The only solution - Shore up demand for LUNA to save UST

Hi there,

I am penning down some suggestions of mine to save UST/LUNA. I don’t profess to be an expert on blockchain projects, but I do have a background in economics and have a reasonable understanding of tokenomics. I hope that someone from TFL could see this and take some of these ideas into consideration.

The Problem

First, let’s talk about the problems that are causing the depeg.

Problem 1: Excess supply of UST on exchanges causing downward pressure on price, depegging it below $1. Price stabilisation mechanism not efficient enough to restore peg swiftly due to slow burning and mint/burn spread.

Problem 2: Low demand for LUNA causing excessive dilution. The price stabiliation mechanism assumed that there is demand for the LUNA token to absorb the LUNA dilution arising from arbs. But confidence in Terra is at all-time low due to the depegging, resulting in low demand. Do Kwon’s tweet endorsing 1164 create a market expectation of further dilution (and therefore fall in price) of LUNA. Given that, market speculators looking to profit off the dilution began shorting LUNA heavily, exacerbating the demand scarcity of LUNA tokens.


So, how do we solve the problem? Problem #1 has already been addressed by proposal 1164, which will hasten burning of UST and reduce the spread. All we can do is just to wait for it to go into effect.

But Problem #2 remains unsolved. Without active demand for LUNA, the mcap of LUNA would just dive down and once it reaches a value close to 0, the price stabilisation mechanism will fail and UST will go to 0 too.

So, I am convinced that the only way out is to substantially shore up the demand for LUNA token. Several ways we could do so are:

#1: LUNA buybacks with proper comms. I am not sure how much reserve we still have left. But those that we have should go into regular LUNA buybacks to absorb the LUNA dilution from arbs. Buyback plans should also be accurately communicate to the public so that speculators (now expecting demand for LUNA position) can close their shorts beforehand and allow LUNA to recover (and therefore reduce LUNA dilution).

#2: External funding for buybacks. I am sure TFL is working hard on this. But we should be securing as much external funding as we can to do so. If we still have UST left in our community pool/incentives, we should pledge them to investors to obtain immediate loans in USDC that we can use to execute buybacks. The UST pledge will be paid to the investors only after the peg has been restored.

#3: Suspend trading on CEXes. Needless to say, CEXes are where most speculators are actively shorting the LUNA token. If we can arrange for trading halt on CEXes, this would reduce the selling pressure on LUNA in the immediate term.

#4: Using LUNA as fees. Another proposal in this forum had proposed to stop accepting UST as fees and instead use LUNA instead. Agree that this would help to shore up LUNA demand.

#5: Temporarily lower the pegging of UST. Again, this is another suggestion I read on the forum and would like to support. If we can temporarily lower the peg of UST to say $0.9, it will restore more confidence in the market about UST repegging and alleviate some selling pressure for LUNA (particularly from those betting that the project will go to 0).

Thanks a lot for reading, and hope that some of these suggestions are useful. Thanks.


There is hope for UST, as for LUNA, it will be hard forked

I can’t comment on hard forking since my technical knowledge is quite limited. But my understanding was that if LUNA fails, UST will fail too since arbs to maintain the peg will no longer be possible?

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This is a different case compared to The DAO and hard fork will not work. The value of Luna is based on if it supports UST. By hard forking we proved Luna’s failure. So the forked version will not attract market demand.

I like this proposal. Thanks for putting the effort!

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Some possible temporary measures.

Burn UST faster.
Freeze UST minting.
Stop paying UST for staking.
Stop lending out UST on Terra’s protocols.

Simply, greatly increase cost to borrow UST.
The cost to borrow UST on CEXes is already high. Make it super painful for speculators to short UST.

Sounds like a good plan, before Binance delists Luna contracts, it would be great to hear some positive announcement from the management & CEO, which might help with the price recovery…