[Proposal] Generalizing the stabilization fund, saving the peg, slowing the minting

Governance & Proposals
1

Summary

A stabilizer fund is proposed and the mechanics for increasing the recovery price should flow with the UST’s market price to quickly clear out bad debt and return the peg.

Motivation

Something has to change before completely wiping out LUNA with dilutive minting. Perhaps we can do this without making really bad terms for everyone. Let us try our best to find a way forward even if it may seem unworkable or impossible. A fail for Terra is a fail for DeFi everywhere. There is no time to rest for anyone in the DeFi community until Terra’s problem is resolved.

Whether the following hypothetical generic scenario could work does not matter (and we are not recommending it). It serves as motivation to be more robust.

  1. Borrow $10 billion for shorting
  2. Use $10 billion to short the source coin (eg UST) on one or more Centralized Exchange (CEX)
  3. Move $1 billion of the source coin into a wallet
  4. Find a liquidity pool on curve.fi containing the source coin and a destination coin (eg USDT) where its liquidity is far smaller than $1 billion (or adjust up the size to what is needed) and swap them
  5. Curve.fi reduces the source coin’s value as the destination coin’s liquidity evaporates (brownie-tutorial/lesson-18-applications-ii at main · curvefi/brownie-tutorial · GitHub)
  6. Keep the sell side pressure until the source’s crypto system buckles and crashes systemically
  7. Cover the source coin on CEX using random small sizes to appear as noise under the now large volume market panicked trades
  8. Slowly drain the source coin from curve.fi to wallet
  9. Cover short positions on CEX
  10. Rinse and repeat on the next victim source coin

The above is a more sophisticated version of front-running the oracle prices which exploits the fact that curve.fi’s AMM does not require external price sources for decision making, and that until government regulatory bodies come in the picture, that it is not yet illegal for the attacker to perform.

The Bitcoin Reserve Pool (Bitcoin Reserve Pool) concept was a nice pressure release valve to defend the peg but this implementation was never activated before the death spiral event. Even so, as it was proposed, the Bitcoin Reserve Pool would not have been able to absorb the magnitude of this financial DDoS, if you will, especially when major crypto asset classes, especially BTC, fell in value and extreme shorting pressure existed. A large depeg would have motivated panicked UST holders to sell for anything. The $0.98 BTC stabilization fund would have run out of fund very quickly and left investors to eat each other down to the bones. The curve.fi Wormhole pool (UST-3Crv) had been one of the largest liquidity pools but it was completely drained and its internal oracle pricing did not require any external inputs to determine UST’s lower pricing and this depeg kept very low pricing for days as long as the attacker remained committed to keeping more USTs for sale than other liquidity providers in the pool. There needs to be a cycle disconnection to this feedback loop.

Let us agree that during states of depeg we must do everything to save the peg, for without the peg, the Terra ecosystem cannot grow. Let us agree that saving UST requires clearing out bad debt fast. The suggestions we make should be in the spirit of saving the peg and not without consideration for the supportive market participants.

Proposal

The intuition is to form a diversified stabilizer fund. Whether this stabilizer fund contains major crypto assets and stablecoins are details best determined by the community. Perhaps eventually we can find alternative assets that could serve as an indirect value instrument. Bitcoins have value because they are benched to the electric cost for mining ever more complex puzzles for coins and for validating network transactions. The indirect value is assumed in USD, SDR, or local denominations. For the purpose of this proposal, the existence of a stabilizer fund suffices.

Unlike the Bitcoin Reserve Pool, the fixed $0.98 BTC should be changed to the volume weighted average UST price (VWAP) in USD that the oracle sees across the exchanges plus a tiny amount higher (delta) as the price offered to panicked UST sellers during depeg events (<=$0.95). The VWAP+delta is to encourage bad debt sellers to buy from the LFG Reserve stabilizer fund (front-run) than off-chain markets and to avoid burning the stabilizer fund at the unmaintainable $0.98 BTC rate during large attack/panic volumes. As before, the LFG Reserve holds on to the USTs which effectively takes them out of circulation until the repeg. The LFG Reserve should repeg much faster. The favorably acquired discounted USTs could then be used to buy more stabilizer funds to increase robustness for the next time and to use some of the discounted UST acquired to burn LUNAs (the LFG Reserve’s UST will be used to supply the USTs for LUNA to UST swaps without minting new USTs).

In addition, during the depeg, all LUNA staking should be burned. Staking is an inflationary instrument and during a depeg that minting more LUNA is the worst thing to do. Confidence in LUNA drops and so does its price. Adding incentives for depegged UST holders to swap for more minted LUNA exacerbates the problem when both LUNA and UST in parallel falls in value. Any unnecessary minting should be stopped because the system is temporarily broken. LUNA stakes received should be burned. USTs received should be used to buy and burn LUNAs.

We should consider this proposal along with increasing the minting capacity that is supposed to help arbitrageurs before wiping out LUNA holders. We assume injecting fresh capital to the stabilizer fund to clear bad debt at near market discounts is a viable option to avoid diluting LUNA to oblivion.

Future explorations

  • Airdrops for the remaining supporters when we get back to black

Other reference

  • Sequence of events that transpired to the death spiral (archive.ph)
6 Likes
2

Together we will overcome this problem.

3

This is very well thought out.

1 Like
4

Here’s an example to help people digest a possible use case.

UST is $0.19 on the market. LFG Reserves offers USDT for $0.20. Bad debt holders take this. As these larger holders clear out you should see the UST repeg quickly. At UST repegged to $1.00, the LFG Reserves would gain $0.80 on the dollar for these discounted sales. LFG Reserve spends the first $0.20 to buy back the stabilization fund, spend the next $0.30 buying back more stabilization fund for weathering next time, and buyback $0.30 worth of LUNA and burn them to help raise LUNA’s price for LUNA holders.

1 Like
5

This needs to be coordinated timely and perfectly.

6

At this point, I think its time to ‘cut the leg off’ unless you want to bleed to death. It’s not the end, you lose a leg. But you can replace the leg with something new or use your other leg. Keeping this monster alive is going to kill the ecosystem. Killing it will make it only lose a leg.

This proposal is just moving the problem to another victim. That’s karma you don’t want to come back on you.

7

Irrespective of these analogies, the key is to finish up a functioning repeg system. We already have one and it was being developed before it was deployed when the shorting happened. The change is merely to let the peg free fall to clear out people that should not have overleveraged and use a stabilization fund backing that is not also in free fall. We rather save 2/3 of the people than let the 1/3 who overlevered kill everyone.

Every other suggestion is trying to make Terra into another asset coin or into another algorithmic system that has the same exact problem. We have pointed out how to short every other algo coin on curve.fi to death so what is your proposal out of this?

Your loss should not be everyone’s loss. It is the risk you have assumed when you leveraged. The shorts can drop LUNA’s price and cause a depeg too.

3 Likes
8

i didint get anything too complex for me

9

  1. It’s beyond imperative to let the peg free fall.

  2. This will clear out people that should not have overleveraged.

  3. Then use a stabilization fund. A backbone that inhibits a free fall.

  4. Bench test by modeling.

10

It’s unfortunate. Didn’t do more to save the peg. In the end their decision to repeg by letting LUNA dilute didn’t repeg the UST. The UST is at $0.12. They aren’t learning that curve.fi isn’t meant for similar assets. It’s meant for different asset classes with similar total values in the pool. If the TFL team continues to use curve.fi for liquidity and don’t understand the maximum liquidity that can be moved before the prices skyrocket then they will run into the same exact issue with GAM Holdings. We tried to warn this but many just didn’t understand enough to see. The other lesson the team needs to learn is that their price oracle comes from the CEX but they don’t have AMM bots to help them maintain the prices. This will be the death of all DeFi stablecoins should it not be defended in the reboot. Everyone has lost a lot. Perhaps let’s give semi-DeFi assets and stables another look.