Summary
Creating a reliable stable coin that is only tradable on-chain (no 3rd party markets), that is pegged to a range between $0.95-$1, that allows the burning of large quantity of LUNC and UST, that will help attract utility and is backed by the liquidity of LUNC/UST and has no risk of depegging under any circumstance.
Motivation
The stabilisation of UST’s price as a foundational requirement to attract and keep utility is one of the key motivators to reviving the chain. Due to the lack of available funds that could guarantee a stable price of UST to these shareholders, a revitalisation seems impossible. The following idea is supposed to highlight why it is not the chain’s responsibility to maintain peg through having available funding and how peg can be held through a fixed on-chain exclusive exchange rate that excludes outside markets from offering trading, has no risk of depegging, allows utility to come back on-chain, allows burning large quantity of LUNC and UST and will increase the chain’s income for further development.
Proposal
I truly believe that the creation of an algorithmic stable coin is possible despite the failure (depeg) of UST and the hyperinflation of LUNC. The problem with the old mechanism was that the chain guaranteed every UST holder the possibility of minting $1 worth of LUNC for every UST burnt at any market price of LUNC. Furthermore the chain also is the one taking the responsibility for providing the liquidity to back UST. This responsibility was the only factor that allowed UST to be pegged to $1 on every outside market (exchange) but at the same time was the main factor allowing a depeg.
The chain has no control over other markets (exchanges) and it is heavily reliant on these markets to implement the measures voted for by the community, whether those are burn taxes or other proposals such as RedLineDrifter’s recent proposal (which I liked a lot). If outside markets are not willing to implement the community’s proposals there really isn’t much that can be done to make them implement them and move towards a repeg.
This is why I would like to bring up the idea of implementing a second version stable coin (UST-Cash) that is on-chain exclusive (not tradable in outside markets), only has an on-chain marketplace/orderbook, is not requiring burning/minting mechanisms to hold peg and requires an exchange rate of $1 worth of LUNC or UST for every UST-Cash.
The most important aspect here is the absence of off-chain tradability. CEXs and DEXs are “free” markets which means prices can move freely. The reason why UST’s price used to stay at $1 was because the market swap feature (burn/mint) mechanism guaranteed the availability of funding (through minting LUNC) to back up UST’s value at any point in time.
UST unfortunately is depegged already and distributed through different exchanges and can be bought by customers through these exchanges. This is why I don’t see the use of UST as it exists as feasible and I believe that the creation of a second stable coin would be necessary to implement these factors. If UST-Cash could be implemented in such a way where it is only available on-chain and can only be exchanged for LUNC or UST the price can be held in place. How? I imagine the LUNC/USTCASH and UST/USTCASH market to act similar to a normal exchange with the only difference that UST Cash can only be listed at prices between $0.95-$1. Anything below $0.95 is not allowed by the market module/trading interface.
UST Cash owners would always have to list their UST Cash first before it can be acquired by LUNC or UST holders and UST Cash holders have to choose if they want to receive LUNC or UST before placing the order. Whenever LUNC or UST owners want to “buy” UST Cash, $1 worth of LUNC or UST are required. UST Cash owners that would like to swap their UST Cash are placed in a queue (first come first serve) and will receive the equivalent of $1 worth of LUNC or UST based on the market price of LUNC or UST at the moment of the exchange. The only way to “skip ahead” is to manually lower the price (this is why I mentioned the price range between $0.95-$1). A UST Cash owner may do this to receive his LUNC or UST quicker. This is where I would like to give credit to RedLineDrifter’s proposal and take his idea of charging an additional fee when UST Cash is sold under “peg”.
I will give an example: Someone wants to exchange UST Cash for LUNC and decides to “skip the queue” and sell them at $0.99. The person that wants to exchange his LUNC for UST Cash now sees the offer and exchanges $0.99 worth of LUNC (based on the market price of LUNC at this exact moment) for this UST Cash. The seller now only receives $0.98 (following RedLineDrifter’s proposal). The $0.01 profit is kept by the chain and used to fund the maintenance/development of the chain as well as buy back and burn UST/LUNC. I would like to add here that even if someone exchanges his UST Cash at peg he should still be charged a small commission (maybe 0.2%-0.5%) which goes towards rebuilding the chain.
What is the benefit of implementing a chain exclusive stable coin that can only be traded in the Terra ecosystem?
The price is guaranteed to be pegged in a price range between $0.95-$1 and charges high fees when it “depegs”, which will help lowering UST and LUNC supplies long term, as well as develop the chain. UST Cash can only be acquired on chain (through LUNC or UST swaps) which will produce commissions from transaction fees from moving LUNC or UST from an exchange to the chain, UST Cash holders are always guaranteed to receive $1 worth of LUNC or UST for every UST Cash, LUNC and UST holders act as liquidity providers to UST Cash holders independent of the market price of LUNC. As LUNC can be purchased at market price right before UST Cash is acquired, this is also reducing the risk for LUNC owners. Additionally no new LUNC or UST is minted and the initial creation of UST Cash tokens allows the chain to burn large quantity of UST and LUNC as these are required to attain UST Cash.
The supply of UST Cash can be minted gradually if the demand increases and sold at full price of $1 (worth of LUNC/UST) which will flow to the chain/be burned. UST Cash owners will then be able to exchange their UST Cash right away through the market module to LUNC or UST holders. UST Cash can be minted whenever the community sees a benefit in doing so. An example for this is a low available supply of UST Cash. I would also like to add the importance of the LUNC and UST prices as important factors for deciding if more UST Cash could be minted. I will give an example: UST right now costs around $0.015 => This means that if the protocol minted 10 Million UST Cash right now and offered them to UST holders for exchange, a potential 10000000/$0.015 = 666 Million UST could be removed and burned. These figures of course depend on the market price at the time and that is the point. The minting of UST Cash could be performed only in times of low market prices to burn as much UST or LUNC as possible.
The great thing with this procedure would be that UST is just transformed into a new stable coin that is simply priced at a market price of $1 because the protocol demands so. There is no real need to build a financial reserve either as LUNC and UST holders are the financial reserve. UST holders that don’t want to exchange their UST to UST Cash aren’t forced to do so either. The UST price may increase longterm as the supply is burned anyways.
How can outside markets be banned from trading UST Cash?
The main way is to block UST Cash wallets that are being used by exchanges. While this possibly won’t stop exchanges from offering UST Cash it would be stupid for an exchange to do so as their wallets will simply be blocked otherwise. There are most likely other options as well but this is the most realistic one. Anyone can theoretically create a wallet so it is not really possible to guarantee that an exchange won’t allow the trading of UST Cash.
What if an exchange offers UST Cash pairs?
The price may fall below the minimum of $0.95 if UST Cash pairs are offered for trading on a third party exchange. Remember that it can only fall below this price on the exchange and not on the on-chain market module. This may in the short term shift demand from the on-chain market module to the off-chain exchange where prices for UST Cash may be lower. This really is no big deal as long as the third party exchange’s wallet gets banned in time. The chain’s only responsibility is to guarantee that the price of UST Cash is stabilised and liquidity provided. The banning of outside markets for UST Cash trades is absolutely necessary for this to work.
What is the benefit of “minting” UST Cash?
I look at UST Cash as a tool to increase on-chain activity and with it it’s income. The minting of UST Cash allows a slow step-by-step removal of a large quantity of LUNC and especially (!) the UST supply in a controlled way. No outside participants control how much UST Cash can be minted at a given time. The community decides how much UST Cash is required and whether it’s economically useful to mint as much (if the price of LUNC and/or UST is low enough). The minting of UST Cash is an easy way to remove UST and LUNC without having to “pay” for it. There is no need for the chain to come up with the funds to do so. All the chain needs to do is to guarantee that the price quote stays between $0.95-$1 on-chain and if an outside entity offers the trading of UST Cash that they are being banned from it. The minting of UST Cash is therefore really only a transfer of debt from the chain to the market participants!
Furthermore there is no real need to remove UST Cash from circulation by burning it. It’s similar to a real currency in the sense that a deflation basically never happens in the real world. The more the chain is used for its’ applications the more UST Cash will be required anyways and the more UST and LUNC will be burned while minting no new LUNC or UST. The prices of LUNC and UST will subsequently rise in the longterm as the supply will decrease through burning both.
Why would someone use UST Cash?
The keyword is utility. The reason why no one uses the chain is because UST’s price can’t be relied on as there is no one enforcing a $1 (worth of LUNC) to $1 (worth of a stable coin) exchange rate as well as setting clear restrictions to the prices UST can be sold at and restricting third party markets from allowing the trading of the stable coin. Once there is a system in place that enforces these factors under all circumstances, utility should be coming back as the trust is back.
Take a simple example => Let’s say someone decides to start a gambling application. Obviously this project needs funds to pay out users and users may also themselves decide to deposit funds in order to gamble. The project only accepts UST Cash which means the newly minted UST Cash that is offered on-chain is bought up by community members as well as the developer of the casino. Assuming $10 Million flowing into the casino, this example alone could burn close to 7% of the entire UST supply (assuming the token’s are only offered to UST holders and by using the current market price as a basis for the calculation).
The stability of the exchange rate offered on-chain and the banning of external markets will give the gamblers as well as the owner of the casino the guarantee that they will always be able to exchange their winnings/profits back to $1 worth of LUNC or UST and may do so quicker if they decide to exchange their UST Cash at a lower price. Now imagine bringing dozens of projects (back) to the chain. What makes these projects come back is the knowledge that their UST Cash is stable in price and that the community will protect the exchange rate with the right actions. Ask yourself: If you were to start a business on the chain right now, would the price fluctuations of UST we currently have be problematic? They absolutely would be! If the factor of changing market prices of the stable coin can be fixed and a Stablecoin can exist that is forced to be traded in a $0.95-$1 range things can change to the positive and the chain can finally start marketing itself to the right developers.