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

Those saying that they would boycott LUNAv2 are another evidence that those who want to save Terra are mainly those who helped building it. So many people here are just after their financial losses (totally understandable) and/or want to take advantage of their cheap buys of LUNA/UST.

We are trying to please everyone while Terra can keep going just with those who were holding pre-depeg if we wanted to. What is sure is that Terra would be nothing if we keep just those who sucked the blood on the way down.

I don’t attack anyone, speculation is part of the game but it’s clear by reading this thread and many others that some people just want to get money back and disappear while some others don’t care to get money back but are happy with incentives to build and make things good again. I hope we find a good trade-off but if we can’t and have to go for one group, we should go to the one holding pre-depeg because that’s the one that built the ecosystem.

Burning can be fine only if pre-depeg gets more than others, otherwise the chain will not survive, 100% because among the cheap buyers who held nothing before depeg, very very very few are true builders who care about Terra.

I don’t care to be insulted, I’m used to it on this forum but we’ve been discussing for days and nothing is moving on. We are waiting waiting waiting and nothing will be left very soon.

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TLDR for you friend:

$UST is not really a stablecoin, algostables are a meme. They are actually $1 debt tokens issued by the Terra network.

$LUNA went to zero for 2 main reasons:

  1. Death spiral bug ($LUNA mint to almost 10000x the old supply should not have been possible)
  2. 11B of excess $UST still exists, so can’t burn $LUNA to fix problem 1.

Therefore, because $UST is debt and there is an 11B excess of it preventing it pegging back to $1, this is similar to a company experiencing bankruptcy and failing to pay its debts (= defending the peg). The solution is buying back the debt at pennies on the dollar and burning it. That eventually brings UST back to peg and allows organic $LUNA burn to begin again for minting $UST (only after stability is regained).


@TerraQuant I really understand where you’re coming from, but I don’t agree with your end assertion. We can’t just airdrop based on pre-peg, that value has ceased to exist now. I know it’s hard but take a look at ETH classic (even though technically ETH is the fork so that’s a counter argument).

My suggestions aren’t going to make anybody rich at first, it will be a long period of time before $LUNA can make gains if we are burning $UST on the V1 chain to clear 11B excess. Just so I’m being clear, I don’t want to be the boss and dictate all the incentive %s, but the community has to back the original chain and agree on incentives somehow. I promise you that airdropping them tokens on an empty chain with no stablecoins or oracles (+ inflationary $newLUNA) is not the answer.

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Alright. Several questions then:

  • With what money is TFL(?) supposed to buy back the excess of UST? Even if UST is cheap now, the market cap of UST is still huge (1.3B at this time).
  • Does your proposal suggest some form of compensation for the present and former UST/LUNA holders or does it simply aim at “fixing” the blockchain?

Assuming that TFL manages to get back all of the excess supply of UST and burn it, then, we first have to hope that the peg comes back which is is not guaranteed even if it would be its fair economic valuation because of the general distrust and even it happens, we would still be left with a broken algorithmic stable coin. Which boils down to a lot of money spent by TFL for nothing.

Am I missing something?

Yes since you didn’t read :smiley:

The earlier money is raised to buy back $UST before it gets repriced the better (due to chance of recovery increasing as we start burning down the problematic debts), but obviously at this time there’s no VC that would allocate to Terra. I mean for god’s sakes they’re suggesting a hard-fork where $newLUNA is inflationary and there are no stablecoins.

Any recovery plan is going to involve attracting investment. But my recovery plan was devised so that all stakeholders can come together to destroy the problem (11B $UST excess) while still making $UST, $LUNA, and LP on ecosystem an attractive long term hold, while also incentivising the attackers to get out because if we are burning money on debts there’s no value there for them.

Yeah, others have touched on it too, but I think targeting new chain drops to pre-peg stakers makes a lot of sense. Please suggest extra ideas for this if you have any.

Binance has just announced that it would support the fork if it’s voted by the community…

If community abandons Terra despite debt repayments the whole process can be halted any time. This process just deals with the actual problem at hand instead of hard-forking and pretending the 11B debt doesn’t exist (it does, and feds are watching this very closely). By increasing probability of success we can get back to the ecosystem being reflexive in the positive sense, like it was before the mint system was exploited (my prop also touches on how to fix that problem with TSR). I accept that raising the capital to buy it back and burn is difficult. But the debt is in $UST, so if the chances of success are very low, that makes the debt cheaper!

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I agree with this idea

No fork, and go away, WE need true leader

Respectfully, I don’t care what he says, he was happy to help the death spiral process kill us off before delisting. No doubt Binance benefits from fork more than keeping V1 alive.

Totally this is the best way to save the Terra chain and UST

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Repair the ecosystem, don’t wipe it.
Burn LUNA massively, Burn UST as much as possible, repeg UST, relaunch LUNA progression, put safeguards in the minting rules and safety measures (such as keeping UST market cap below 50% LUNA market cap, for every minted UST keep one in reserve as a leverage for burning UST in emergency to prevent depeg, etc)

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LFG has >1.5bn UST and other assets.

They have recently announced that have only 80M left after they failed depending the peg (at least that’s what they claim but for now, that’s the number we should consider in our assessment).

There’s also the option of auctioning the $UST debt as a lockup yield bearing instrument, this doesn’t need much startup capital to deploy and would be another risk instrument.

I am not familiar with corportate finance so I can’t debate you on the merits of that.

If they pivoted to a debt repayment plan, they might just find that someone would back them for pennies on the dollar and voila.

If I represented a VC fund, I would prefer backing up a new and sounder version of the Terra blockchain rather than bailing out the current broken version.

As for the mint/burn fix you suggest, it has already been proposed several times in this forum and I highly doubt it’s viable. If I understand correctly, you suggest that we keep this mechanism and simply halt it when the market cap of UST becomes too large relative to the market cap of LUNA. Then, some kind of UST buy-back mechanism would take over as long the market cap of UST is too large. While this is mathematically sound, it is not from an economic standpoint. Traders (at least the knowledgeable ones) will incorporate this information into their personal valuation of UST/LUNA and may deem that the whole system can easily turn insolvent even if the market cap of LUNA is theoretically above that of UST simply because of a sudden drop in the price of LUNA, or a significant dump of UST tokens triggering another spiral of death. Disabling the mint/burn mechanism would not prevent the traders from pricing UST/LUNA as if this mechanism was still there. This is a psychological aspect of the question and it plays a major role in financial markets.

We’re both wrong according to https://dashboard.lfg.org/ which states that they currently hold 828.9M $UST. That number is presumably dwindling from >1B I previously stated because they are deploying $UST some other way (which is unlikely to be productive with $UST trading at $0.1).

How do you come to the conclusion that starting an empty chain with: inflationary $LUNA, no stablecoins, no oracles, no market swap module, etc, is a “sounder version”? The proposed fork is exactly what the saying to throw the baby out with the bathwater is talking about.

The mechanism which was exploited was specifically $LUNA minting. Let’s just fix that and keep the things that made us worth $30bn+ once. To throw it all out over an exploit to become a pretty generic Cosmos L1 is crazy.

If we updated the Oracle to account for off chain transactions + monitor the liquidity of Terra reserves relative to $UST market cap, and only allowed mint / burn to occur during times of high solvency, this would effectively automate what all CEX already does but for the on chain market swaps: halt trading during liquidity crises. My proposal isn’t to go back to how it was before. It’s a targeted patch to the vulnerabilities which caused the de-peg event to happen.

The problem last time was TFL had no true incentive to prioritise protections to the peg instead of growth - often times they conflated the 2 as one thing. The 2 new proposed mandates for TFL / LFG incentivise (even force) TFL to focus on solvency and slow growth above all else. Rebuilding the market/oracle modules + burning debts to patch and revert the exact issue which caused this mess is much more economically sound than hard forking away 11B of debts and hoping it all blows over.


The problem with not reading the OP is that you miss things like how $LUNA would make up just 5% of the proposed Terra reserves and should be used mainly for minting $UST when demand is high and price is >$1. That percentage could be higher or lower, doesn’t change the viability of the plan, lower allocation to $LUNA is safest.

Fair enough, the exact figure does not matter much. The bottom line: there is very little money left.

The new chain will be a fork, hence not empty. It retains the dapps, hopefully the dev teams and luckily most of its community and right now, that’s the best assets Terra has. Plus, the USDC/USDT stablecoins will be introduced. It is sounder because it is ridden of UST. Of course, it makes it more generic but Terra will have to find alternative ways of distinguishing itself from the competition.

Several comments:

  • If I am not mistaken, what fueled the huge minting of UST was the 20% yield promised by Anchor and the unrestricted ability to burn LUNA. Given that the former will be reduced to a much more modest rate and the latter could be largely limited too if the fix you suggest was implemented, I doubt Terra would experience the same kind of growth again.
  • In order for your fix to truly secure the economics of Terra, I think we agree that the collateral needed to backstop a death spiral (and preferrably to deter it from even starting) would be very large relatively to the number of emitted UST which, again, limits the growth Terra could expect from its “native stablecoin” mechanism.
  • Buying other cryptos to back UST (like they started to do with BTC) could probably be carried out better than they did (i.e. more discreetly) but isn’t it equivalent to make UST a collateralized stablecoin? In other words, some kind of DAI?

Did not understand what you meant about the “oracle” part.

If I ever reply further, that will be tomorrow. Thanks for your clarifications.

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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.


Nitpicking, but a big part of my proposal is patching the death spiral so it isn’t a risk anymore. It’s not a spiral if the TSR blocks more $LUNA from being minted any time Terra is not solvent.

Now the primary risk simply becomes extended insolvency, instead of $LUNA supply going to infinity. During insolvency LPs are still available to service trades, but if a serious bank run ever occurred draining this liquidity, as long as Terra has a large enough backstop reserve to make the debt repayments by burning held $UST, insolvency should always be solvable, since as $UST drops in value the debt servicing cost goes down with it.


I typed out a rather long response to Do Kwon’s Proposal V2. Of which I am a HARD PASS on the HARD FORK. Comment can be read here > Terra Ecosystem Revival Plan 2 - #2231 by NothingButChase

@wellhat has a rather sensible proposal above. It promotes fixing as opposed to instantly refunding/paying out losses in “HOPE” that they will regain confidence and stick around.

And I think that new leadership is needed. My comments here > Use Governance to Elect New Leadership - #25 by NothingButChase

It is clear that @wellhat knows more of the technicals behind the ecosystem. And think that his proposal with a few tweaks from my comments should actually be written as a competing proposal to Do Kwon’s V2 and put to a vote.