[Proposal] for Classic: $UST debts are a bankruptcy. Those have to be burned first, only then $LUNA classic can be great

Governance & Proposals
1

Summary

Formerly titled [Proposal] A Better Way Forward™ => Say NO TO THE FORK. LFG must instead take over the liability for the $UST debt. This proposal doesn’t relate at all to the V2 fork, references to $LUNA and $UST are for $LUNC and $USTC (Terra Classic versions of the tokens)

Terra (Classic) is bankrupt and it needs a bail out.

Motivation
Right the wrongs caused by de-peggening, give a realistic path to recovery for Terra without requiring a hard-fork.

Edit (27/05/22): I still think if Terra Classic were ever going to thrive it, needs to have a long term plan for the $UST debts. On the consideration that LFG is unlikely to take responsibility for the bankruptcy, the community at least should. I’ve also added Iong term lockups of 1-3+ years as another option in the recovery toolbelt along with $UST purging/burning, because I can see how incentives for this are easier to create when you don’t have any backers.

Proposal

TLDR

I have been envisioning a better path for Terra going forward:

Terra Classic must live on. $UST is bad debt in a bankruptcy and that’s the only way anyone should be looking at it. LFG or some other actor(s) must take charge of the situation by raising capital to buy back bad $UST and purge it (perma-burn for no return). This proposal explains some ways to do that:

  1. Dapps should not be struggling to figure out the correct $ value of trades because they tend to conflate $/UST, which I believe in part is a bug in the Oracle. I propose that the Oracle module needs a rework. Treat $UST token as a debt token which has a volatile value between 0 and 1 depending on how solvent Terra is, not as a stablecoin pegged at $1 (which it clearly isn’t anymore while mint/burn is disabled and there is 11B in excess supply).
  2. Terra Classic needs to raise funds to buy back ~11B excess UST.
    E.g. buy back over time at ~$0.25/UST = -$2.75bn (edit 27/05/22: 11B UST now only valued at $311M today at UST’s current price of $0.03). This needs to be the first goal of Classic stakeholders, not burning $LUNA which will counterintuitively only serve speculators and market makers who want to offload their $LUNA. $LUNA burning was only good because of its role in the $UST stabilisation mechanism, so we must fix that first.
  3. $UST can be forced back towards its old peg value of $1 if the market could be incentivised to buy $UST at heavy discount then lock up or purge large amounts of $UST from the circulating supply. While there is still far (far) too much UST for it to be worth $1, early lockups should be longer and burning would be a great alternative if it can be incentivised without more $LUNA minting.
  4. Only after specific conditions indicating solvency have been met according to the updated Oracle module, mint/burn can be re-enabled. My proposal is about patching the vulnerabilities in the mint/burn mechanism which caused the $LUNA gigamint de-peg event. Even better, I’m suggesting that by fixing the mechanism and purging the debt LFG & Terra community created before, we can bring back profitable seignorage and $LUNA burning which is a great mechanism which just needs to be defended appropriately. Fix the problems quietly while your mandate is buying back the $UST debt at pennies on the dollar, then I think you’d see $LUNA come back stronger than ever before.

The Debt Repurposing - $UST gigaburn and lockup phase:

I think dapps have an opportunity to innovate on many different ways to get the community aligned with getting the bad $UST off exchanges and locked up or burned. The only constraint we have is to create incentives for getting rid of $UST other than more $LUNA minting.

Terra Classic stakeholders need to play it smart to acquire the $UST back at a fair discount, and so should work to keep $UST beneath a target acquisition price ($0.25 per UST token was initially used in my calculations) by making markets with soon-to-be burned $UST which they acquired cheaply.

While original $LUNA classic holders will still be diluted heavily, they will have lots of time and opportunity to pick up $LUNA at discount during the $UST burning phase. Since $LUNA supply will be stable at ~7T without burn/mint, we can expect mercenary capital to exit $LUNA during the debt repayment phase, new $LUNA purchasers would not be punished by dilution for allocating to $LUNA while minting is disabled. Airdrops could be targeted at $LUNA holders from prior to the de-peggening if it’s felt that they need more value back.

Terra Solvency Rating (TSR), Market and Oracle Modules v2.0, $LUNA buyback

Many Lunatics seem to think that we have to pivot everything because the system failed under intense pressure (coordinated governance attack). I prefer changing things minimally, since Terra ecosystem worked great 99.9% of the time. The goal should just be to patch the vulnerabilities which were actually exploited in the end causing the de-peg event.

i.e. Mint / burn is what distinguished Terra, we shouldn’t be aiming to do away with it completely! However, giga dilution of $LUNA equity should never have been possible. I propose adding a Terra Solvency Rating (TSR) to the Oracle module which aims to detect insolvency from unexpected exit liquidity on or off chain.

TSR falling below 100 would trigger another debt repayment phase where excess $UST supply would have to be re-purchased and burned. New $LUNA or $UST could be minted again only when peg is close enough to $1 for TSR>=100. Therefore $LUNA value does not go to zero by dilution when Terra is insolvent, the insolvency death spiral is patched because excessive $LUNA minting cannot occur when solvency is low.

I think protocol developers are better placed than me to discuss implementation details for TSR, but I’m knowledgeable enough to be sure that building it is absolutely possible if we still have brilliant devs around to help.

$LUNA burns to mint $UST were always brilliant with few drawbacks for Terra, an extemely profitable and successful seignorage mechanism which prevented $UST from trading >$1. We can and should re-use this when the $UST burn phase is completed (i.e. debts are repaid) and the system is regaining stability where $UST can find its peg back at $1. However it would be prudent to only allow minting of new $UST when the oracle reports a solvency rating of >=100.

(edit 27/05/22): When I originally wrote this proposal, I wanted to stop the fork so that LFG could take responsibility of the mess they created here.

Now it has become clear that it will not be them who have to follow any mandate, but whichever mad person(s) wants to buy Terra Classic.

For this to work, stakeholders need to be incentivised to buy back $UST and either lock it up long term / or burn it when solvency is low (i.e. when $UST is not worth $1).

To prevent the $UST death spiral happening again, stakeholders would need to be incentivised to lock up exogenous collaterals in contracts which help to backstop the $UST peg. LFG was on the right track trying to back their reserves with exogenous collateral ($BTC buys), but it should have been a diverse portfolio of collaterals, some being interest bearing staking instruments similar to what Anchor was building for their Borrow dapp, some not. A key unsolved challenge is still that this lockup feature needs to be done with audited smart contracts, rather than trusting some centralized actor like LFG.

This would be a space for dapp innovation, in particular I think longer term lockups with the option of functional $UST borrowing against the true value of your collaterals. I say this because Anchor Borrow at this time only allows you to borrow as much UST as the $ value of your bonded assets making it effectively useless - could new borrowing dapps be built once the Oracle is updated to account for $UST as a volatile token?

Rather than repeating the mistake of publicly announcing huge purchases, focus on quietly bidding on a diversified basket of quality apex assets to build a reserve backstop, at fair value or discount (no more free lunch for frontrunners). Of these reserve assets, $LUNA shouldn’t exceed an allocation of (e.g.) 5%, and it would be liquid and ready to use to mint $UST when it trades above $1 (and solvency is 100).

Reserves held by Terra are weighted into the TSR; this incentivises stakeholders to follow up on their secondary mandate to lock up a portfolio of apex collaterals in a Terra Classic reserve while profiting consistently from seignorage and remaining highly solvent. This closes the final loophole by making $UST far more resistant to extreme $LUNA volatility.

–

You see guys, it is going to take a lot of hard work to shake off the big whale $LUNA bags that have been getting huge amounts of coins for scraps. That is why it’s necessary to have a slow and brutal debt repayment phase during which $LUNA whales will distribute their $LUNA back into the community’s hands.

With newfound confidence instilled by Terra’s commitment to a UST debt repayment plan, community could again realistically speculate on $LUNA making long term gains while still priced at handsome discounts from exiting whales, knowing that the reserve will be buying $LUNA for seignorage - this is all made possible by first buying back and locking up or burning bad $UST.

Feedback welcome.

68 Likes
2

Ive read almost all proposals, some of them trash others very good. I create this account just to say this is the best ive read. I agree.

18 Likes
3

I like this proposal. This is similar to [Proposal] 8 Steps to Save Luna Now - Economic Refactoring Proposal From Industry Professionals but they go into more detail of what went wrong and some of the formulas to use to restrict minting.

6 Likes
4

I agree with you. Get rid of the fork option immediately with all your might, and boycott Luna v2 if it ever comes out because they’ll be printing Luna 2 and taking advantage of the community again.

6 Likes
5

I also don’t like the idea of a fork (it’ll be ded on arrival with no trust). At the same time, the current chain is also done for. No amount of burning can fix it, as there will be no more staking on this chain ever again. No more staking and probably no more real governance due to fears of governance attacks. Even if we burn for several weeks/months, it doesn’t matter. There will never be staking on the current Luna chain again.

2 Likes
6

Rad. Just use LUNA as main on chain currency, Setup Astroport pools for LUNA paired with all project/dApp tokens and open the system back up to user trade and use, of which there are now 10s of thousands more around the world. Can even do locksrop LuNA pools to kickstart from here and take some LUNA off the market.

Those already familiar with the system will be in at ground floor. (some of us are still on chain providing liquidity to keep the chain running, and help with exit liquidity or whatever else for those “stuck” and need it. LUNA and UST price propped up a bit and staving off total annihilation LUNA and UST and all the “new speculators” on exchanges are even more helpful for this too, LUNA ain’t 0 right now and trade volume amazing especially for a “failed” project)
UST account holders we can work out how to do right by.

Terrachain is amazingly good user experience and marketplace. ONBOARD THE TRADE.

2 Likes
8

If $UST debt repayments became the focus, $LUNA would only have speculative value until the peg is restored. Give the attackers the opportunity to take profits and get out while we pay off our ecosystem debt, re-enable staking when stability is re-found and TFL can acquire a controlling stake.

1 Like
9

I agree to this completely but what are the legal implications for this? Would this make UST a security then rather than a utility?

1 Like
10

I agree to this completely but what are the legal implications for this? Would this make UST a security then rather than a utility?

The thing is, $UST is already existing exactly as described! I’m not a lawyer + different jurisdictions see things very differently ofc.

Updating the chain to reflect the true situation of $UST today shouldn’t change anything with regards to its position as a utility vs a security (I hope but IANAL).

My suggestion is just to make the dapps + chain aware of the current value of $UST (+ solvency), so that the chain reflects reality and $1 peg can be found again; at which point $UST will again resemble a utility much more than a security.

Going forward de-peg risks must be made a lot more clear to onboarded users, calling $UST a stablecoin was a mistake. We have to acknowledge that it’s actually a debt instrument due to being unbacked (algostables = misleading to investors).

Btw, it’s particularly the legalities you’ve raised + the governance problems wrt $LUNA which I’m unsure about, so thanks for the feedback.

3 Likes
11

Whatever the solution TFL takes, I think it would be best to hasten the decision-making process before the governments start to weigh in in light of the recent events. (As you guys know how bureaucracy is slow and painful)

14

I agree, they do not even need to play with cunning, it would also be enough to give the signal that they are moving in that direction and the trust will return for 80%

15

Good proposal, close to other good ones. The main challenge is to remain attractive enough for builders to stay. There should be some equity options to be distributed to keep builders around

2 Likes
16

Full support for that proposal. How hard can it be to raise 2-3b$ to buy back UST? I’m positive this can actually be raised by community.

Maybe even better… offer some reward to UST holders that are willing to lock their UST for 90 days or more? This way available UST in next months would probably cut by half?

With UST peg moving back up to 0.60 (for start). Tons of luna can be burned.

Many will make a lot of money with buying luna so low but this is probably a small cost to save whole ecosystem.

7 Likes
17

100%. You have to imagine what is a worse look to governments and regulators, hard-forking 11B of $UST to make it disappear in thin air, or TFL committing to buying back all $UST and burning it to repay their debts?

The feds are going to go after TFL if they think we can just hard-fork and forget about all the bagholders of their stablecoins (airdrop to a new chain is not repayment). Commit to $UST debt repayments and you stand a chance.

7 Likes
18

This is by far the best proposal. A few points come to mind.

As the oracles are very important to this model, several should be used to avoid a single point of failure or an attack vector. There should be a method to monitor the status of the oracles in addition to having multiple oracles in use. In the event that there is one viable oracle due to some unforeseen event the entire eco system should be made aware. In addition there must be safe guards against flash loan attacks. The addition of White Whale in the ecosystem guarantees that the price of UST on chain differs from the off-chain UST price making the ecosystem vulnerable from the flash loans exploits.

The source of this attack was off-chain liquidity depletion. At minimum there should be monitoring of the off-chain liquidity with on-chain controls to facilitate a rebalance of the external liquidity pool (i.e. Arb bots, Arbs by farmers incentivized by high yields). The monitoring should include actual levels of liquidity in the pools to highlight Soros attacks.

There should also be a procedure in place where in the case of Binance they can halt trading on their exchange and work through liquidity issues. This could be automated.

To ward off fake news bot attacks, Anchor should be modified to lock aUST in use in other dapps for 3-5 days. Ex. If aUST is deployed to Kujira, Mirror, etc. There should be a time delay to unwind those positions. This would slow the potential for future bank runs. Additionally Anchor should not only display the capital deployed in other areas of the ecosystem via aUST it should display the current calculations driving the APY. Fear was amplified by influencers and bots leading to a condition ripe for mass panic.

3 Likes
19

If the focus pivots to security from expansion, I would stake with Terra in a heartbeat. I believe others will once the stability and certainty are back. The Luna branding in great, and the recovery effort is marketing in an of itself. Not to take the discussion to off topic, Pepsi caused riots which resulted in the death of several people. Today no such stigma exist. People will return if the right steps are taken now. Terra should consider itself the leader in Defi, willing to make mistakes because it is strong enough to learn from them and grow stronger. If Luna is kept intact, and the mechanism for the fixed are plainly explained the trust can and will be restored.

3 Likes
20

Thanks. I worked on adding bit more detail on TSR and edited the OP.

21

This point will make TFL/LFG a critical element of the process, increasing centralization. Instead sell the debt on the open market. As a purchaser I would benefit from buying back the debt in the same way that Kujira opens up distressed assets to the open market.

If bUST is the token I hold as a purchaser of the debt, the value of bUST should equal price of UST + payments from the treasury + debt reduction fee

If the return in value is sufficient, the repayment of the $11B will happen quickly without centralizing the Terra network.

4 Likes
22

I like the solution being made on the current chain. However I think we should have a slight different model then proposed by you.

Anchor should provide staking UST for minimum lock period of 2 year whereby stakers get APY rewards as USTB. These rewards will be generated through the burning mechanism. This is only a small amount so it should not hurt at all. In the same time people will buy UST and lock it for the APY since its valued at 1$ instead of the current market value. This will create value locked in the system which will close all debts and raise the value of Luna as well.

Please share your thoughts

3 Likes
23

What would be the value of $UST at the time of the burn; is it the unpegged value or is it equal to 1 USD?