How to make our ecosystem resistant to hyperinflation

Inflation is a common problem that erodes the confidence and development of any market in the world. Below, I suggest a self-regulating mechanism to combat hyperinflation, at least to stakeholders (the real supporters of the system), which can restore credibility to our ecosystem.

In my opinion, the only problem with the algorithm was hyperinflation to stakeholders, which uncontrolledly dumped excess Luna onto the market, causing a system-wide spiral of disbelief.

After re-establishing the values for those who are entitled before the depeg (hardfork?), I suggest implementing a variable staking rate exponentially linked to inflation, to at least maintain parity with the current value without lost money when you are in staking. I could be wrong, but the only reason why the stakeholders (of Luna and UST) lost money was because the staking didn’t keep up with the inflation generated after the depeg.

In the same way that there is a period of 21 days to recover funds invested in staking, a period must be implemented so that new amounts allocated to staking can return rewards, preventing opportunists from getting staking after acquiring Luna cheaply on the market. So, even if the algorithm dumps Luna on the market, the project’s legitimate supporters (those who were already staking) will be protected from inflation, and often even profiting from it (by exponentially adjusting the staking rate), increasing the community’s trust in the token and avoiding a new spiral of distrust.

There is only one tool against inflation, interest! Only with high interest rates (read high staking reward) will the investor feel confident in keeping his position in Luna (or UST in Anchor protocol), even if there is some disturbance in some of Terra’s stablecoins. Whoever holds Luna/UST in moments of market turmoil will safe or be even richer.

About the hardfork, the new Luna needs to be strong and resilient, it needs to be a store of value for stablecoin trading, and this will only be achieved if people trust that holding the new Luna will not lose money, and for that, the new Luna has to appreciate in value, moments of market excitement (when interest in stablecoins grows), and during moments of inflation. With this model, the new Luna will not be interesting for trading, as whoever acquires them will be interested in staking to protect themselves from inflation.

In short: this proposal to reward those who decide to keep their money in staking during a crisis makes the system stronger, as it makes it more profitable and works like a magnet attracting more money when someone makes a large withdrawal trying to destabilize the system.

God bless us.

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What is wrong with hyperinflation? Hyperinflation transferred all money from Luna holders to UST holders exactly as intended. That is what you are betting on when you buy Luna. However, it wasn’t enough and the protocol does need some kind of circuit breaker so that Terra is allowed to drop if Luna hyperinflates. 100% of the wealth was already transferred, and adding extra zeroes is not going to transfer any more. Holders of UST will have to accept it was undercollateralized, and either sell at a low price now, or wait for the peg to recover.

Interest cannot magically make money out of thin air.

Hyperinflation makes everyone lose money, because UST holders don’t get pegs without Luna, and because of that, they will never keep their money par with the Dollar, which is their main objective. UST only exists because of Luna, and because of that, Luna needs to be stronger than all of Terra’s stablecoins (Luna’s marketcap needs to be bigger than the maktetcap of Terra’s strongest stablecoin).

Hyperinflation of Luna is literally how UST is supposed to defend its peg when it’s too low.

Conversely, Luna hyperdeflates when UST is too high. Welcome to gambling.

I understand this balancing mechanism (burning and producing Lunas according to the demand of stablecoins), but if you don’t defend the people who staking Luna from hyperinflation, then no one will want to hold Luna anymore, hence the spiral of disbelief. I didn’t propose the elimination of Luna’s production, I only proposed shielding investors who staking, so staking will be an interesting business, and more people will want to support and strengthen the ecosystem, even in moments of FUD. This mechanism can be more interesting than the Anchor protocol itself, depending on its parameterization. Note that this idea eliminates the need to keep Bitcoin reserves, which can be used, at least in part, for anyone who wants to be compensated for the previous collapse and abandon the project, giving legitimacy to the new system, as it will satisfy everyone.

It’s risky, I know, but it’s a doable solution that deserves to be considered, as any alternative will also be risky and could go wrong.

When money entered, UST went from 10 million to 18 billion (18,000 million) and LUNA only went from 1 billion to 0.7 billion.
Then money exited and UST went from 18 billion to 12 billion and LUNA went from 0.7 billion to 6 trillion (6,000 billion).
That’s hyperinflation without hyperdeflation.

It can be argued that this was a contrast of slow-and-steady entry versus black-swan exit, and that fast repegging and restored confidence might have resulted in fast re-entry of money with hyperdeflation. However, if this re-entry were overall slower (more cautious) than the panicked exit, then similarly the effect of slow movements would not have balanced the effect of large movements, even if exactly the same money exited for a short while and then re-entered.

Thoughts would be welcome on what problems a constant-product Total Supplies approach might have.

I have made the proposal to stop infinite hyperinflation. It is normal that hyperinflation is more likely to happen than hyper-deflation in the real world, the problem now is unlimited hyper inflation. People who swap from UST to Luna will be diluted away as well if they don’t sell it quickly. Putting a bound of UST/Luna ratio solves this problem.

The point of staking is that you lose your money if the protocol fails, so you are incentivized to keep the protocol running. That’s how staking works. If the protocol fails then whoever staked loses money.

Yeah it can be redesigned with constant-product or whatever. That’s the real solution. Capping minting is just broken.