Hi everyone.
I am wassielawyer - the guy who posted 'A Sensible Decision-making Framework. Since I made this post, I have had many people reach out to me, including some incredibly helpful members of the Terra builders group, UST holders, LUNA holders etc to share views on what the future of the Terra ecosystem might look like.
Having considered the leading proposals on this forum, I have put together what I consider to be a sane compromise for all parties.
Disclaimer
Firstly - a long disclaimer is necessary because of all the messages I have received in the past 24 hours. This has not been endorsed by any party. All views are strictly my own. I do not hold any significant stake in the Terra ecosystem (<10k in UST) which is a negligible portion of my investment portfolio. I only took an academic interest in the Terra ecosystem after the collapse because of my background as a restructuring professional. I do not work for TFL, LFG or any other person and I have not received monetary value from any person for my work on this. I have done this entirely out of intellectual interest and not in the capacity as a lawyer or legal advisor to any involved party. I am not affiliated with TFL, LFG or any other party in this matter so please do not send them messages relying on what I have said. This has literally been a weekend hobby. I will not be sticking around past Monday because I have family commitments and I hope my contribution to date has been helpful.
The Starting Point
Let us first think about who the stakeholders are after the astronomical collapse in the last week:
- An incredible community of builders facing uncertainty about their future
- Firm believers in LUNA who have seen their investments crash to a fraction of a fraction of a cent
- Stablecoin stakers who have lost 80 - 90% of their savings.
- Post de-peg investors who bought in cheap but still lost big as the protocol death spiraled.
The interests of each of these stakeholders must be considered for any compromise plan to be successful.
Now let us think about what proposals have been mooted.
1. The Terra Ecosystem Revival Plan based on the LUNA Go Forward Plan (Revival Plan)
This is what I considered to be a builder-favored plan which is sensible because it is the builders that will drive value to the proposed new Terra ecosystem (Terra 2.0). Without the buy-in of the builders, Terra 2.0 is hopeless before it even begins and everyone receives zero, whether they hold LUNA or UST.
This plan also broadly aligns with pre-peg LUNA stakeholders because these are the guys that bought into the Terra project and Terra ecosystem. It broadly accounts for post-peg LUNA buyers in a manner which is not entirely unfair by allocating them 10% of Terra 2.0, allowing anyone who wants to stay in to exit by trading away their LUNA or holding onto it for Terra 2.0 tokens.
However it is not palatable to UST investors even though it is evident that the plan wants to compensate them by giving them a large 40% share of Terra 2.0. This is because UST investors do not want a speculative investment and bought into the Terra ecosystem on the promise of a stablecoin. It does not matter how much speculative value you give to them - many of them cannot even pay their rent the next month.
2. The Tiered Repayment favoring small wallets plan
Which leads us to FatMan’s tiered repayment favoring small wallets plan (the FatMan Plan). This plan is incredibly sensible and replicates what would happen if this were a bank run in a conventional bank. The bank would guarantee each depositor up to a certain amount and if FatMan’s math is right, a large supermajority of UST holders can be made whole.
The downside of this plan is that it is entirely reliant on a LFG bailout which may or may not be forthcoming. It also does not consider the interests of stakeholders other than the UST holders. This is fine - I do not think this was meant to be a comprehensive proposal.
3. The Economic Refactoring Proposal
This isn’t part of the combined plan I have put together but just wanted to list this here because someone will inevitably ask about it. I think it is a reasonable plan that can be folded into a broader plan if this plan doesn’t work (it requires new money) but requires buy-in from the builders.
The Blended Plan
What if we used the Revival Plan as a starting point but then also implemented the FatMan proposal? Here is what it could look like using the Revival Plan as a starting point.
1bn new tokens in Terra 2:0 with allocation as follows:
• 20% to the developers
• 40% to LUNA holders at the time of depegging
• 10% to LUNA holders at the end of the old chain
• 30% to the rescue financiers or angel investors.(the Angel Investors)
The 30% of the tokens will be allocated to the Angel Investors in exchange for an investment of between 1bn - 1.5bn. And what do we do with the 1bn - 1.5bn? We implement FatMan’s proposal to make the supermajority of the UST holders whole up to a maximum of UST 50,000 per wallet snapshotted at the time of the attack. The excess (if any) will be used to fund the developers.
Note that the allocations above are subject to change and further discussion.
THIS IS SIMPLY A STARTING POINT FOR A RECOVERY FRAMEWORK
Wait where the heck are we getting the Angels?
Terra 2.0 remains an incredibly investable product. The ecosystem has inherent value as long as there is a team of builders and investors who believe in the ecosystem.
There are two potential source of funds here:
1. TFL / LFG
This is the source of funds FatMan was considering in his proposal. If TFL / LFG is willing to commit these funds, we can easily close this case. TFL / LFG redeem themselves in the eyes of the community and (at least partially) repair their reputation.
2. New Money
As mentioned above, Terra 2.0 is an investable proposition, especially if it can retain its talented builder teams and emerge with some sort of goodwill. What better way to restore the reputation of the chain than to have reputable and legitimate new investors come in to take a stake?
Yes but isn’t a valuation of 3.5 - 5bn dollars ridiculous?
This valuation is not unsupportable. Assuming that the market is pricing in the Revival Plan as the most likely outcome at this point, the market cap of UST equates to 40% of ownership in Terra 2.0. Considering UST is currently trading between 15c – 20c and has 11bn in supply outstanding, it can be concluded that the market currently values Terra 2.0 at around 4bn, not including a discount for uncertainty.
If this is too high a valuation, an alternative would be to raise half the amount which values the chain at 1.7 – 2.5bn allowing each UST holder within the FatMan Proposal the election to take 50c on the dollar or accept new LUNA tokens.
Modifying the percentage allocations would also affect valuations.
Why does this work?
Let us consider the interests of each stakeholder group if we are able to successfully implement this proposal.
Builders: A significant ownership proportion of the new chain is set aside for the builders, potentially more than what the Revival Plan on its own would have allocated to them. This is the cornerstone for the success of Terra 2.0.
UST Holders: If over 99% of the UST holders can be made whole, Terra 2.0 starts off as a successor to a chain that has substantially fulfilled its promise to people who entrusted their life savings to its predecessor protocol. This is an immense amount of goodwill - and goodwill forms the cornerstone of Terra 2.0.
Angel Investors: Angel Investors get to participate in the upside of Terra 2.0 and come in at what could turn out to be a deeply discounted price. They also get immense community goodwill from having participated in the first ever crypto bail-out.
Pre-attack LUNA holders: Pre-attack LUNA holders bought LUNA because they believe in the ecosystem. Giving them new tokens in Terra 2.0 is equitable because this mirrors their investment into the old chain. If Terra 2.0 is successful, the price of their Terra 2.0 tokens will soar once again. Having Angel Investors come in to provide goodwill and restore brand image will also go a long way in restoring trust which in turn translates to value in Terra 2.0.
Post-attack LUNA holders: There are broadly two categories of holders here, but both caught the knife. One are those LUNA holders that believed so firmly in the protocol they kept buying on the way down. The other are speculators that bought believing in a quick buck. Whatever their motivations, they need to be ascribed value. This proposal gives them value in Terra 2.0. If they are a long-term holder, they simply have to hold their post-attack LUNA to get an even bigger chunk of Terra 2.0. If they are a short term speculator, the announcement of this plan will create a market for people who want the Terra 2.0 tokens, allowing the speculators to exit.
Note: Implementing FatMan’s proposal in conjunction with the Revival Plan allows the allocation amount to the Angel Investors to be lower than to the UST holders because you have to pay more value to a UST holder to accept an instrument he fundamentally does not want. An Angel Investor comes in knowing he is getting a good deal if he can exit off a successful Terra 2.0 in 2 years. A UST holder just wants to pay his rent next month. What we are doing here is giving the stakeholders the sort of instruments they want. This allows us to be efficient with value.
Concluding Remarks
Combining the two proposals as per the above allows us to align the interests of the various stakeholder groups and allow us to allocate value efficiently. Builders and goodwill are the two key pillars of Terra 2.0 and you cannot have a successful re-launch without either.
While the Revival Plan is reasonable in its treatment of Builders and LUNA (pre and post-attack holders) because it allocates them an instrument that mirrors what they had in the old chain, this is not the case for UST. This makes paying UST investors off with Terra 2.0 tokens far more expensive than reimbursing UST investors with capital raised from people who actually want exposure to Terra 2.0.
Next Steps
I have drafted a broad letter outlining this proposal to be addressed to potential rescue financiers and handed it over to a group of builders trying their hardest to rebuild the Terra ecosystem. It broadly explains to the rescue financiers the plan above and what the benefits of providing such financing are. They (or whoever they choose to share it with) can edit this as applicable and share this with potential Angel Investors in due course in the hopes of getting them on board.
Note that this group of builders have not yet decided to support or reject this proposal - this is simply a unilateral act on my part to make it easier for them to pursue this option if they choose to do so.
I am going on vacation so will not be engaging with this matter for the next few days, and in fact this may be my last engagement on this matter.
I want to reiterate that I am a private individual engaging with this matter out of academic interest. I have no relationship to TFL, LFG, any builder group or any fund. All views expressed here are my own and do not represent that of any other persons or collective. Honestly, all I do is help build an anime penguin NFT project.
Edit to add a correction: It has been correctly raised to me that this leaves UST purchasers on the secondaries out to dry. This should not be the case and they should also receive value. I would propose that UST holders be treated the same way as the LUNA holders that purchased post-attack and the allocation percentage to that class of holders be increased.