility with a practical control measure, there is no stopping of traders to use CUST during bear market or whenever traders want to stay away from extreme market conditions. CUST can also be used to pay developers.
11. Is CUST an inflationary coin?
Yes, CUST is an inflationary coin as there are no cap to the circulation / total supply. Transaction volume (current burn tax) and LUNC price increase will mint new CUST and increase the total supply.
12. How will you control the CUST total supply?
It is not required to create a cap for CUST but if due to unforeseen situation where there are too much coins generated, then we can look at reducing the tax % to limit minting of new coins. Alternative way is to disable the distribution of funds from VCF to mint CUST. i.e. instead of minting new CUST, VCF pool will keep accumulating funds until the mint function is enabled. Reason for accumulating funds in VCF is that it can provide adequate back up to LCF if LUNC price crashes more than 3X from current price. The more CUST is minted, the more funds be distributed to stakers in decentralized way and healthier the chain be. This will encourage more LUNC to be staked in the ecosystem and reduce the circulation supply. It will be a WIN WIN situation for the entire community.
13. Can this proposal be explained in much simpler terms as it seems to be very lengthy?
I do agree this is a very lengthy read but wanted to explain my ideas clearly for a better understanding on the functionalities. I would request you to go through the complete proposal whenever you find time.
Sharing the below screenshot for quick understanding on this proposal.
Image 1 — Flow Diagram
VCF — Act as volatility controller and rebalance the peg value on 1:1 basis during LUNC price variation.
LCF & CUST — Have the same % of funds flowing in the respective pools so that $ value remains 1:1 at the time of allocation.
This proposal will abolish the LUNC burn, instead, 60% of burn tax funds will act as if these funds were burned (will not be available in circulation except for CUST) and create a new AFT backing it.
If the community feels that ORD can be replenished in other ways, then these funds (20% of 0.2% burn tax) can be moved to VCF in AFT pool to increase the holdings and act during volatility.