Any stablecoin fails under extreme conditions. Bitcoin didn’t become what it is today because users never lost confidence in the protocol, or because it’s value was never destroyed. Likewise, the dominant stablecoin of the future will likely have endured difficult times as well.
Making the Terra protocol safe again will certainly require modifications, and probably a shift away from the current algorithmic system.
Making UST holders whole
Restoring Terra’s peg can without a doubt be achieved by freezing almost all current UST, and then gradually unlocking small percentages over time.
When the liquidity and stability of non-frozen UST reaches a certain point, additional UST can be unfrozen. It’s only a matter of time and effort to scale the solution.
Expect years to rebuild trust broadly but smaller wallets could be prioritized and 90% of UST holders could potentially be made whole relatively quickly.
People are still looking for an opportunity to profit from the adoption of stablecoins. Some people also highly prefer a decentralised stable one can truly own, without a central party in power of it, or it’s collateral.
There’s also a substantial group of people and entities who would be happy to contribute to a safe, viable path forward, and possibly be part of saving a large user base who didn’t deserve to get rekt.
Demand for UST and Luna will surely come back if solid peg stability can be proven over time. There’s currently no other stablecoin with the same value proposal as the original Terra.
Improving the protocol
One way of making the peg stronger could be to partly collateralize UST with bitcoin, in a fully decentralized manner. Minting 1 UST with $0.5 worth of bitcoin and $0.5 worth of burned Luna would make the peg far more resilient.
Burning 1 UST would either sell bitcoin and mint/sell luna proportionally, or at a fixed rate. Over time, as bitcoin will become more valuable and the dollar more inflated, the btc/usd collateralization ratio will keep improving.
Bounties for de-pegging could help battle test the protocol and regain trust over time.
Making Luna holders whole
It’s much harder to bring Luna back to $100, at least in the foreseeable future, without editing the supply manually. But who would risk buying Luna when UST trades under the peg, if they weren’t sure they’d get to keep their coins? Burning seems risky.
Current fork proposals are also unlikely to save Luna investors, in my opinion. It’s of course speculation but i believe it will be challenging to reach anywhere near the previous market cap without the momentum from the adoption of UST.
Let’s start small instead and gradually build back confidence over time, with the aim of making each and every holder of UST and Luna, whole again.