Long time listener, first time caller here. Unfortunately, after reviewing all proposals that have been submitted and tracking the activity undertaken throughout this time of volatility, I can only describe my view as disheartened. There are numerous positions that are being advocated that run afoul of the intent of the LUNA/UST dynamic and potentially even financial law.
I would like to take a moment to bring to everyone’s attention a few key points before outlining a potential revival plan. Through a series of smart contracts designed to create an algorithmic stable coin, UST has a senior claim to the value of the Terra Ecosystem & Assets with a fixed rate of interest (through the Anchor protocol) and principal amount, while LUNA has a residual claim to the Terra Ecosystem & Assets with upside equivalent to all value above the principal and interest amount due to UST holders. The LUNA/UST dynamic is analogous to a digital bank (or even generic corporate structure) with the UST holders representing depositors (or debt holders) and LUNA representing equity holders. In all bank failures, all assets of the bank operating company (or again any generic corporate entity) are used to secure the senior obligors before any value is accrued to equity investors. The Terra Ecosystem has 2 assets: the assets held by LFG and the value of the Terra blockchain. These are 2 assets that all UST holders should understand and should be used to secure their claims. Please note that in all real world work-out scenarios (regardless of jurisdiction), there is a solvency test. Generally when the value of all assets underlying an entity fall below the liabilities of the entity, the entity is deemed to be insolvent and control/voting power is moved to liability holders (this a generalization and summarization for simplification). Suffice it to say the LUNA chain is insolvent (hence why we are discussing a revival plan which again is analogous to a bank or corporate work-out), and I think that UST holders should seek to gain control of the revival process. This insolvency test exists in all jurisdictions and to believe that the construct of digital assets rids the world of any notion of seniority of claims would be a black-eye to cryptocurrency broadly, not to mention come under extreme regulatory scrutiny. I think it is in the best interest of UST holders to create a creditors committee and make their voices heard. To believe this restructuring will take place without the key remaining constituency leading the process would be wrong.
Furthermore, the handling of LFG assets should also be noted. As a former Wall Street credit correlation trader (this may not mean much to many but basically a quant that spends his entire time minimizing risk/monetizing value), it is clear to see the LFG approach falls well short of a system designed to provide stability. The explicit intent of LFG was to defend UST and maintain its value as close to the $1 peg as possible. In the worst case scenario, LFG may have simply held the $3 Billion plus of bitcoin (and other assets) and at the point of halt issued an airdrop of bitcoin (and any other assets) to all UST token holders. Only gross negligence, mis-management, or potentially something even worse should result in a terminal value below $0.30. Unfortunately, through the decision made by LFG much of the value that should accrue to UST token holders has now accrued to LUNA sellers and arbitrageurs/trading firms. Further to the issues of LFG management, when you want to create a "stable"coin, the reserves you hold should work to offset any risk inherent in the dynamic of the coin itself. Holding assets (as well as pursuing a trading strategy) that exhibit a high correlation to the risk embedded in the coin adds risk as opposed to stability to the coin. Ideally, LFG would have held assets that had little or negative correlation to UST/LUNA, but again LFG fell short here as well. For a project that relies so heavily on trust (as do all algorithmic stablecoins), the lack of transparency and utilization of basic financial principles left UST holders exposed to substantial risks.
To hear proposals that will give value to legacy LUNA holders ahead of UST holders, is both misaligned with the construction of the LUNA/UST dynamic and will be put under extreme scrutiny by regulators. Now having set the stage, I would like to push towards a potential solution. The type of restructuring here must be more involved than proposals I have seen to date to allow for the most optimal outcome and least amount of volatility.
1,000,000,000 Luna tokens
25% - Community pool, controlled by staked governance
1% - Essential Developers emergency allocation. No lockup
4% - Essential developers (1 year cliff, 4 year vesting thereafter, granted after launch traction)
70% - UST holders at the “Launch” snapshot - 10% unlocked at genesis, rest vested over 2 years thereafter
Stabilization Period: 2 years to match the vesting schedule
During the stabilization period, there will be monthly double blind Dutch auctions. Where by all legacy UST holders would be able to submit reservation prices on where they would be willing to exit their unvested genesis V2 token.
The ultimate goal of the stabilization period is to provide an orderly unwind of legacy UST holders who did not signup for this type of position. Each holder will determine their own reservation price which will be a function of how soon they need that money, how much market risk they are willing to take, and their belief in the Terra Ecosystem.
This also allows all Investors the opportunity to efficiently access large volumes and incentivizes investors to move quickly to bring capital. As each monthly auction fills the lowest reservation prices first.
The double blind Dutch auction means that no one knows where any buyer or seller’s reservation price is just the clearing level (both price and size) of each auction. The clearing level is set as the lowest price that matches buy and sell interest volume. With all buyers at or below the clearing level filled at the clearing price and vice versa for sellers.
Post stabilization period:
At the end of the stabilization period, there will be no more monthly auctions and holders will no longer have the opportunity to exit through the auction process but instead must use regular avenues.
Make whole amounts: a percentage of all revenue generation of all genesis V2 tokens will move into a make whole reserve account which will be used to make whole any losses incurred on the first 25,000 of UST of each holder after the conclusion of the stabilization period. The make whole amount will be the difference of where each individual seller sold their tokens at auction and par. Any holders who did not participate in the auction process will have a make whole amount determined by the final auction.
Key points going forward to consider:
-The percentage amount to allocate to the builder community
-The length of the stabilization period (and vesting schedule)
-The period between auctions
-Amount of the make whole threshold
-Percentage of V2 genesis token revenue diverted to make whole reserve account
The basic premise of LUNA has been that it is to support UST stability, in fact that is the premise of all algorithmic stable coins. This is the key risk you take in investing in the sister coin of a stablecoin. To think that legacy LUNA holders could accrue value before UST holders have been made whole is wrong. There are countless instances of the founders of the LUNA project referring to UST as defended by the market cap (and hence entire value) of LUNA, and here we see the entire value of legacy LUNA not being used to defend UST. This is not only a moral issue but a legal issue. One asset had a daily vol that rivaled any coin in the top 100 by market cap, the other was pitched as a savings instrument with little to no vol. This story could turn into a beautiful story by saving UST investors or an ugly story by giving value to legacy LUNA holders before UST is made whole.
Much of the points I have made above were summarized to avoid excessive detail/minutiae, but I would welcome the opportunity to discuss this and other proposals in more detail as this truly is a seminal moment in the history of cryptocurrency and blockchain technology.
The darkest days provide the brightest opportunities. Every regulator around the world has turned a sharp and discerning eye to crypto and more specifically stablecoins. The ability for the Terra Ecosystem to navigate this unfortunate incident while maintaining builder incentivization, a valiant attempt to make whole stablecoin holders, and championing transparency and community will lead us through the next crypto revolution.