If we move quickly, we can revive the Terra project with a few key modifications. Here are the key points:
- Snapshot of the chain pre-attack and distribution of LUNA to Terra 2.0 chain
- Collateral redemption mechanism for resiliency
- Anchor protocol modifications
- Migrate the amazing community and protocols
There is no way to make everyone whole and there will be controversy with any plan, but I propose a snapshot of the Terra chain before the UST peg attack and a distribution to LUNA holders something to the effect of the square root of their holdings pre-attack. Possibly also the square root of (UST holdings divided by the price of LUNA). Individual protocols will have to decide how they want to distribute to their original users and keeps Terra out of that element. Square root chosen so users are incentivized to return to 2.0 chain while also giving plenty of room for fundraising so we can have a solid collateral system.
Now, the collateral system. If Terra has a total collateral value of x and a total minted UST value of y, then the mechanism should allow for a redemption of something close to $0.98 * x/y (with a max of 0.98 if the UST is overcollateralized). A concept this simple means there will always be more collateral than what is being redeemed by anyone panic selling. The sellers are getting a haircut on the dollar, but a relatively small one as long as the total collateral is close to the total UST value. The collateral should eventually be all decentralized currency, but in the early years of Terra 2.0, it would be wise to include a small basket of other stablecoins.
Anchor Protocol needs a dynamic interest rate with a smoothing mechanism rather than a month-long rate. This protocol should be sustainable without any refills. We can leave the mathematical debates to another post, but since Anchor is important to creating UST value, it goes without saying that the mechanism needs to be self-sustaining. Terra 2.0 can focus on balancing stability with growth rather than just blind growth.
The amount of protocols that were being developed on Terra was staggering and the innovative tech is too important to lose. We need to onboard these amazing teams to Terra 2.0 immediately and try to revive the demoralized community.
The losses from Terra’s death spiral will remain and the next path will have slower growth. But we have an opportunity to create a more resilient system and move decentralized stablecoins further. This week is a setback, but what we do now will impact the entire crypto ecosystem.
Feedback appreciated. My Twitter is @cc5alive