I would like to hear your opinions about couple of ways forward that I have been thinking.
First off, I would like to state my involvement in the Terra ecosystem. I started investing in Luna when it was 19$ and made very good money with it, at its top point, my position had amounted to 50% of my overall wealth. I’d read the whitepaper many times and I was aware of the risks -choosing to ignore them regardless. With lunar crash I lost 50% of my net worth.
I’ve been investing for other people as well. Not all crypto but for the crypto portfolios I had with my investors, I was invested heavily in Anchor. Also around 10% of my net worth was on Anchor. I lost a total of 130.000$ including my personal losses, it might be small for others, indeed it was less than 10% of my investors money, however that week in may was the worst week of my life. I’d also made my father put 20.000$ of his hard-earned money in Anchor. When he asked me to withdraw at 0.78$, I told him that I believed it was going to repeg.
I believed I was doing calculated risk management (for my investors) and the death spiral would not happen for UST as it had many use cases and believers. After all, money is something abstract (excluding hard-money) that exists consensually and I’d believed that there was strong consensual belief in the UST peg.
Now I would like to offer couple of solutions to repeg USTC. After the FTX events of today, we know more than ever that decentralisation is a MUST. We had all gotten involved in Terra ecosystem because we believed in that ideal. If USTC is repegged before the next bull market, and redesigned in a collateralised manner, it might be our chance to get closer to that ideal and also advance the Terra ecosystem into new heights.
You might think that I do not care about LUNC and just want USTC to repeg because I am too biased or hurt; but I believe, to make Terra ecosystem great again, to make people excited about using LUNC again, we need to restore the confidence that is lost. I am certain that repegging the USTC would be the biggest thing to bring the Terra ecosystem and LUNC back to their glory. Maybe now it seems impossible, but don’t forget many believed BTC was done after Mt. Gox or that ETH was done after ETH DAO hack.
We must also acknowledge that the whole narrative of the ecosystem was based on decentralised money and it’d made Terra what it was.
Moreover, even though I do not have the data available right know, I believe LUNC burn tax is not going well as the chain is not active. I think the solutions I will propose can breathe life again into Luna Classic and Terra ecosystem as a whole. It would drive the activity upwards, thus burn more LUNC as well.
I do see two main ways to repeg USTC. As the LUNC market cap is approx. 5x USTC market cap today on 10th of November 2022, I think we have an opportunity to repeg USTC and restore confidence in a slow but sure manner. I will also share my comments on how to make these two ways work.
Buy USTC on open market slowly and burn. This would reduce supply and give us fresh start weeding out the people who lost belief at the same time. Also the cost of doing this will be minuscule if USTC peg is restored.
Restart the burn mechanism and let the LUNC/USTC burn mechanism do its work; I know that it had not been great at doing that : ). I believe the USTC absorbing overhead in LUNC can be mitigated with certain tweaks to the mechanism. This method would also reduce the USTC supply (it could also increase it as designed initially, but one of my offered tweaks will adress that below)
I will first share how I would approach the second task:
2.1)There must be a maximum amount of LUNC that can be minted each day by the renewed burning mechanism. Also the burn mechanism must be unidirectional meaning USTC is burnt and LUNC is minted and not the otherwise to reduce the USTC supply.
2.2)There must be an algorithmically increasing $ value for each USTC, way less than 1$ but more than the current market value of USTC to incentivise arbitrage. This set value must increase every week (or another chosen period of time) until it is 1$ (USTC repegged) IF the open market does not mass-sell USTC to decrease its price below that week’s increased set price. Then, the set price will remain the same (or even decrease) until the open market stabilizes. Note that the set price decreasing or increasing might postpone the full repegging, however, the burn mechanism effectively reduces the supply no matter the set price, and as the non-believers are eliminated there will be no sellers below the set price forcing the set price to increase eventually.
Let’s assume a renewed burning mechanism scenario given two points above o demonstrate that a highly satisfactory result can be achieved even in a year.
Assume, we design the mechanism in such a way that 0.1% of LUNC supply can be minted every day and we set the value of 1 USTC to 0.05$ for the beginning and then increase it by 5 cents every week. Also assume that the market sells USTC every week so that we keep it at 5 cents for a year.
Today on 10th of November 2022, USTC price on open market is 0.025$ and LUNC price is 0.0002$. Their respective market caps are 250 million $ and 1290 million $. Respective circulating supply is 9.8 billion $ and 6.5 trillion.
Going from assumptions above, and assuming that LUNC price stays stable (as it’s inflationary to the tone of 44% per year -excluding the current burn tax-, it might actually have downward pressure in price but I will briefly mention that below), everyday for a week we can burn 1.29 million $ worth of USTC at 0.05$ set value. That equals 25.8 million USTC (25.8 x 0.05 = 1.29) per day. In a week it equals around 180 million USTC. In a year we can burn 9.36 billion USTC which is ~95.5% of USTC supply…
The caveats to my approaches to restart the burning mechanism:
This creates about 44% inflationary pressure on LUNC per year. This will have downward price pressure on LUNC so it is not sustainable. What I am thinking is that maybe we can set the amount of LUNC minted each day to the amount of LUNC burnt one day before through the new tax. This would effectively keep the supply unchanged until the repegging of USTC.
It can be interpreted as sacrificing LUNC again at a vain attempt to repeg USTC. Therefore the above exemplified parameters must be variable depending on the price action of LUNC somehow.
The advantages to my approaches to restart the burning mechanism:
It burns USTC at a lower price than its supposedly pegged value of 1$. This allows us to remove USTC from the system at a very low cost and also it does not hurt the people who believe in the eventual repegging as only those who sell at a loss are affected.
It keeps the believers in the system and gradually remove the non-believers at a $ value they feel comfortable losing, i.e if you exit at 0.5$ it is way better than (20x better) exiting now at 0.025$…
If “Buy USTC on open market slowly and burn” method explained below is implemented on top of it, they can work together to repeg USTC even faster
Now I will share how I would approach the first task of buying USTC on open market and then burning it. This actually requires brainstorming but I am confident very creative solutions can be found
1.1) A smart contract can be written in such a way that when a willing powerful market actor (who believes in the repegging) buys X amount of USTC and send it to a burn wallet, they are algorithmically entitled to some percentage of X in some years. E.g Justin buys 100 million USTC at 0.05$ and burns it, then he receives 30% of 100 million USTC in 4 years. Assuming the repegging happens by that time, Justin spends 5 million $ and receives 30 million $ in 4 years.
I believe other compensation mechanisms can be found as well including either LUNC or LUNA.
1.2) A percentage of burnt LUNC can be instead used to open buy and burn USTC. Or, another tax can be presented that will go towards buying and burning USTC.
1.3) A portion of staking rewards can be used to burn USTC.
My proposed solutions are what have been going through my mind in the last couple of months. Nothing is set in stone and I would like hear what you think and what kind of improvements we can make. Please share your feedback. I think a Terra revival is possible if we be a little original and stick to a plan, of course meanwhile adjusting to changing circumstances.