How to restore the fixed exchange rate between the USTC and the DOLLAR?

如何重新恢复** USTC **对美元的固定汇率?——How to restore the fixed exchange rate between the USTC and the DOLLAR?


First, let’s have the faith that Terra will be able to rebuild at little cost or wholesale changes to the system. The exchange rate collapsed, the brain drain, the dispersion of communities, we are already at the bottom of a rock bottom, so nothing can be worse than this, and if we make a change, it can only be up.


Why must it be rebuilt? We only need to look at the market value of Lunc and Ustc. Lunc’s floating market value is about 50% higher than Ustc’s, which means that at the current market exchange rate of Ustc, Lunc can be fully recovered as Terra’s asset reserve. In fact, Ustc’s market value has never exceeded Lunc’s.


But for now, a few important ideas need to be set straight, some basic concepts need to be clarified, and the remaining talents who want to contribute and the retail investors who still hold out hope for Terra’s rise need to be aligned with common sense and purpose more than anything else, which is the focus of this article.


Next, I will discuss how to restore the fixed exchange rate between USTC and US dollar in four parts. They are: Exchange Rate, Mortgages, Governance and Monetary Policy.

1、汇率/Exchange Rate


To give you more confidence in me, it is worth mentioning that I have personally translated the Chinese version of Terra’s white paper, know the core principles of the algorithmic stablecoin, and have several years of experience as a blockchain financial journalist, and have a solid understanding of economics, management and cryptocurrency.


The nature of exchange rate is the conversion ratio between two currencies. Many people do not have a deep understanding of Terra after reading its white paper. Terra is actually an economy, similar to a country or region in the fiat world. So for an economy, it must have its own currency, otherwise it cannot have economic transactions with the outside world.


Ustc is The currency of Terra, which represents the credit of the economy of Terra. It was originally designed to anchor the DOLLAR, but it does not mean that it is the dollar, but to monetize Terra’s credit with the dollar. The credit needs to be supported by collateral, otherwise it is a false scam.


The current collapse of the Ustc is due to the disappearance of the collateral behind it and the abandonment of the credit of the Terra economy by the crypto world. Therefore, the essence of our re-pegging of the Ustc to the DOLLAR is to restore the credibility of Terra’s economy, not to establish a new staboin mechanism. In other words, it is to rebuild credit, not instruments.


Going back to the question we discussed in the forums, Leslie asked Web3Panther: Are you rebuilding UST or a brand new stablecoin? There is a fundamental difference between the two, as the former means that you collect the Ustc (on behalf of Terra’s debt) and start again, while the latter means that you avoid the debt and start directly, which obviously does not solve Terra’s credit problem at the root.


Then we have to cite a famous modern financial theory - Mundell’s impossible triangle. The theory is that a country cannot have free capital flows, monetary policy independence and exchange rate stability at the same time; you can only have two of them, not all three.


That is to say, if we choose a fixed exchange rate, we must give up either the free flow of capital or the independence of monetary policy. So, as you can see, our disagreement on the reconstruction of the Ustc exchange rate is really between capital freedom and monetary policy.


Similarly, it can also be found that the collapse of Terra’s exchange rate was due to the abandonment of the independence of monetary policy and the absence of a monetary team in the whole ecosystem, which led to the collapse of the Terra system at a loss and ultimately allowed the free flow of capital to destroy the whole Terra system. To address this loophole, I will go into more detail in the chapter on monetary policy and governance.


After Terra’s collapse, new economic changes took place. There is 10.2 billion Ustc debt in circulation right now, and although it is very concentrated, 95% of it is in the first 100 signatures, we are a decentralized community and cannot uniformly recycle these chips to the Treasury for disposal, so a direct peg to the DOLLAR is not possible.


By the same token, although we have Lunc of nearly $800 million, we are a decentralized community and these assets are scattered across regions and cannot be centralized, so these assets are not useful for debt repayment. As we said at the beginning, reconstruction looks easy in faith, but difficult in execution.


But that doesn’t mean there’s nothing to be done. At the end of the day, Terra does not have enough assets to support an excessive exchange rate of usd 1, just as a defeated country does not have the economic strength to peg to USD. Therefore, the Terra economy must devalue its currency to the market level, which may be 0.01 or 0.05, and rebuild the whole ecology on this basis.


You can think of it as a fixed exchange rate for a particular period. Some people may question: Can a Ustc that is not equal to $1 be called a stablecoin? What makes you think that after 0.01 or 0.05, people won’t keep selling it? And what to prepare for further selling?


These are very critical questions, but I can answer them responsibly. First of all, after the stress test of super intensity (big crash), the EXCHANGE rate of Ustc did not fall below 0.005 at the lowest point, which is basically the lowest level of exchange rate after a country goes bankrupt.


Second, Terra has no credit to speak of since its collapse, and its true economic status can only be measured by its exchange rate. Finally, Terra is not without assets. The contract code, user base and community consensus that developers leave behind are valuable assets.


Moreover, we can have full confidence that the demand for Ustc will be picked up below the lowest exchange rate. One is that the Ustc’s low exchange rate is temporary. As the economy is rebuilt, it will eventually return to $1, which will encourage people to buy Ustc on a large scale. Second, once the exchange rate is fixed, Terra’s miner arbitrage mechanism will be reactivated and the system will create Ustc in the form of the recovery of Lunc. The appreciation of Lunc will greatly increase Terra’s asset reserves.


So, the specific question we are going to discuss is: what is the minimum level of the Ustc fixed at? And by what extent should the Ustc exchange rate rise? Who should carry out an orderly appreciation of the exchange rate? If the community agrees with what I said earlier, then these issues can be resolved by community discussion.


Let’s move on to asset collateral: What is the Ustc backed by? How to pledge?

2、抵押/ Mortgages


First of all, thanks for thoughtful insights.
I support all what you said.

  1. My question is how can we decentralize the reserve assets backing ustc. Keeping reserves in Terra Lab or in any organizations balance is not decentralization.
    Value kept in LUNC was not enough in the death spiral event.
  2. There are bad actors among in top USTC and top LUNC holders. Even USTC repegged, their position is much better to fail the system than it was before. How to prepare to that event?
  3. Second point, the bad actors can do governance attacks on the system. So LUNC allocation should be healthy, spread out by millions of wallets.

Once we solve these issues, it is going to be repegged by itself.
Still you have point, it is not impossible but very difficult.


Unfortunately, It’s useless to discuss about LUNC/USTC because there’s no one who can implement our proposals. there are several proposals which is passed, but nothing is implemented.

Τhe proposal is in the testing phase. I know that there was a bug, which is easy to fix.However, the code needs to be resynchronized and this requires a little time. After that, the implementation on-chain will begin. We all have to understand that we are not programmers and the creation of a code is not done by pressing two buttons.Also is very important that everything works perfectly without errors.

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where is this information came from ?
somehow, validators should apply patch for that, but there is no leader now. would they implement the patch ? I don’t think so…

Terra rebel is not a official dev team… would validator apply patch ? I don’t think so…


Here are some specific concerns about these issues:


First: when refixing the minimum exchange rate of Ustc, we should see the concentration degree of Ustc, which means that whales have enough chips to re-launch short selling, which is also an important issue for the community to worry about. But as things stand, the problem is not insurmountable.


Let’s go back to one of web3Panther’s suggestions: lock in the top 100 whale wallets and keep only 5%-10% of the TOTAL Ustc in circulation. Although this will hurt Ustc liquidity, it is only temporary and we need to eliminate the huge short risk for the time being. As to whether this proposal can be implemented, I think it will be difficult, because whales have every reason to reject it.


Let me explain further the rationale for this approach. Again, according to Mundell’s impossible triangle, refixing the exchange rate to the minimum level effectively abandoned the peg to the DOLLAR and temporarily floated the exchange rate. Locking up the whales’ wallets is essentially a contractionary monetary policy that prevents Terra from further worsening its debt.


Second: we still need to have a reserve of underlying assets to deal with the risk of an unanchored floor. Whether orcas agree to lock their wallets or not, this base asset reserve needs to be there. We have two ways to obtain it. One is to obtain venture capital from outside, and the scale should be enough to cover the strength of short selling. As for the strength of short selling, the quantitative team can simulate and test it.


Second, we can rally the whales and convince them to unlock their Ustc periodically, which I think is very important. This is based on the fact that Terra’s minimum exchange rate has been fixed and the minting mechanism has been restarted. At this time, increased demand from THE Ustc will lead to the appreciation of Lunc, which will replenish the Treasury. The Treasury could redeem the Whales’ Ustc with money.


Third: establish emergency circuit breaker mechanism. This section is strictly a chapter on governance and is also the recommendation of A.E. As Marventus says, a good proposal needs to incorporate input from the community. Since we have a common goal, the proposals are certainly reasonable, but they need to be properly integrated.


In short: collecting debt and replenishing the Treasury is the first step towards rebuilding. We need to be statesmen to convince Terra’s largest creditors to make a profit, thereby restoring confidence in the system. And, as a builder, tell Terra’s retail investors that Ustc is worth reinvesting in. In this way, we achieve a positive loop.


Let’s move on to asset collateral: What is the Ustc backed by? How to pledge?


2.抵押/ Mortgages


I mentioned in the previous section that one of the reasons for Terra’s collapse was that TFL/LFG gave up an independent monetary policy, which in fact they never had. If they are only responsible for buying or selling asset reserves without the power to enforce system parameters, then monetary policy is not independent and will not be able to deal with subsequent black swan events without independent monetary policy.


Even if LFG’s asset reserves cannot cope with a severe redemption crisis, if they can stop the minting mechanism of the system in time, there is still a glimmer of hope that they can save the crisis, at least reduce the extent of the collapse and delay the collapse. Therefore, before considering the issue of collateral, it is more important to change the parameters of the system, establish currency teams, implement emergency circuit breakers, etc.


This part belongs to the category that A.E. is studying now, and it seems to have made practical progress. The part of governance can be discussed in combination with his research.


Now, let’s focus on the question of collateral.


A simple banking system would have assets equal liabilities, with banks setting aside reserves for as much money as depositors put in their deposits, but neither the real world nor the crypto world works that way.


In a real-world banking system, you don’t have 100 percent reserves, because you don’t have 100 percent convertibility from your depositors; Banking systems in the crypto world, on the other hand, have to prepare excess collateral because the value of the collateral is unstable, and in the event of a black swan, the value of the collateral can fall sharply.


To paraphrase Leslie, a stablecoin cannot achieve stability by pegging a basket of unstable assets.


One big mistake Terra made was to use Lunc to buy BTC as its own asset reserve, which allowed the big bears to sniff their prey. The 20% annualization of Anchor itself has made Ustc vulnerable, while the unstable asset mortgage is the last straw for Terra. Once the exchange rate is unanchored, the whole system will enter the death spiral.


There are two main ideas about what Terra has as collateral. One idea is to borrow Hong Kong dollars and buy stable currencies such as USDT or USDC as its foreign exchange reserves, because the USDT or USDC is stable enough to reduce the probability of unanchoring. Using them can reduce Terra’s mortgage costs.


Of course, we can also join Dai, which is a decentralized stable currency with good stability.


However, this method also has drawbacks. The scale of Ustc will be bound by USDT or USDC. Before the collapse of Terra, the market value of Ustc once soared to the top three stabocoins. In addition, Terra could become the largest creditor of Usdt or Usdc, creating instability risks.


However, this is a relatively late consideration, in the early reconstruction stage, this method is not too bad.


Another idea is to adopt a multi-asset approach, such as part of the assets in stable currency reserves, part of the assets in commercial paper reserves, part of the assets in US Treasury bonds reserves, part of the assets in crypto assets reserves, etc. As for the proportion of these needs to be discussed and determined by the currency team and the whole community.


To be clear, Lunc represents Terra’s assets, but it does not serve as a reserve of assets, as it is an imaginary value of assets that fluctuates according to the issuance size of Ustc. It contains a duality: It represents the assets of the Treasury internally and the debt holding scale of creditors externally. Terro1.0 did not pay attention to this problem, which ultimately led to its insolvency and could not meet the selling of Ustc.


Why am I not worried that Terra will run out of assets? Because the Lunc will grow as long as Ustc issuance demand exists, it will give Ustc (creditor) holders the illusion that the Lunc is an asset to the Treasury. But it’s not, it’s essentially a seigniorage on creditors, and they won’t be aware of it.


But Terra must recognise that, as Lunc grows in the Treasury, it must be bought into other forms of assets.


Again, to quote 4LEX_4SH4W, it is important to maintain a dynamic balance between debt and assets. For example: when do you start buying asset reserves? How to determine the magnitude and size of the purchase? How do you quantify this process in a decentralized way? These are the specific issues that the Treasury and Currency Panel will need to determine, and I am only throwing stones here.


Please see my following thread, which should answer your question to some extent

Why did I initially say that Terra’s algorithmic stabilization mechanism was not flawed? There are plenty of currencies in the real world that use algorithmically stable and pegged exchange rates, such as Hong Kong’s Hong Kong dollar. Soros’s Hong Kong dollar bet is based on the same logic as Terra’s big short, based on the core idea that the system can no longer support a high exchange rate.

So why can’t the system support a high exchange rate? Because the economy is weak, there’s too much debt and assets are shrinking. In other words, too much leverage. Tron’s Sun Yuchen correctly pointed out Terra’s collapse: There were no major design problems with the algorithmic stablecoin, but Terra’s leverage was too high.

Let’s analyze Terra’s leverage before the crash. As I pointed out earlier, Lunc is the false value of assets based on the issuance scale of Ustc, which contains a dual attribute: internally, it represents the assets of the Treasury, and externally, it represents the debt holding scale of creditors. That is to say, Lunc’s growth is achieved by issuing Ustc on a large scale, which is the first leverage – excessive issuance of debt.

In addition, Lunc has been slow to buy its own asset reserves in the mistaken belief that Lunc itself represents assets, which creates a second lever – zero reserve requirements. When the system collects the Ustc with Lunc, it is essentially collecting the debt with the debt, and there is no end to this until everyone demands redemption of the Ustc and Terra’s system crashes.

Often, people do not realize that Lunc is also their debt and simply ask the system to redeem their Ustc. This illusion can mask some creditors’ demands to pay Ustc. But the fact that the system bought BTC with Lunc opens up the illusion that the big bears can open up Terra’s Treasury by repeatedly shorting and pushing down Terra’s exchange rate, and then they go in and rob it. This is the third lever – unstable reserves.

This is where Stabocoin Dai has done well. After several runs, Dai has attached great importance to its leverage, strictly enforced excess mortgage, set up liquidation red lines and not overextended, which is the core reason for its survival. It is therefore important for Terra to de-leverage all three as it builds its portfolio of assets.


Let’s discuss the most important governance link. Why is this the most important part? Because we can’t move forward with any of our subsequent proposals without addressing the governance issue.

There are five problems facing community governance:

First: the verifier problem. Due to the fact that voting rights can only be held by pledge, after Terra crashed, it was disabled, resulting in 99% of voting rights out there not being able to participate in the pledge. The original verifier controls the system with 1% of the votes. Restarting the pledge is undoubtedly the most important issue at the moment. But restarting the pledge carries the biggest risk of all: governance attacks.

Like a power attack, a governance attack causes the chain to be taken over and the original verifier to lose validation. So the verifiers are doing two things: persuading Orca not to attack the network, and concentrating their votes. Hopefully the verifiers are prepared to make sure that the probability of governance attacks is zero or they will have to fork.

Second: voting rights. In the world of decentralized governance, especially the POS consensus, votes are voices. How many votes does Terra Els have now? Is it a verifier? Can I get a verifier seat? Can the retail vote be pooled? If we fail to solve these problems before the resumption of pledge, we will lose the right to speak and make proposals in governance.

Third: the establishment of a council and a monetary group. The council was the executive branch and the monetary group the central bank. The two departments are independent, dealing with community governance and monetary policy, and both are elected by community vote. The specific rules need to be discussed in great detail. The monetary panel, for example, would have to be given emergency powers to bypass a vote on a proposal and shut down minting, reserve purchases and cross-chain conversions. Of course, exercising this power comes at a cost, and it must face subsequent community trials on whether the currency panel acted appropriately.

Fourth: modify system parameters. This parameter includes exchange rate anchoring, arbitrage mechanism, fiscal allocation, dynamic reserve purchase and debt recovery. Community discussion is followed by a vote on the proposal. The fine-tuning and revision of subsequent parameters will be discussed by the monetary panel and then submitted to the community for approval.

It is worth mentioning here the order of working and non-working reserves raised by A.E. This is an important question because the Lunc is not a working reserve per se, but a mirror debt generated by the Ustc. In the face of large-scale redemption of Ustc, working reserves should be used first, and then non-working reserves should be used when reaching a certain level.

In addition, there is a throughput problem with the working Reserve Lunc, you can’t recycle the Ustc from the system cast Lunc right away, and the delay will destroy the system if it is too long, as Terra’s crash shows. This is what A.E. is working on, and he has come up with practical solutions.

Fifth, establish the exchange rate circuit breaker mechanism.

Because of the Terra minting mechanism, large fluctuations in exchange rates and long periods of de-anchoring can cause a currency to collapse. Therefore, it is necessary to establish an exchange rate circuit breaker mechanism: when its fluctuation exceeds a certain percentage, the system will be turned off in an emergency manner, stopping the coinage mechanism and miners’ arbitrage, leaving room for the actions of the later currency team.

  1. Monetary Policy

Monetary policy builds on the fact that the first three components have been resolved and implemented, and is the framework for action of the Monetary Team, the Central Bank of Terra. For example, whether to adopt a tight monetary policy, or a loose monetary policy, or a neutral monetary policy, etc. These are the contents of monetary policy. We could call it the Terra Fed.


Please see this proposal

Hey bro, your proposal is exactly on the right track to slowly bring Ustc back to $1 with a floating exchange rate. However, you need to make it clear why you set this parameter. And it’s a simple proposal with some details to work out. For example, does it have to go up 0.0015 cents a day? Can we accelerate the previous rise and let the exchange rate rise in the form of a logarithmic function? How to control the marketability of Ustc in the process of rising?

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Hi Kaniki, thanks for your reply.

The 0.0015 cent is the amount it needs to raise to get back to peg in the proposed 700 days.

There is also a max burn amount per day as not to put pressure on lunc

It will also only raise the next day when the burning function didnt reach its max. If it did reach the max burn for that day, it means there is still too much outflow and we should let the people flow out for that same price until the outflow has stopped again.

The marketing side for the ustc;

Well quite frankly I believe it is a good thing for the community if the holders get out asap because it will lower the debt at a large discount.

The people understanding this proposal will buy and wait for peg. Once it has reached its peg, there will be a pressure again so it will hover just below the 1 usd as long as there is no trust or any other usecase or incentive.

We should restart the anchor protocol at that stage again and start with healthy but worthwhile apy’s for ustc holders. This will remove the last bit of selling pressure and will, depending on the apy on the market, even create more demand then supply.

For this we should indeed look at other solutions; which should be in the form of new collateral. I would propose renbtc as the decentralized gold standard.

Im drifting off again.

I would love to see your view on the proposal

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Are you in Terra Rabels’ group? We can refine this proposal and get it approved. In addition, I think your secondary market estimates may be on the conservative side. You see, the current anchoring mechanism has not been restored, but the MARKET exchange rate of Ustc has risen to the level of 0.05. Therefore, it is obviously not practical to re-anchor at 0.01 at this time. Expect to see you in groups in TerraRabel, where a dedicated quantizer team can test metrics. Here is the invitation link: Terra Rebels 🍌


Thanks for the invitation link, i was not in the group yet, just joined.

When making my initial proposal the ustc was hovering around 0.01, but yes I would agree that we could start with the current market rate of 0.05. At least we can burn up some cheap ustc as a community to bring down the debt.

You can contact me on discord im #5321 on the channel now.

I really like your idea, but I have some questions regarding details.

For example, you say 0.0015 cents. But I think you mean $0.0015, or 0.15 cents. Right? Also, you mention max burn per day. Does it mean max allowed burn per LUNC per day or per USTC?

Yeah non developers will understand it lesser what was supposed be be accomplished by the relelase

If anyone can point out why not to implement this proposal which looks more sensible in all approaches . Would be great and helpful

Finally someone, with some sense, that is a good plan, similar to what I have proposed in the past… let’s get back as quickly as we can, let’s peg at a realistic level, USTC almost naturally pegged at 0.01 USD