This gives Luna a fair chance whereas any type of fork would mean the end of the ecosystem!
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Agreed!
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The problem inherent with UST minting still remains as burning LUNA doesn’t wiithdraw value from mcap to transfer it to UST mcap. Why not pairing a 1x short LUNA for every UST mint on a dex? A dex built on top of LUNA will enforce its usecase and it will be a proactive defense against leverage attacks. Also I think oracle attacks are a nothing burger if exchanges block withdrawals, decentralized oracles fail and the market module gets bloated; most of the liquidity should rather be onchain to garantee ust exit liquidity.
Assets from other networks shouldn’t be allowed to mint UST if not paired by an adequate amount of LUNA collateral to ensure solvibility and strengthen network securty.
I understand your reasoning but it is not economically sound.
Yes, that would avoid getting in a situation where the market cap of UST is greater than that of LUNA and prevent the spiral of death. But by allowing UST to have a floating rate, you kill the financial incentive to re-peg it via the mint/burn mechanism that exists in the current form of Terra blockchain.
Assuming the market price of UST is $0.9, what would be the point of burning 1 UST again $0.9 worth of LUNA? Currently, the AMM gives you (in theory) $1 worth of LUNA which creates an arbitrage opportunity meant to be exploited. This creates a dynamic system but unfortunately, too dynamic when UST starts to deviate wildly as we have witnessed. Your proposal instead would create a static system because no one would have any incentive to mint or burn UST/LUNA which means the price of UST would not change, at least not because of the mint/burn mechanism.
Not to mention that, as I said previously, no one would want to use a so-called stablecoin that is not certain to keep its peg. Take Ampleforth for instance, that is not what I would call an appetizing coin to store your assets on.
If I understand correctly, the variable rate of UST would only happen when Luna/UST market cap ratio drops below 1. Once it recovers the rate will be fixed again. In theory it would be rare but expected and not cause a panic.
What I don’t yet understand is: what forces will help fix the market cap ratio in that scenario?
2 Likes
I support this proposal.
I really like the idea of trying to fix what is already running instead of coming up with a completely different system that will alienate some groups within the community like the other forks that are being proposed.
Not sure what the terms were on the AVAX partnership, but doesn’t LFG have some on their balance sheet? Could we use that to help with a buyback or used as collateral for bonds to raise funds?
4 Likes
Yes, one of the steps is to add a “safety” switch that would enable the system to work in a crisis mode in events when LUNA’s cap goes below the cap of UST.
It would compress UST impremanently, and help keep LUNA out of the spiral death.
It can be achieved with a price oracle that would take into account the simple formula x * y = k
So basically if
k(LUNA) > k(UST) = operate in normal mode
else if
k(LUNA) <= k(UST) apply dynamic peg based on the ratio between the two caps (with both burning and minting taking this into account).
This simple implementation will always protect LUNA from the death-fall and will actually create an interesting corner case, where an algo stablecoin goes below its peg in a programmable way so that it would be capable of bouncing back together with investors’ confidence.
Changing the peg temoporary to a lower impermanent price would not alter the way the current system works.
Yes it will add stress to the investors, but on the other hand, when investors know that this is expected (yet less probable scenario), they may be incentivized to buy more UST at the lower price, because of the fact that the system would most likely return to the default peg setting of $1 and that this is a rare event.
There’s also the 19% APR which is central to the system which on its own is massive and to large extend offers a hedge against unpeg.
And for LUNA this means net positive inflow of capital. It makes no difference wheter LUNA is minted in rate of $0.8 or $0.7 or $1, because it burns supply. And supply change vector is key for investors.
LUNA would be capable to burn supply even when it’s in crisis mode and thus leverage on the potential trust of investors that are witnessing this.
Think of the unpeg event as a point where the two systems start to pull away from each other with UST hurting LUNA and in the end LUNA destroying UST. And the determinant for this is the level of collateralization.
Having this mechanism in place coupled with the other mentioned above, would create an immediate protection. Again emphaisize is on this happening extremely rarely, but it is still critical to have the logic bound into the protocol as that would give investors some peace of mind. We expect the unpeg to deviate with less significance because of this.
In fact I think the drop in this case would not have exceeded $0.7
On May 11
k(LUNA) = $9.5B
k(UST)= $14B
Fair price of UST would be $0.67. Markets would try to push price higher, which means there would be a strong burn effect on LUNA.
This would also enable professional market makers to define the accurate mid price to continue providing liquidity with little uncertainty.
Yes it would be a painful but likely short-term. Also if the Anchor measures were in place with lockup, there would be no chance for a panic extraction of so much capital at once.
Price of UST would then start improvement and investors would likely strenghten their position in an effort to benefit from the inversion, which would be rare, but still a pre-planned event.
11 Likes
Solid proposal @Nikola-HydraChain
I’m sure with a few tweaks it could be a potential fix - but only time will tell.
4 Likes
Was pondering some of these ideas myself today and what you’ve written here makes a lot of sense. $BABYLUNA.
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The peg mechanism obviously needs some re-engineering.
Unsustainably high interest rates, paying people to borrow, and minting with wild abandon… I wonder if there was fraudulent intent?
Clear communication is important. For example, Do Kwon suggested a 40:40:10:10 “ecosystem revival plan” with a new token. People who hold stablecoins won’t want a yo-yo one. It is likely a new token will be dumped quickly and Terra will lose this portion of the community.
Teams of developers can easily adapt to another chain.
Execution in tiny steps, instead of a one-off big bang helps.
1 Like
Great proposal, touches on the key issues and factors that allowed for such a death spiral to occur and how to possibly mitigate it in the future.
What’s concerning, while the Terra ecosystem was growing at a break-neck pace (mostly via Anchor, which was being addressed with gov proposals, etc.) none of these ideas were being employed from the top down. Albeit, DAOs and the governance model are in place specifically to decentralize voting power; those mechanisms work well under normal market conditions - but as we saw are not structured or equipped to react in a timely manner during a crisis.
Part of this proposal needs to address how the structure of the DAO, the investors and “leaders” at the top of this ecosystem failed monumentally when they were needed the most.
3 Likes
please get this proposed
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Best proposal so far. UST is indeed a derivative liability.
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agreed!
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I just wanted to make you notice that users cannot arbitrage directly through the burn/mint process (the market module), the spread is absorbed by onchain liquidity pools and then redistributed to ecosystem actors. Second, Ampleforth is still alive and working just fine, even if didn’t grow much by marketcap this last year, while to my knowledge all stablecoin systems based on two tokens did fail or didn’t achieve critical adoption.
Simplify your proposal to reach a wider audience.
A better executive summary needed or a shorter main body.
It is a good proposal, but most of what you have documented can be considered appendices to the core content. Also, without simplification, you will alienate many retail investors.
4 Likes
Why is no one acting on this? Only this proposal makes sense in the sea of terrible ideas. Anything else we heard so far is just temporary fix to the problem, and not a resolving solution to the issue. Why would you create another copy of the coin with the same issues as the current one, and that is destined to fail at the first air drop that people receive, as everyone will sell the hell ot of it to recover anything. @dokwon
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Out of all the proposals I have seen this is honestly the best one. It is carefully thought out and even addresses what the issue was to begin with. Any sort of restitution will result in the same death spiral. @dokwon We should be pushing this as it will be the best chance for success.
10 Likes
By far the best proposal.
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