[Proposal] Tiered repayment: 1:1 USDC refund to all UST holders up to a certain cap per-wallet using LFG funds, favouring small wallets

Hey everyone. I would like to suggest a tiered repayment system for the first batch of users.

The events that unfolded in the last few days have deeply affected all of us, and I’m sure we can agree that small to medium sized traders have been affected the most. Families have lost livelihoods, students and working professionals have lost years of savings, and lower-calibre ‘investors’ have even lost other people’s money. In a few weeks, everyone will talk about how obvious this event was, but in truth, it was very hard to see coming. LUNA was a blue chip coin and Anchor was a state of the art DeFi protocol.

It is clear that LUNA cannot be salvaged and will be used as exit liquidity to retain some of UST’s peg, which is its purpose anyway. At some level, Terraform Labs and the Luna Foundation Guard have a responsbility to get UST as close to $1.00 as possible. This will be a tough task given the sheer amount of money that’s left to repay.

I think when it comes to analyzing stakeholders, we should put the small trader first. Someone I know in my circle committed rope last night due to the LUNA crash. Many people are on the ropes, and I’m sure we’ve all seen the posts online. This is taking a disproportionate toll on smaller investors, so I believe we should prioritize paying them.

Advantages of paying small holders first

  • Reduced sentiment impact: given that small holders make up the vast majority of the community in terms of numbers, it will greatly improve general morale and sentiment since over 80% of Anchor users will be made whole
  • Easier to manage remaining creditors: once most of the creditors have been sorted out in a lump payment, the remaining creditors (institutions and multi-billionaires) will have greater mobility as solutions can be discussed and executed in a tight-knit group
  • Most effective use of funds in the interim: with only $1B or $1.5B, the majority of affected users in terms of numbers can be made 100% whole instead of making all users 10-20% whole.

I am speaking from experience here. I witnessed a site with investors getting hacked, and there was a lot of community turmoil. Ultimately, the site owner paid back most people with a small amount of funds, which made the majority of people happy and they came back to use the product. The larger shareholders were issued a debt token which is slowly being paid off. What was most interesting to me was that the stakeholder who lost the most amount of money (over 50% of the project was his) seemed the most chill and compliant. You will find that multi-billionaires tend to be more calm, reasonable, and rational when it comes to handling monetary losses. It doesn’t affect their QOL that much. For us, this could be everything.

Proposed mechanism

The exact mechanism can be worked out and tweaked, but here is what I think will be best.

  • Take a snapshot of all aUST and UST holders on the Terra blockchain at the time the depeg happened. This will stop people from splitting funds into separate wallets after seeing this proposal.
  • Calculate the amount of money needed to pay out the bottom 75% of users in full. It shouldn’t be more than $1B or $1.5B given that the top 100 Anchor addresses have over 92% of the funds. I am not sure of the exact figures, but something like “all wallets with 250k aUST or less” should be a decent parameter.
  • These addresses can then be added to a redemption whitelist. On the whitelist page, addresses that are on the list should be allowed to swap their amount of aUST or UST directly for either USDC or USDT at a 1:1 ratio, limited to the amount they had during the snapshot.

Do Kwon said he is working on arranging some funds (to make UST collateralized), and I believe my method will be the most effective way of alleviating community stress, bringing the project back, and creating a more calm, malleable and navigatable way forward when remaining stakeholders have closer seats at the table within the captain’s chambers. Thank you for reading.

Edit: 14th May Proposal Update

After a long community discussion surrounding this proposal (over 700 comments), I have reviewed multiple perspectives from multiple stakeholders and we have decided to make three major amendments to the original proposal. This will make it a near-perfect solution.

  1. Only initial deposits made into Anchor will be eligible for the refund, not yield. This will free up a decent percentage of capital which can be redistributed to more people. We should prioritize giving back people the money they actually put in, and refunding Anchor profits would cut into that. This can easily be calculated on a per-wallet basis using the methodology from this tool. Put simply, if you put 20,000 UST into Anchor last year and now have 24,000 UST, your refund amount would be capped at 20,000 UST.

  2. All forms of UST on Terra would count in the first refund batch, including UST staked in LPs and pools like Osmosis. I received feedback from a lot of users that had their funds staked in these services, so we will not limit refunds to just Anchor and vanilla UST - it will include all UST balances on Terra across all services (as long as they can be tracked on the blockchain).

  3. Instead of paying out just small wallets, we will pay out all wallets, including whale wallets, up to a set cap per address. This solution seems to be a good balance between including whales and having more money to make smaller players whole. It will cut into the per-wallet amount by quite a bit, but it is a more equitable solution and mirrors real-world refund setups like FDIC insurance and bankruptcy proceedings. For example, with a hypothetical per-wallet cap of $50,000, someone with $5,000 in Anchor would receive the full $5,000 as a refund, and someone with $800,000 would be limited to a $50,000 refund. We should still be able to clear out debts for most Anchor users depending on how much money LFG has left.

Thank you to everyone for their suggestions and helping me amend this proposal to make it more equitable and reasonable. It is now likely the most realistic and most beneficial solution out there, and I hope TFL is able to join the conversation.

PS. I have changed the title of this proposal from Tiered repayment: airdrop USDC/USDT to small UST holders on Terra to Tiered repayment: 1:1 USDC refund to all UST holders up to a certain cap per-wallet using LFG funds, favouring small wallets. This better reflects the spirit of the amended proposal.

1440 Likes
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Addendum: We should probably set the snapshot block to the block in which UST depegged. This will allow us to process reimbursements for holders who put money in while UST was $1 and not people who bought in specifically to make money off of the depeg (which is fine, but shouldn’t be a priority. Anchor was marketed as a blue chip savings account, and people put in their actual savings. These people should be prioritized). Recovering UST is fine and dandy (and I’m sure it will happen), but it will take at least a year and billions of dollars. With our first billion, which will be available much sooner, we should engage in effective altruism and carry out the maximum possible good.

(4:40PM: I am working on the numbers and will edit in an update here shortly.)

(5PM: Okay. For simplicity’s sake I will look purely at aUST for now since it is the bulk of the protocol’s money and it’s likely that people staking/saving were using aUST, not just UST that was sitting in their wallet. Based on when we take the snapshot these numbers can be tweaked a little, but the general idea should be the same.

  • Outstanding aUST: 8.3 billion
  • The top 10 Anchor wallets own 26.824% of all aUST (!!!)
  • There are a total of 256k Anchor wallets
  • The top 1,000 Anchor wallets own 82.37% of all aUST
  • The poorest wallet from the top 1,000 has 955k aUST

I have taken figures from DAIC which only shows the top 1,000, but these numbers are incredibly promising.

With $1.46B, we will be able to refund 99.6% of all Anchor wallets, which is probably over 95% of all Anchor users. The refund amount will be approximately 17.6% of all outstanding Anchor funds. This will be a beautiful use of resources, as almost everyone affected by the depeg will be made entirely whole, and a limited number of whales will have to wait slightly longer for a refund which they can most likely afford to do. Of course, everyone will not like this idea, but I believe it will bring us the fastest refunds for everyone (yes, including the whales) and maximum societal good. As it stands, everyone who had under a million dollars in Anchor will be made whole, which I think would be really amazing.

TFL currently has around a billion dollars in LUNA and can probably raise the rest within a few months. This plan will also work with a smaller amount of money - as long as people in the small/medium bracket are refunded, it will have a similar effect.)

548 Likes

Agreed here.

53 Likes

I agree as well! And using the remaining funds to centralise the collateral assets to stabilised UST

52 Likes

Agree

37 Likes

I don’t think this is the right way to do this. They can use the money to save the entire protocol, why only some of us get our money back? Completely not fair.

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I have explained exactly why in the main post, but I will try to elaborate a little bit.

Firstly, this proposal is a tiered repayment. The repayment (or general plan execution) should happen in stages. For now, it looks like there will be some sort of mass socialization of losses - Do Kwon is allowing bad debt to drop off by letting people exit UST, and there will be some sort of low level collateralization that will apply equally to everyone. This is fine, and it will work (albeit progress will be incredibly slow), but I think my solution is better.

A tiered repayment plan favouring smaller wallets is so much more powerful because it lopsides money, emotion and community power to the place where it matters first. The rest won’t be ignored, of course. Their payment will simply be slightly delayed. Think about two situations: in situation A, 5% of everyone’s losses are refunded. In situation B, 100% of 60% of people’s losses are refunded. The second one will be amazingly powerful for the community and morale.

We must also keep in mind that I am proposing that the first refund go purely to smaller/medium wallets for good reason. People with 250k aUST or less should get this. I may offend someone by saying this, but I have to be brutally honest. People with millions or billions in Anchor do not need the money as much as someone who put half their $50k life savings in. Someone with a billion dollars can afford to wait for their 5% repayment. I prefer we prioritize people who need the money. This doesn’t mean the billionaire won’t get it - he will just have to wait a bit, and this is fine, because like I said, it won’t affect his core quality of life. A billionaire’s marginal utility derived from each additional money unit is very low compared to a millionaire or a normal person.

This plan will also most likely speed up the whole plan in general, since a top-heavy community morale injection en masse will add momentum and confidence to the project as a whole, likely speeding up ventures to get more backing funds and/or kickstarting Anchor again.

Please feel free to ask if you have any questions about my proposal because I feel very strongly that it’s the best way to get out of this situation and I will be happy to elaborate on any aspect you like.

203 Likes

Repaying the community will help a lot in bringing confidence back to the users of UST w/c is right now in shambles. Hope this proposal is approved.

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I have run the numbers and added an edit to my very first reply in this thread. The rough conclusion I came to is with around $1.5B, we will be able to refund over 99% of Anchor users (everyone who had a million dollars or less in Anchor) with a 1:1 USDC or USDT redemption. This is likely the best way forward in every way as I explained in the original post. I would love to hear what someone from TFL thinks about this. I would encourage whales to think about this as well, because although it may not result in immediate financial gain, it will likely result in a faster long-term refund overall since it will increase health and confidence in the protocol as a whole.

128 Likes

Hello FatMAn,
Your proposal is actually what would make a lot of impact in the crypto community, it would shut a lot of “ponzi” or “rugpull” claims. Moreover, it’s actually sawing the seeds of trust in an ecosystem that protects its holders.

Your explanation is on point, I truly hope your proposal makes it to the voting stage and positively goes through it.

116 Likes

Thank you for the support. To be honest, I’m not quite sure if a vote would be useful/necessary. This is a suggestion directly to TFL regarding how to use their funds. They made billions of dollars from the LUNA machine selling an algorithmically pegged stablecoin and earmarked away hundreds of millions for the support of the peg. This is not meant to sound accusatory - the team is highly competent, but they do retain some level of responsibility when it comes to taking care of Anchor users. IMO, following this proposal is the best way to both restore confidence in the peg/system/community/team and to restore the hearts & wallets of the people. I hope someone from TFL can comment (and criticize!) so we can work out a practical solution based on this system and move forward.

126 Likes

I think is a good idea! I’m Italian and here a bank did something similar with a great gain in trust and popularity, during the Lehamn crysis in 2008.

https://amp.ilgiornale.it/news/doris-e-fininvest-salvano-i-clienti-lehman.html?fbclid=IwAR04COgC4dNONdVFv889S27NLP8zGffcfV9EleRUtdHJFl6YMMJQOR_c6jk

This is the link for the story. It is in Italian but you can use Google to translate it.

30 Likes

I understand and agree with the intention of the proposal of making everyone whole. I’m hoping this includes people like myself that does hold UST in Osmosis and inside the UST/OSMO/ATOM/LUNA pools. However, to protect the ecosystem from people exiting upon being made whole, maybe that amount can have a 6 month lockup where it is staked earning APY, and then followed by a dynamic vesting schedule based on how the market recovers and confidence increases in UST as a stablecoin. Anyone who doesn’t want their funds locked up can get a sort of severance package where they receive a fraction of UST back that increases over time.
I also think that maybe LFG can launch a buyback program for those that want immediate liquidity and at the same time offer loyal followers the chance to buy tokens at a discount that will be locked up for a period of time. People are selling and flipping, we need to buy back and lock to stop the bleeding, and give Terra the chance to rebuild.

Intentions

  1. Stop the bleeding and decrease in value ASAP.
  2. Provide investment opportunity to people who want Terra to succeed.
  3. Provide the time and new funding to Terra that will help rebuild quickly.
  4. Allow a better distribution of Luna/UST to long term holders to avoid this from happening again.

Thanks for taking the time to read this and put up the proposal you did. #wagmi

43 Likes

What about users that had aUST on AVAX? Can there be any consideration for them?

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Yeah, sure. The proposal can easily be tweaked around the edges to accommodate all chains, a slightly higher/lower budget, etc. The numbers I used (Anchor users on Terra) were just to get the big picture and prove viability, ie. the fact that the vast majority of people can be made whole with a relatively small amount of funds.

Smaller chains like AVAX in particular should be fairly trivial to account for. AVAX only has around 54m aUST on it (compared to Terra’s 8.3b) and about 65% of those funds are in non-millionaire wallets, so it shouldn’t prove an issue to add them to the whitelist. If we can refund 99.6% of Terra wallets in full with < $1.5B (up to millionaires), then surely if we adjust the parameter to a maximum of $500k or $200k per wallet, with less than a billion we can do wonders and uplift virtually everyone on every chain into a full recovery.

30 Likes

Totally agree to this.

But what about people who held during the depeg but sold during the way down?

If we are paying them, they would get a reimbursement + their salvaged UST money when they technically ‘contributed’ to the downfall.

Open for discussions.

16 Likes

That’s a great question!

There are a few solutions we can talk about, but here is what I propose.

  • A snapshot is taken of aUST holders right as the first depeg happened. This will prevent future buyers and sellers from reaping rewards from the buyback program, as only original Anchor holders/savers will benefit.
  • People who bought UST/aUST after this snapshot will not be entitled to the refund and will have to wait out redemption on the open market. This shouldn’t be a huge deal, as UST should edge closer and closer to $1.00 organically anyway.
  • Whitelisted addresses will not simply get the USDC/USDT: there will be a page where they can redeem a set amount of aUST for their USDC/USDT. This amount will be limited to the amount they held during the snapshot. If they panic sold their UST, they can buy it back on the open market and redeem it. If they bought additional UST, they will be limited to what they originally held.

This method makes the most sense to me. What do you think?

58 Likes

Can they create a bridged version of usdc or usdt and do an airdrop to the 99% of anchor users you selected ?

All they would then have to do is bridge back

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I would love to see this proposal be implemented. It would certainly have a huge impact to those who need it most, and send a powerful message of what this community is all about.

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What I meant was, let’s say I have 100k UST on anchor, during the depeg event I didn’t sell it so I got the snapshot for the refund, but then after UST continued to depeg and I sold the 100k UST for 40k USDT on Binance. Would that means I get the 40k USDT I sold my UST for and the 100k refund?

Would it be better to take 2 snapshots? Before depeg and for example now. If they don’t take their money out, they get reimbursed. This would make the money needed way less and there will be no double spend problem. Plus rewarding people that believe Luna until the end.

7 Likes