0. Disclaimers
I manage the LUNC808.eth Validator I mostly work solo and self-study crypto ecosystems; therefore, I do not have any formal affiliation with Terraform Labs, or other major organizations like TerraCVita.
Table of content:
- What does LP token mean?
- What do I mean with transferring LUNC-USTC LP token to the burn wallet?
- What are the pros and cons for the terra classic blockchain?
- How would we do this?
- Perform a test run with the stables from the oracle pool.
- Put up a governance proposal to use x % of the USTC reserves to swap 50% to LUNC and burn LP.
Thanks @wrapped_dday, I took the disclaimer from your agora post.
1. What does LP token mean?
Alright, let’s dive into it, LP token stands for liquidity provider token. Whenever you provide liquidity to a decentralized exchange (DEX), in our instance LUNC-USTC it has to be balanced 50/50 and in return you get a liquidity provider token. By providing a double sided liquidity to the pool you not only bring stability to the market swaps but you also enable more depth to the order book allowing bigger trades to happen without having a high slippage, this will create a healthier and higher on-chain volume and all the validated blocks will be filled with transactions which will eventually increase the burning rate, in return you get rewarded for the trades happening within that liquidity pool.
Friendly reminder: read about impertinent loss before providing any liquidity to any DEX.
2. What do I mean with transferring LUNC-USTC LP token to the burn wallet?
After providing LUNC-USTC to the liquidity pool you get a LP token, which we understood by now hopefully. We actually take it a step further and send that LP token to the burn wallet, all the fee rewards from the transactions within that liquidity pool will always continue to accumulate into the burn wallet. Imagine staking your LUNC and USTC and sending your staked coins to the burn wallet where now the burn wallet will continue to receive the staking rewards, FOREVER, unless someone cracks the burn wallet…
3. What are the pros and cons for the terra classic blockchain?
Let’s start with the pros since in my opinion they far outweigh the cons of making this happen.
- Faster burn
- On-chain liquidity
- Attract more traders
- Less chance of getting sandwich attacked**
Before we get to the cons, I believe the pros are fairly simple to understand but let’s discuss sandwich attacks (front-running) a little more in-depth taking the example of Ethereum.
If your liquidity pool does not have enough money (liquidity) in it, a few thousand dollars worth of buying or selling (also referred as swapping) could create big price swings enabling a gap (arbitrage) for bots (smart-contracts) to front-run you by doing a query to see how much gas fees you are paying when the block is being queued to be validated and the smart contract will sandwich that with sending first a buy order with higher fees than immediately after a sell order with lower fees than your transaction.
Here below you will see an example of a sandwich attack that I literally found happening on the Ethereum network while writing this agora post.
The bot (smart-contract) saw the transaction coming in and made the instant calculation to send the right sized buy order worth $576.57 (0.4083 ETH) at $3.15 buying 182.818 tokens than the regular DeFi enthusiast pays $918,16 (0.65 ETH) at $3.34 for 274.98 tokens, than the bot immediately sells the 182.818 tokens back at $3.36 for $613.54.
The bot initially invested $576.57 and ended up with $613.54, which translates to:
$613.54 - $576.57 = $36.97
OR in (%)
$36.97 / 576.57 = 0.0641205751 x 100 = 6.41205751 %
And the main reason why this sandwich attack was possible with just a small $900 trade is because the liquidity of this pool was low so the slippage was high, a total of $52,860, when we apply the magical LP token formula that means that we have to split the pool 50/50 meaning that $26,430 in ETH and $26,430 in Token.
Terraswap which is one of the decentralized exchanges (DEXs) currently still operational on terra classic has for example on their LUNC-USTC roughly the same numbers as the pool described above.
To pretty much explain the same what’s being said I think a little simpler you can refer to the image below.
Alright we spoke about what I believe to be one of the main benefits I could come up with now and today, hopefully with the input and feedback of the #LUNC community we can come up with even a better idea.
The only con that I could come up with is that if somehow the LP token could get accessed in the burn wallet (not sure if possible) but yeah that was pretty much the only downside I could see to it. I mean sure, there is always the argument of what if we used the “funds” somewhere else to generate a higher revenue on income (ROI). I do personally believe this is something if we start building now that it will benefit us far more down our path than simply burning luna classic right now.
4. How would we do this?
We are not inventing the wheel here, it has already been done before on multiple chains where the founders of a project send their LP tokens to the burn wallet providing a safer trading environment, lower spread and deeper order books for their users and less chances of getting Rpulled.
Below is an example on how they sent their LP token to the burn wallet of Binance Smart Chain (BSC) 0x000000000000000000000000000000000000dead
On Terraswap for example you have 3 options:
- Swap between different coins/tokens
- Provide liquidity
- Withdraw liquidity
My suggestion is to add an “expert mode” within the withdraw window that enables a SendTo terra1sk06e3dyexuq4shw77y3dsv480xv42mq73anxu function and than you can pretty much use a slider to decide how much % of your LP token you want to send to the burn wallet.
5. Swap all stables from the oracle pool to USTC (Test run)
Before we actually use this to burn larger amounts of money (runway), I suggest we first do a test run with the stables collecting dust in the community pool.
After calculating if we converted all the stables (rates correct at time of posting):
(KRTC, SETC, EUTC, MNTC, MYTC, AUTC, SDTC, CHTC, IDTC, JPTC, GBTC, THTC, CNTC, CATC, PHTC, HKTC, TWTC, NOTC, DKTC, SGTC, INTC)
KRTC 4,890,951.00 / 1,237.00 = 3953.88 USTC
SETC 2,890.26 / 10.39 = 278.17 USTC
EUTC 71.74 / 1.08 = 66.43 USTC
MNTC 216,219.87 / 3,382.00 = 63.93 USTC
MYTC 270.22 / 4.32 = 62.55 USTC
AUTC 66.54 / 1.43 = 46.53 USTC
…
You got the idea add all these stables up convert it to USTC swap 50% of it to LUNC and provide it to a liquidity pool and send it to the burn wallet.
6. Put up a governance proposal to use x % of the USTC reserves to swap 50% to LUNC and burn LP.
If after doing tests the community likes the idea and completely understands what this proposal could potentially mean, we would have to decide together what an acceptable amount of USTC is available to use for this purpose, because with the stables I don’t think we are going to cut it, ideally our liquidity pool should at least be $500,000 in my opinion.
I am mostly active on twitter so if you got any questions, you can always contact me as well, but I will try to be as active as possible here as well. I’m still learning how to use agora, this is my first post and thank you for reading all the way through the end, happy discussions.
