USTC Repeg with Additional LUNC Hard Peg Burn

Summary:

This is a proposal to restructure the USTC/LUNC mechanism, which shouldn’t be too difficult from a technical standpoint. LUNC needs something to differentiate it in the crypto space. This thing is its relationship with USTC. Positive headlines of USTC repegging would be great news for everyone in the entire crypto community and would likely drive new investment to us.

I propose a hard peg of USTC to LUNC that could be swiftly implemented. This restores the thing that set us apart quickly, and likely will gain attention to our cause if USTC price increases.

USTC investors will have much higher confidence if they know there is a clear plan in place to support USTC in the event of a future depeg event. For this reason a dynamic price oracle must be instituted to allow for controlled and expected depegging events that will not panic investors.

I propose the following six step plan:

  1. Currently the market cap of LUNC is $400M and the market cap of USTC is $85M. This results in a ratio of 140 LUNC/UST currently. Initially allow LUNC to be burned and new USTC minted at this ratio (Hard Peg). This will restore the relationship between the two tokens, and both will rise in value together.
  2. Enable tiers on Anchor Equivalent Platform and bind the Anchor earn economy with LUNC demand
  3. Enable a cap on the rate of newly minted USTC, to increase the general utilization rate and strengthen the organic arbitrage economy with an additional decrease in money velocity. Strengthen LUNC’s economy around stability, staking, and burn, to create a deflationary mechanism.
  4. Strengthen LUNC and make it deflationary
  5. Enable a dynamic price oracle to monitor the ratios of k(LUNC):k(USTC) and when collaterization falls below 1, affect USTC price to controllably start compressing. This will avoid putting inverted pressure on LUNC.
  6. Disaster buyback/burn fund. Reduce circulating supply by enabling a buyback/burn mechanism. Already underway with these proposals:

[Proposal] Distribute 50% Transaction Fees to the Community Pool + Increase Proposer/Validator Rewards.

Motivation:

The problem needs to be addressed in three layers. LUNC, USTC, and Anchor Equivalent Platform in order to make a more sustainable system without sacrificing the appeal.

The money velocity should be significantly reduced in conjunction with minting, while the focus should be on utilization, redundancy mechanisms, and deflationary tools to stimulate demand for LUNC beyond the USTC minting.

The USTC:LUNC relationship also resembles one of a liquidity pool, and USTC price can compress similar to what impermanent loss is to LP, as long as it is not redeemed at the low rate. After confidence in LUNC is improved, then it may be possible to decompress the price of USTC back to the $1 peg (or a lower value initially).

Proposal:

Step 1 - Hard Peg USTC to LUNC

Currently the market cap of LUNC is $400M and the market cap of USTC is $85M. This results in a ratio of 140 LUNC/UST currently. Initially allow LUNC to be burned and new USTC minted at this ratio. This will restore the relationship between the two tokens, and both will rise in value together. This can be implemented very quickly. It should raise the value of USTC quickly and gain attention from the market/new investment.

Once USTC price rises to desired level, and LUNC circulating capacity is reduced to desired level, the dynamic price oracle and USTC coin circulation cap can be started with a goal of keeping the USTC peg at $1 (or something less initially), and the LUNC-to-USTC hard peg can be removed.

Example Calculation:

6.55 trillion LUNC/140 = 46.8 billion USTC

Add the 10.25 billion USTC existing to get 57 billion USTC equivalent currently in circulation.

We would need a market cap of $57B to restore the USTC peg to $1. Roughly equal to USDC marketcap today.

The burn will reduce this over time, and also in the future, the community could vote through governance to reduce the hard peg ratio between LUNC/UST to speed the repeg of USTC to $1.

Step 2 - Setup Tiers on the Anchor Equivalent Platform

Enable tiers on Anchor Equivalent Platform and bind the Anchor earn economy with LUNC demand

  • 6% for random people → Direct USTC deposit
  • 10% for bLUNC owners $1k min → Deposit to lockup USTC + bLUNC
  • 12% for bLUNC owners $10k min → Deposit to lockup USTC + bLUNC
  • 17% for bLUNC worth $100k + lockup of 90 days → Deposit to lockup USTC + bLUNC (thus creating demand for both assets)

In the future, during the compression events, Anchor rewards may continue to accrue but withdrawals to be disabled temporarily.

Step 3 - Cap the Amount of USTC Coins in Circulation

Enable a cap on the rate of newly minted USTC, to increase the general utilization rate and strengthen the organic arbitrage economy with an additional decrease in money velocity. USTC as a high interest-bearing asset needs to have limits and a sense of exclusivity. The initial proposal is to limit to no more than 10% to 20% USTC supply increase per year and to have an additional limit to no more than 35% of the market cap size of LUNC. This would add a near 3:1 overcollaterization factor that will significantly reduce the probability of USTC losing peg even in harsh market conditions.

In fact, if we break-down existing stablecoins according to Market cap/Utilization rate in May 2022:

USDT Market cap 76B, Volume 50B → 78% utilization rate

BUSD Market Cap 16B, Volume 12B → 75% utilziation

USDC Market Cap 51B, Volume 7.8B → 15.3% Utilization

DAI Market Cap 6B, Volume 0.63B → 10.5% Utilization

UST Market Cap (prior to crash) 17B, Volume 0.6B → 3.5% Utilization

As it can be seen UST had a significantly underperforming utilization rate and minting new coins was not really necessary. Instead, a limit on supply should have been put in place in order to add a natural reserve to absorb market contraction.

Even with an applied cap on USTC minting, Anchor’s model would still likely be capable to generate significant demand if tiered approach as described in step 1) was applied, because bLUNC would be introduced as a prerequisite for the eligibility to benefit from the high APR product. Thus increase of utilization on USTC without increase on USTC market cap, would automatically imply an increase in demand for more people to enter into Anchor and lockup more bLUNC. A feature that may offset the reduced demand factor from the more conservative setting on new USTC minting.

USTC coin CAP could be changed only with a governance vote with a very high quorum. The cap will enable a deflationary nature of USTC and facilitate stronger demand for it on a psychological level.

Not instituted initially, wait until hard peg is removed. The CAP of USTC would be set when the dynamic oracle is started.

Step 4 - Strengthen LUNC and Make it Deflationary

Strengthen LUNC’s economy around stability and staking and focus on a deflationary mechanism. Deflationary tools such as burns are already being introduced to cut LUNC supply.

LUNC needs something to differentiate it from everything else in the crypto space. USTC, a decentralized algo stablecoin is that differentiator.

Step 5 - Create a Dynamic Price Oracle That Allows USTC Price to Compress

Enable a dynamic price oracle to monitor the ratios of k(LUNC):k(USTC) and when collaterization falls below 1, affect USTC price to controllably start compressing. This will avoid putting inverted pressure on LUNC.

The $1 peg is a hardcoded setting based on assumption that there’s sufficient collateral at all times. Changing the peg temporarily to a lower impermanent price would not alter the way the current system works.

Yes, it will add stress to the investors, but on the other hand, when investors know that this is expected (yet less probable scenario), they may be incentivized to buy more USTC at the lower price, because of the fact that the system would most likely return to the default peg setting of $1 and that this is a rare event. It would be creating an opportunity out of the problem.

And for LUNC this means a net positive inflow of capital. It makes no difference whether USTC is minted at a rate of $0.8 or $0.7 or $1 because it burns LUNC supply. And supply change vector is key for investors. Investors’ confidence is the core goal here and is what adds a disproportionate amount of elastic resources that can support the project.

LUNC would be capable to burn supply even when it’s in crisis mode and thus leverage on the potential trust of investors that are witnessing this.

Having this mechanism in place coupled with the other points would create immediate protection. Again the emphasis is on this happening extremely rarely, but it is still critical to have the logic bound into the protocol as that would give investors some peace of mind. We expect the unpeg to deviate with less significance because of this.

In fact, I think the May 11 drop, in this case, would not have exceeded $0.7

On May 11

k(LUNA) = $9.5B

k(USTC)= $14B

The fair price of UST would be $0.67 probably for a brief moment of time. Markets would try to push prices higher, which means there would be a strong burn effect on Luna. And UST would recover because of the recovery of the underlying asset.

This would also enable professional market makers to define the accurate mid-price to continue providing liquidity with little uncertainty.

Yes, it would be stressful but likely short-term and it can be communicated to affected people. Also if the Anchor measures were in place with lockup, there would be no chance for a panic extraction of so much capital at once which further exacerbated the problem.

The price of USTC would start recovering and would likely strengthen its position in an effort to benefit from the inversion, which would be rare, but still a pre-planned event. It is quite possible for such crashes to actually turn into flash crashes as professional market makers would be most likely the ones to seize the opportunity.

Step 6 - Disaster Buyback/Burn Fund

Announce target plan to reduce circulating supply by enabling a buyback/burn mechanism. Already underway with these proposals:

[Proposal] Distribute 50% Transaction Fees to the Community Pool + Increase Proposer/Validator Rewards.

Marketing:

Our system will have several unique selling points:

  1. Fully decentralized ownership free from government control/shutdown
  2. Sympathy from investors who know the stories of all those that lost so much from the UST collapse. I’m sure in the future some donations could be made to those affected by the collapse if this does well.
  3. The opportunity to buy algo stablecoin below peg for added value and arbitrage possibilities.
  4. In the future I envision the LUNC/USTC community comparable to the mai.finance or frax.finance platforms if we could incorporate the ability for users to stake their own collateral. Possibly promote 0% interest loans like mai.finance does to mint USTC. Our community would have a much better origin story and possibly better name recognition than those competitors at the moment.
8 Likes

There are some great ideas in this proposal, some things I don’t understand, and some ideas I very strongly disagree with.

  1. LUNC/USTC hard peg - agree that the algostable is what set Terra1 apart and should be rebuilt, and agree that the current exchange rate is a very viable baseline by which to retire most of the bad debt. However, there are contradictory goals here. USTC needs to be burned into LUNC at a market rate in order to retire bad debt. That should push up LUNC supply. The good news is that LUNC supply shouldn’t go up much because at current prices the mcap of LUNC is so much higher than USTC

  2. Anchor tiers - no way. Ponzu financing is over. The savings rate is algorithmically set to whatever level is breakeven. If the protocol wants to use tax revenue to algorithmically subsidize this rate, the protocol can do so. But Anchor’s ponzu deposits were what killed Terra 1.

  3. Sort of agree, the Terra economy needs to be re-oriented towards real world debt/borrowing (“RWA”) along the lines of what Maker has done

  4. no opinion

  5. Reserve needs to be exogenously collateralized to 50-80% BTC.

2 Likes
  1. LUNC/USTC hard peg - agree that the algostable is what set Terra1 apart and should be rebuilt, and agree that the current exchange rate is a very viable baseline by which to retire most of the bad debt. However, there are contradictory goals here. USTC needs to be burned into LUNC at a market rate in order to retire bad debt. That should push up LUNC supply. The good news is that LUNC supply shouldn’t go up much because at current prices the mcap of LUNC is so much higher than USTC

I was proposing only allowing LUNC to be burned for USTC. Just to lower the number of LUNC coins because in the future we need the ability to mint LUNC when the dynamic price oracle is in effect. I suppose we could open it both ways and let the market decide where the coin supply lands.

Reserve needs to be exogenously collateralized to 50-80% BTC.

Yes, collateralizing with assets that have other use cases is best, and should be a goal, but implementing that and incentivizing people to fund/deposit will take time. It should ideally be a diverse group of assets not BTC exclusively in my opinion.

In the meantime, hard-peg initially then eventually dynamically allowing USTC to compress occasionally is the quickest path forward to showing the world there are signs of life with USTC. Drawing in new investment while a system of exogenous collateral can be implemented.

1 Like

This is also good way.

If it’s a stablecoin, the collateralization will be diluted at LUNC holders’ expense during a bull market. Think about it:

If LUNC has a market cap of $2B with a 70% exogenous collateralization ratio ($1.4B). LUNC goes up 50% during a crypto bull market, so now has a market cap of $3B. That requires $2.1B of collateral. But if our CR is stablecoins only, we still just have $1.4B of collateral. So we need to print and sell $700M of LUNC in order to top up the CR. This will be very dilutive for LUNC holders over time.

In liquidity crises, altcoins mostly go to zero and drastically underperform BTC. That has been true of every crypto cycle. BTC is the least correlated, most liquid, and most decentralized crypto-asset. It is obviously the best cryptoasset collateral for the reserve.

Physical assets like gold require centralized administration and custody at some level. Whoever administers that relationship will have enormous power over the entire protocol. So while they are intuitively appealing, they will create points of failure similar to the Terra 1 reserve.

My proposal includes a cap on USTC minting so we could control the collateralization ratio by not minting more USTC than what we have BTC to back it up with.

The complete algo USTC would only be temporary until we build collateral.

@Domenico_Pietrovito the value prop of UST(C) has been to be an “undercollateralized” stablecoin. As opposed to USDC (100% collateralized with cash & Treasuries) or DAI (160% collateralized with crypto-assets), USTC needs to be collateralized with X% LUNC and 100%-X% of outside collateral.

Kwon had gotten Terra1’s exogenous collateralization to 20%, it was ~15% BTC and 5% stablecoins / AVAX / SOL / ATOM / etc. That was clearly way too low. I think a level around 70% makes more sense. That would mean 70% BTC (or BTC/others) + minimum 30% LUNC (in reality it would be closer to 50%). LUNC’s market cap would get very unstable when its market cap drops to <1.5x that of USTC.

The advantage of “undercollateralization” is that your growth is less constrained by the assets coming in. The disadvantage is that it’s more fragile, particularly if the reflexive . The market for 100%+ collateralized stablecoins is already saturated, all we’d bring to the table is inferior scale and highly uncertain governance.

USTC’s future lies in honing the undercollateralized algostable model, not in abandoning it. That’s what always made us unique and what will, within intelligent boundaries of risk, keep us unique.

4 Likes

I think we should use BTC to overcollateralize… because BTC has the most significant market cap and also it will always be decentralized in the geo-politics scheme…

We should just pick a new peg 1c or 10c… The current market cap can support either of those options. We should also limit the arb per day to 10% of the cex volume on luna.

YEs but only some… like 10/15%to -25% otherwise will finish similar in every Bear market …

I agree. Here is something I worked on that takes a few things from over-collateralized stable coins on Cardano and Ergo chains to move forward with an under-collateralized USTC.

3 Likes

Helllll Nooooooo

1 Like

first step we need is to burn ust. there’s more than 4b ust (lfg, ust printed for rewards) that we can burn

$ LUNC we must fix what was told is broken. LUNA SUCCESS WILL HAPPEN, start with $ LUNC!

Interesting post ! everyone should read this

1 Like