Restoring Terra Ecosystem by Repegging UST to a New Peg and Issuing IOU

Governance & Proposals
1

Summary

There are many comments going around a with lack of basic understanding of how LUNA - UST minting mechanism work. Since I have a background in Finance and Macro-economics, I’d though I’d chime in.

There are many proposals on forking the Terra Network to preserve the value of the Terra ecosystem and community without the stablecoin. This may work, but it carries significant risk and at least some value destruction. First and foremost, restructuring the Terra ecosystem with a hard fork takes time and human capital to deploy. Between now and deployment, protocols, NFT projects, and community members may move on, resulting in value loss and community fragmentation. If different stakeholders in the community can not agree, we may even end up with multiple forks to the detriment of all parties.

It’s important to remember that Terra projects built their protocols with the utilization of stablecoin in mind. Abruptly deleting the stablecoin would cause significant disruption to their workflow and the DeFi stack. For some protocols, it renders them inoperable in the ecosystem. (White Whale, Anchor, Pylon,… etc)

Rather than forking the network and turning it to a Layer 1, I propose taking another hard look at the possibility of restoring the network in its existing form with the following remedies.

  • Repeg UST to a new peg + an IOU Token issuance
  • Restore LUNA to its previous state based on pre-attack snapshot (with some dilution for post-attack buyers)

Doing so could immediately restore equilibrium and would not trigger the continuation of the death spiral minting of LUNA even if on-chain minting was restored. Furthermore, all the protocols in the ecosystem could continue to run without disruption reducing their incentives to leave the ecosystem.

Motivation

After talking to several protocols in the last few days, I realized that the ecosystem had already begun to fragment. Nearly all of the protocols on Terra that I talked to are exploring options and looking at different chains to migrate. Other Layer 1s have actively reached out to poach Terra protocols and developers.

The Motivation for this Proposal is to preserve the tremendous value of the terra ecosystem and community. And by doing so, ensure an outcome that is beneficial to LUNA holders, existing UST holders, and the projects that have dedicated thousands of man hours building outstanding applications in this ecosystem.

Terra was one of the most vibrant crypto ecosystems and community just a week ago. None of that is gone. We just need a pragmatic way to restructure the debt (UST) and then make improvements with the lessons we learned once the dust settles.

Proposal

There are many reasons why the LUNA – UST death spiral occurred. You could say it was because of a weak macroeconomic backdrop. Attackers that exploited thin liquidity during curve migration, initiated a DDOS attack to congest the network and spread FUD with Twitter bots. Or the absence of mechanisms to prevent the massive flight of capital from leaving Anchor simultaneously. And you would be right because they are all true.

But one of the big underlying reasons it collapsed is that the system was overleveraged. The market cap of LUNA and UST are tied. While LUNA’s market cap doesn’t necessarily need to be higher than UST’s market cap to work. Whenever UST’s market cap is greater than LUNA’s market cap, risks of a death spiral increases.

LUNA in a sense is equity and UST is debt. The on-chain minting mechanics essentially allows you to convert equity to debt or debt to equity whenever UST is off peg. So if UST’s market cap is more than LUNA’s market cap, then you are technically insolvent in some sense. And if that debt is all being recalled simultaneously, you will become insolvent (AKA bankrupt).

This is why it’s vital for UST (debt holders) to take a haircut otherwise both LUNA and UST will go to zero.

Repeg UST to a significantly discounted rate to USD + IOU Bond

I propose repegging UST to 50% of its current market value. This repeg will be permanent going forward. For example, if UST is currently trading at $0.20; the repeg will be $0.10. There will be an IOU token issued for the remaining 0.90 cents. Since UST was meant to be Pegged to the US Dollar 1 to 1, we will have to call this repeg token something else… like let’s say “DIME”. Hence every UST holder will receive a DIME, and an IOU token. After that, all UST will be burnt. (Alternatively, you could also burn 9/10 of all UST instead so that $1 UST becomes $0.10)

How will the IOU work?

Rather than a fixed payment schedule which could increase the reflexivity of the price of LUNA during bad times (AKA risk of death spiral). The IOU tokens will get 10% share of Luna’s staking rewards until the remaining $0.90 is completely paid off. When staking yields are high, the IOU will be paid down faster, and when yields are low, it will be paid down slower. But you never end up in a situation where LUNA generates extremely low or negative yield. Because that may cause investors to sell or unstake their LUNA if they aren’t getting any yield. This is why opting for a percentage of LUNA’s staking yield generated from seniorage swap and transaction fees to pay down the IOU is better than a fixed payment schedule.

And of course, at any time, the community can also decide to vote and use excess funds to buy up IOUs at the market price if they see fit.

Restore LUNA to its pre-attack state via snapshot (with some dilution)

LUNA’s liquid circulating supply was about ~90 million before the depeg attack. UST-LUNA minting mechanism during a death spiral has caused LUNA minting to grow exponentially going to infinity. Currently, the supply of LUNA is 1,176, 228,408,840. Yes, it’s in the trillions with a capital T.

It would make sense to roll it back to its previous state with a pre-attack snapshot to restore some of the value loss from original LUNA holders. An additional 10% of LUNA will be minted and distributed to those who has bought newly minted LUNA post-attack.

Why is it essential to restore the Pre-attack state of LUNA?

Aside from the problem of having a tremendous amount of LUNA minted. The most important reason for restoring the pre-attack state with a snapshot is to retain Terra ecosystem’s community and regain it’s confidence.

The pre-attack LUNA holders are Terra’s long-term investors, content creators, builders, educators, and users who have vast knowledge of Terra and all the protocols and projects in the ecosystem. Many were utterly wiped out and would otherwise have no means of participating in the network. They must retain a sizable share of the network since we will need them to build it back and continue to contribute. I’d argue it’s not only beneficial for the protocols on Terra and UST holders, but even new LUNA buyers that intend to be long-term holders to ensure this happens. Messing this up would result in heavy token selling by many retail traders during relaunch and the loss of the LUNAtic community. And quite possibility subject the network to a governance attack by a few individuals holding billions of coins.

While it might not be possible to reverse the blockchain to a previous state without a hardfork persay, maybe using a combination of burning LUNA and airdropping new tokens (LUNA or new token name) we can arrive at essentially the desired result. This would alleviate the burden for projects/protocol to even have to migrate. Or maybe a hardfork would be easier, I’ll leave that to the technical experts. It’s reasonable to assume accomplishing this could mean recovering 20-30% of the value everyone had loss. Maybe even more.

This Proposal is only meant to be the first step of reviving the Terra network, going forward, there will need to be a discussion on how to improve Terra stablecoin mechanics, whether that be to introduce collateralization or not. I have some ideas for changes, but I will leave that for another date. The priority right now should be to preserve the ecosystem and community without disrupting Terra protocols and prevent fragmentation of Terra’s core community. And this does mean that it’s necessary to have stablecoins in the network.

– Note: I am also largely in agreement with wassielawyer’s blended proposal, which includes paying down as much outstanding UST debt as possible with remaining LFG reserves (if there are any) and prioritizing small wallet balances as suggested by fatman’s proposal.

Happy to answer any questions and my dms are open on Twitter if you like to reach out and discuss

https://twitter.com/TheCryptoCents

9 Likes
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Nice thinking. I support this

2 Likes
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What about this?

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Problem with burn tax is that it simultaneously reduce trading/swap volume. You also accepting the complete dilution of the original community members and handing the network over the degen meme coin traders that have affinity with the ecosystem. The ecosystem will lose the community the process and the value will plummet.

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You are proposing—nay, insisting on stealing from new buyers, who threw their money in to help prop up a dying network.

That will not restore confidence: To the contrary, it will destroy the last shreds of public confidence in this project. Who wants to buy a coin that can simply say “oopsie!”, and take your coins away?

A blockchain which hardforks to redistribute value arbitrarily from some people to others is a scam, period.

(Disclosure: I bought into the crash. I did it on principle. You could have, too.)

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And I did buying into the crash as did you. But at this time, the ownership of the network has likely shifted from if what was once 100k holders to maybe a fraction of that. To give you an idea, a week ago one LUNA was about $80. I bought multiple times down all the way to the day prior of the halt, my last buy was ~45+ Million LUNA for $50… it’s simply not tenable. But at the end of the day it will be up to governance on what’s decide what goes through.

Pragmatically speaking, it’s better off for everyone to ensure community members have a reasonable stake. Protocols would not be interested in the ecosystem if all the community and actual users are gone. I would also add that in terms of a hard fork, any distribution in a sense is arbitrary to one extend or another. Even the current Terra Revival plan proposed by Do Kwon. At the end of the day, it comes down to striking a balance so that you can retain key stakeholders and buy-in for the ecosystem survive.

And it’s not really stealing because a hardfork is akin starting a new company, you can technically do whatever you like. Anyone can do a hardfork, you could even just transfer all the UST to new buyers only, but it’s just unlikely to get buy-in. Hence it’ll be an empty network with little to no value.

I also think given the current discourse, it’s possible we may end up with more than one fork, but that would be to the detriment of everyone if the ecosystem fragments.

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I don’t get how it’s possible to roll the system back, people would sell immediately, and we would have the same bank run, just faster the second time. All we can do is move forward.

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i agree , colleteralise this shit , and move on and bring our funds backs. Luna and Ust and stop fucking mint and dilute people.
I did not came to buy shiba inu or safemoon.

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If UST takes a haircut, people wouldn’t be dumping, it would in fact rally. The inherit value of the ecosystem which has been generating revenue for LUNA holders between 6-10% just from network and swap fees is there there. That is still worth billions.

The reason why there’s constant sell pressure is because UST is off-peg and that causes LUNA to mint in order to reduce UST supply to bring it to peg. But the discrepancies is too big right now. It’s as if a company 1 billion in revenue but has 10 billion in debt and has to declare bankruptcy. Know that fact, you would sell the company shares making the situation worst.

But if you restructure the debt, from say 10 billion to 1 billion and the company survives, it can still be generating that 1 billion in revenue and pay the debt holders off time. In simplified nutshell that’s what we are trying to do.

2 Likes
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I really appreciate your thoughts and suggestions. And although I can see your point on some of it, would it create a future where we say blockchain is immutable except when you roll back? Which i believe has already happened once at least.