Summary
Use the LUNC burning rewards to buy back UST at low prices by paying out guaranteed returns in LUNC for every UST that is sold to the network.
Motivation
The only way to lower the UST debt is by using income. This doesn’t mean that all UST should have to be paid back at full price as some investors joined in later and didn’t invest $1/UST and many times way less and UST simply can’t be paid back at full price.
Proposal
The current market price of UST is around $0.02. Let’s say I was to buy one LUNC for $0.02. Technically UST is supposed to be worth/repeg to $1, the problem with this however is, that there really aren’t the funds available to back up this price from a fundamental perspective. Now let’s assume I am a new investor that wasn’t around prior to the crash and I decide to buy UST for $0.02: What justification is there really for me to expect a $0.98 profit? There really isn’t when you think about it. Let’s say instead we change UST into an income producer that burns itself off over time and use this as a tool to “buy back” the debt that we have at a low price. Here is how: Let’s say I sell my debt to the community at a guaranteed profit of $0.01/UST. This means that at a $0.02 price point I would expect a return of $0.03 (profit = $0.01). This would equal a 50% profit at current market rates. Here is how it is going to be paid:
LUNC burns => The rewards will be paid through LUNC burning income and will be paid out in LUNC. Looking at the amount of LUNC that was burned up till date we are at around 25B, which equals around $4.2M worth of LUNC at the current market price. Again, we won’t pay back UST holders $1 worth of LUNC as this can’t be paid by the network. But imagine users expect a 50% return on their UST paid out in LUNC and sell their UST at a fixed rate to the network. Once the user received $0.03 worth of LUNC the UST will be burned. Remember that this is NOT newly minted LUNC but simply LUNC that hasn’t been burned and instead has been used to lower UST debt.
Example: You sold $0.02 worth of UST at an interest rate of 50% (determined by the reward which is always $0.01 divided by the price of UST), meaning you will be paid $0.03 in LUNC. Let’s say we were to take the 25B LUNC that were burned as an example: $4.2M/$0.03 = 140M UST burned at a price of $0.03 (just burned $0.97 * 140M = $135,8M worth of UST debt without even having to pay back all of this money). Now you might say: “But what if the price of UST rises? Won’t we have to pay more?” - Yes, but here is the deal: The higher the price of UST, the lower the return will be. Let’s say the price of UST rises to $0.10 => We are still “only” going to pay $0.01 worth of a profit, but obviously have to pay $0.10 on top, as this is the rate that the user sold the UST to the network at (market price). 10% is still a good reward but might not be as appealing as a 50% reward which will possibly keep the price at a lower price for a while which makes it extremely cheap for the network to buy back their debt. I would like to also mention that a price of $0.10 as a cep might be too high, it is just an example.
Assuming the price will rise, this is obviously what UST owners will want, at this point however the network isn’t really responsible for paying back high rewards or taking in more debt than it can/wants to. Let’s say the price rises to $0.50 => Users can obviously sell at this price through an exchange, so why is the network supposed to pay $0.50? So it won’t! The network might choose to say: “We are going to only pay a maximum price of $0.10 + $0.01 in returns”. This needs to be done to not overpay for the debt and keep this an economically viable option. The price at which debt could be purchased back might also be depending on the length of the queue or the amount of (projected) available LUNC earned through the burning tax and limited at certain times/to certain prices as determined by the network at the time.
The only problem which is actually a benefit for the network:
Price fluctuations of LUNC => If i sell my UST for $0.02 expecting $0.03 in return, I have the risk of LUNC fluctuating in price. Based on the debt ahead of me in the queue, the time that will elapse until my debt + interest is paid through LUNC to me is the only unpredictable factor. The price of LUNC may rise or fall. This is the risk the purchaser of UST takes on. It is basically like indirectly buying a futures contract. This is what is supposed to keep the price of UST low to buy back the debt at a low price as otherwise the risk the borrower takes on is too high as the reward is fixed to $0.01 (this is why the percentage rewards are supposed to be high to minimise the risk of LUNC’s price volatility).
It would be possible to allow users to choose to “lockin” a certain reward as well by paying a premium. Let’s say I sell 1 UST at $0.02 to the network. There are two ways I could be rewarded:
- I get paid a certain amount of LUNC in the future. Based on the market price in the future. Example: I sell my UST for $0.02 and get a $0.01 profit. Let’s say it takes 1 month for the return to be paid. Let’s say the price of LUNC rises to double what it is worth now => I will still “only” get paid $0.03 worth of LUNC at this point in the future, if I had chosen the other option however i would have received double the reward ($0.06).
- I get paid a predetermined number (amount) of LUNC at whatever monetary value it is priced at in the future. Example: I sell my UST for $0.02 and get a $0.01 profit. Let’s say it takes 1 month for the return to be paid. Let’s say the price of LUNC rises to double what it is worth one month from now but I locked in a certain number of LUNC as a reward at the previous price (when i entered the contract). I will now get $0.06 worth of LUNC.
The same obviously also applies if the price drops by half or whatever other amount:
- Example: I sell my UST for $0.02 and get a $0.01 profit. Let’s say it takes 1 month for the return to be paid. Let’s say the price of LUNC falls to half of what it is worth now => I will still get paid $0.03 worth of LUNC in the future as I chose to be paid by monetary value. if I had chosen the other option however i would have received half the reward ($0.015) which would cause a loss.
- Example: I sell my UST for $0.02 and get a $0.01 profit. Let’s say it takes 1 month for the return to be paid. Let’s say the price of LUNC falls to half of what it is worth now => I will get paid by the number of LUNC I have chosen and would get paid LUNC only be worth half the monetary value.
As you can see these two options can function as a speculative or possibly even hedging instrument for traders if they choose to. The reason why i would expect the price of UST to stay low and make it easy for the network to buy back large sums of UST for cheap is because the reward is fixed to $0.01 and directly exposed to the price fluctuations of LUNC. The option where a user would be paid based on monetary value in the future may or may not be activated in the beginning, throughout or at all, or may require the user to pay an “insurance fee” or receive lower rewards, or may only be available based if it can be hedged against traders that use the other option for being paid out.
Remember that the “locking” in of UST means that your rewards (profits) will be paid based on the amount of users ahead of you in the queue. The rewards that would otherwise be LUNC that is burned will be paid to the person at the top of the queue. The longer the queue is and the more debt is ahead the riskier or rewarding it can be for you to expose yourself to the possible market fluctuations of LUNC as it takes longer to payback your interest rate, which is once again why I expect the price of UST to stay low in the beginning and help erase a large portion of the debt.
An option that could be added as well is the possibility of receiving back your UST in case a user changes their mind or the price of LUNC fluctuates or it takes them too long to be paid back. This would however require a fee that would instantly be burned. Example: You try to get back your 1 UST: You will only get 0.9 UST and the rest is burned.
Now, you might say but what about burning LUNC? The moment the price of UST rises to prices that are considered “too expensive”, the chain could switch back to using the income from the LUNC burn fee to burn LUNC and/or create a reserve for future UST buybacks in case the price should drop again. If no one is willing to trade their UST at a low enough price to warrant large sums of them to be bought back for cheap then it isn’t worth it to do so.
The other aspect i want to mention is this: If swaps from LUNC to UST were to be enabled in the future again it would need users to require to spend $1 worth of LUNC at that point to swap for UST. At this point newly minted UST might still earn rewards through burning taxes and incentivise users to swap their LUNC for UST. This option however should only be enabled later and wouldn’t require a full payback of the entire investment but would basically only pay “dividends” based on the income generated through burns or lending out UST based on other collateral or whatever.
