Emergency measures for restoring Terra peg

Author: Daniel Hong (@unifiedh) | Peter Pan Crunch LLC, ex-Terraform Labs & Anchor

Proposed changes to Terra Core:

Increase base_pool from 50M SDT to 1B SDT, and decrease pool_recovery_period from 36 blocks to 1 block.

This is an amendment of a previous proposal that also implements a similar change, but at a smaller scale.

As this change is fairly aggressive (increasing total minting capacity by ~720x), minting parameters should be rolled back to less aggressive levels immediately as market conditions stabilize.

Proposed changes to Anchor Protocol:

Decrease minimum interest rates to 3.5%, and maximum deposit rates to 5.5%, with a targeted interest rate of 4%.

Based on the current block time assumption of 4,656,810 blocks per year, this translates to:
target_deposit_rate = 0.000000008589570972
threshold_deposit_rate = 0.000000008589570972
dyn_rate_min = 0.000000007515874600
dyn_rate_max = 0.000000011810660087

This should temporarily stop the Anchor reserve from depleting such that TFL will not have to deploy additional UST, which should contribute to stopping the depeg death spiral.

Again, as this change is fairly aggressive, those parameters should also be rolled back when deemed necessary.

For market module parameter changes on Terra Core:

Current market parameters cannot properly contract UST to levels required to restore its peg.

Anchor alone saw a $8B decrease in TVL, let alone all other TeFi applications. Counting in discounts due to UST depegging, this loss in TVL is massive.

Emergency measures should be made to temporarily increase virtual liquidity for Terra <> Luna swaps ~1000x, otherwise UST depeg would be prolonged, worsening the situation.

Another reason for the 1-block pool_recovery_period is Tendermint’s FIFO mempool.

The Cosmos SDK and Tendermint (of which Terra is based on) uses a fixed gas price system with transactions being accepted with a first-in-first-out basis, which may easily get congested during high traffic. This means Terra <> Luna swap transactions may not properly go through during a time when arbitrage is of utmost importance.

Resetting the virtual swap pool every block should help with this, as there would be no competition for better exchange rates and lower slippage immediately after the base_pool is reset.

For Overseer contract parameter changes on Anchor Protocol:

A depegged UST cannot sustain 18% APY any longer.

While some may argue higher interest rates help with less UST circulating supply, when the stablecoin have already lost trust from the public due to a 2-day depeg people would try to exit anyways.

One significant factor for today’s depeg was the release of Terra’s stability reserve into the Anchor reserve every time it was depleted, introducing newly minted UST that was not supposed to be there into circulation.

Back when Terra’s focus was on payments, having a centralized stability reserve at least made sense from a business perspective, because it is capitally inefficient to introduce new Terra into circulation from burnt Luna for a traditional fintech application like Chai.

When you’re doing savings and DeFi products, Anchor could have done better.

Temporarily lowering Anchor’s interest rates should stop the Anchor reserve from being depleted, preventing additional UST from entering circulation. Interest rates could be re-calculated when the depeg is resolved.

Terra Core:

  "subspace": "market",
  "key": "BasePool",
  "value": "1000000000000000.000000000000000000"

  "subspace": "market",
  "key": "PoolRecoveryPeriod",
  "value": "1"

Anchor Protocol:

    "order": 1,
    "contract": "terra1tmnqgvg567ypvsvk6rwsga3srp7e3lg6u0elp8",
    "msg": {
      "update_config": {
        "target_deposit_rate": "0.000000008589570972",
        "threshold_deposit_rate": "0.000000008589570972",
        "dyn_rate_min": "0.000000007515874600",
        "dyn_rate_max": "0.000000011810660087"

This proposal is live for on-chain voting.

1 Like

For validators voting NoWithVeto with proposal 1169: I do understand a 720x increase in on-chain liquidity seems extreme, but as mentioned with the proposal this is a temporary measure.

I do not believe such parameters would be sustainable in the long term.

However, parameters suggested with proposal 1164 would also be acceptable as a solution, albeit slower in terms of peg recovery.

++ ANC stakers; the Anchor Protocol portion of this proposal is also live for on-chain voting. If you stake ANC, please let your voice heard as well :slight_smile:


Wow this overwhelmingly rejected. Maybe dev team should release a less aggressive approach or No with Veto voters should express concern as soon as possible so all parties can come to an agreement :handshake:

1 Like

Hi dear friend. Please do something as soon as possible that will ruin my whole life, I lost about $ 250,000 in luno currency. Please do something as soon as possible, really all the capital of my life is gone. Needless to say, the Luna currency was the best currency to invest in, but I do not know what happened all at once. That everything was gone

Support Burn Proposal

Can someone explain what is the effect of a large increase to BasePool, and of decreasing PoolRecoveryPeriod?

I think it’s got to do with the terra-luna swap price, but I cant figure out what will be changed as a result of this parameter adjustment. But the OP talks about increasing total minting capacity, which I am having a hard time connecting such a change to BasePool or PoolRecoveryPeriod

The market module is disabled, nothing changes until it stays disabled.