[Proposal] for Classic: $UST debts are a bankruptcy. Those have to be burned first, only then $LUNA classic can be great

Which Terra dapps don’t rely on stablecoins, or $LUNA’s deflationary staking reward? They will have to re-design everything just to migrate to a chain which will be empty to start because all of Terra’s current dapps are built around the features they’re axing.

It would still experience growth, but slower and more sustained growth. I’m certainly not proposing that we can get the $LUNA supply back anywhere close to <1B.

We would have long periods of time where Terra is insolvent and it pretty much sucks to hold $LUNA (though $UST should trend upward). Then, we would have bull markets where TFL is making consistent seignorage profits, their reserve is gaining value, and $LUNA is being bought back to the reserve but only 5% leaving plenty of $LUNA on the table for community to buy up with new money or leverage.

Gains i.e. growth would come to those who backed $LUNA during or before the debt repayment phase when $LUNA’s real value is zero (+ speculative chance of recovery which improves as we repay debts), also to those who backed $UST to recover its peg.

My ideas come from many hours of musing about what made Terra great before, what broke, and what the solutions are to what broke. It’s about bringing all stakeholders together on 1 mission, clear the ecosystems’ debts and then we go again with all the good parts from before + less vulnerabilities.

It could be undercollateralised to allow for rapid expansion, so long as the $LUNA demand isn’t so excessive that Terra becomes insolvent again (i.e. loop of => $LUNA rallies too hard, $UST moves above $1, more $LUNA is burned).

The exact details for the collateralisation mechanism do need to be fledged out, and I’m not sure what would happen with my idea if $LUNA demand was so strong that $UST depegs above $1 and Terra’s 5% $LUNA reserve was all burned up. Even though that is technically insolvency, it’s unclear what the repurcussions would be in that case.

I think the outsized demand insolvency can be solved by continuing to buyback $LUNA to reach the allocation target 5% and burning until $UST demand is calmed down. If $LUNA reserve depletions lead too often to insolvency and interruption of seignorage profits, we should raise the target $LUNA allocation % slowly.

The positive reflexive loop of buying $LUNA and leveraging up is great fun until it stops working and the leverage is dumped on. If TFL failed to acquire enough backstop collateral for the reserve, TSR would drop and $LUNA burn for $UST would be halted. The Terra reserve would need to topped up with more collateral to continue enjoying seignorage profits.

Re oracles: above Do Kwon is suggesting the market swap, oracle, and treasuries are totally removed in V2, along with UST. My suggestion is to upgrade the current Oracle to factor in solvency and alert the Market module not to service any mint / burn swaps when Terra is insolvent. Throwing everything out that made Terra brilliant is a big mistake. That’s why my proposal is about fixing the modules Do Kwon proposes removing (he is scared because his creation has caused so much suffering, I think he just wants to remove anything perceived as remotely risky now).

This is where the discussion becomes very nuanced. A reserve backstop is not exactly the same as stablecoin collateralisation, as we saw with the $BTC backstop being disastrously handled.

I don’t think that the reserve size necessarily has to be greater than the market cap of $UST, it only has to be big enough to reliably make interest payments on issued $UST in any market conditions (the 0.2-1% daily burn during debt repayment that I talked about). It’s not dissimilar to how the US Fed can expand its balance sheet beyond the country’s GDP, as long as they can afford to make interest payments on the debt perpetually, the total value of the debt becomes a secondary consideration.

Diversification and careful position sizing would be important to manage to prevent TFL becoming the biggest buyer in the room for any of its positions (always leads to disaster: Cathie Wood / Ark, Bill Hwang, LFG’s BTC debacle).

When I speak about Terra, I am speaking of TFL + LFG + community - because if we can get things rolling again, no doubt in my mind that the community, memers, and speculators will back V1 $LUNA and $UST. That reduces some of the debt burden but reprices $UST back toward $1 so we need TFL to act fast at the beginning if they can, while the debt is being mispriced due to their other props.