Summary
Contrary to some of the proposals I am seeing on here, the sole purpose of luna is not to provide exit liquidity for ust holders. Luna provides security and stability to the blockchain, enables a mechanism for consensus, and is used in governance. The blockchain cannot function without luna, and if the blockchain is not functioning, there is no ust (hence the mentality of kill luna to save ust is a very flawed one, as demonstrated by the shut down of the blockchain yesterday due security concerns around luna’s hyperinflation). However, the terra blockchain can function without ust, and since terra is a PoS layer one with a strong community of builders, that can be capitalized upon and used to compensate ust holders and deflate luna back to its pre-spiral supply.
Motivation
A potential solution that could satisfy luna holders, ust holders, and terra builders.
Proposal
- Stop arbitrage between UST/Luna. Shut off all mechanisms that mint Luna & UST.
- At this point UST will collapse because it loses it luna backing.
- Any capital TerraForm labs has should be used to buy back and burn the Luna tokens to secure the blockchain enough so that its useable (i.e. no one person is able to accrue 50% of total supply on the retail market and potentially manipulate governance or the network).
- Convert the seigniorage mechanism that burns luna and sends a portion to the treasury into one that passes 80% of the luna through a bridge to Ethereum and swaps it automatically to USDC (off-chain collateralized stable coin). The other 20% goes into a treasury for to fund grants for builders on Terra who’s applications drive transaction volume on the blockchain. This fixed luna fee would apply to every transaction on the terra blockchain on top of the miner fee (below).
- Increase the miner fee to a fixed 1% to make up for the loss of the luna burn and keep the miners properly compensated.
- Set up a migration portal that allows people to exchange their UST for USDC 1:1 gradually as the treasury on Ethereum accrues capital. Burn the UST that is redeemed for USDC.
- Once enough capital has accumulated to cover the debt (i.e. it is equal to the amount of UST tokens in circulation) convert back to the seigniorage mechanism, burning 80% of the luna fee on every transaction (and sending 20% still to the treasury to fund grants for builders) until the circulating supply of luna is brought back down to pre-spiral levels. At this point the miner transaction fee can be adjusted down as luna burning on transactions has been restored.
This would convert terra into a L1 blockchain that could be primarily used for dapps, NFTs, etc. similar to Ethereum by incentivizing development on the chain via builder grants. It also makes ust obsolete by gradual conversion into usdc, and compensates properly all the ust holders as time passes. Eventually, after compensating ust holders, it will begin to gradually restore luna back to pre-spiral levels.
This will take some time to achieve all this, but I have yet to see an instant solution that would satisfy ust holders, luna holders, and terra builders alike.