Editing (new post really since I can’t edit a post in slow mode…) to reflect the forgone conclusion of a fork and the looting of remaining reserves.
This is a living proposal. I believe the powers that be have misstepped throughout this crisis and following them into a fork is just another in a parade of errors.
Motivation
Crypto is a promise written in code. Forking and running away is… forked up. Trust is earned by following through.
The promise written in code is NOT a stable 1$ UST or $100 LUNA. It isn’t a guarantee of investment or a protection against loss.
The promise written in code is a USD tracking coin with eventual USD parity driven by arbitrage and backed by the market cap of LUNA.
The coins were tested, and they faltered, but it is the humans who are killing them. It was the humans who squandered the reserve. It was the humans who failed to address hyperinflation built in, and worse, poured gas on the fire. It was the humans who halted the network repeatedly, resulting in days of stuck coins and panic.
Let’s let the algorithm do its job. If we do that then UST will eventually reach parity and LUNA will grow in value again.
Summary
I propose the path forward is:
- Re-enable staking. At this time any participant who wants to can access equally inflated LUNA to add to their staking.
Staking must be enabled for governance votes to be legitimate.
- Burn Excess UST
UST supply must be reduced to match market demand. Supply grew by 16 billion in less than a year, it is going to take some time to unwind.
UST growth went hand in hand with LUNA appreciation. LUNA did not exist at $100+ without UST. Similarly LUNA can’t be restored without restoring UST.
The following changes should be implemented to support this.
A) The swap algorithm should be updated to change the exchange rate of 1 UST = 1$ LUNA. There is no need to make UST exchangeable for $1 of anything directly through the market module.
The swap rate should be the minimum value required to drive arbitrage. The swap value should be set to the lesser of 1$ LUNA or the current UST Oracle value multiplied by 1 + a new parameter ‘SwapMarginUusdToUluna’.
This parameter will be changeable through standard parameter change proposals to increase or decrease margin as necessary to encourage arbitrage while minimizing Luna inflation. Initial value will be .05, or 5%.
The current market cap of UST is 655 million USDT against a supply of 11.28 billion.
Not accounting for compound inflation the current mechanism would need to mint over 10 billion USDT of Luna to restore the peg.
The proposed change reduces this to approximately 30.8 million USDT of LUNA minted to restore peg.
B) Re-enable Market swaps AFTER implementing A.
C) Work with DEX/CEX partners to voluntarily disable UST->LUNA swaps in favor of Market swaps. This will help accelerate burning.
D) Create a ‘burning floor’ mechanism. The burning floor will be an alternative swap mechanism that allows swapping UST for a proportional amount of reserve assets. This will serve as a minimum redeemable value for the token and ensure a market always exists for redemption. The burning floor is an emergency pressure release. A reserve pool should be established and may be funded in a number of ways. When UST is burned outside of the burning floor the reserves remain, which increases reserve coverage over time.
- Restore LUNA
LUNA must continue to inflate in the near term as the backing token for UST. It is vital to be vigilant in adjusting swap rates for UST → LUNA (A above) to minimize inflation.
Salt in the wound, if the reserves had not been burnt on UST at near face value they would have been able to cover the entirety of the current market cap for Luna and UST. That horse has left the barn though so we have to do things the harder way.
A) At current market cap UST will have shrunk supply by about 96.5%. As confidence restores and demand for UST returns new UST will be minted. Even modest growth in UST demand after re-peg will drive meaningful price growth for Luna.
B) I propose the $1 Luna → 1 UST swap rate be modified to include additional Luna earmarked for reserves. A new parameter should be created ‘UusdReservePercent’ that defines the reserve premium. The new swap rate should be $1 Luna * 1 + UusdReserveRate.
The parameter will be adjustable through standard parameter change proposals.
The portion of Luna swapped for reserve should be swapped for reserve assets instead of being burned. The reserve assets will support the UST burning floor in 2) D).
Your feedback and improvements are solicited and welcome.