USTC Revitalisation and Incremental Peg to $1 through the implementation of a Peg Divergence Tax on Transactions both on and off chain
Nearly 8months have passed since the collapse of Terra Luna (LUNC) and USTC last May, and while we’ve made great strides in updating the blockchain and keeping it secure we have been severely lacking in terms of developing on-chain utilities and repegging USTC.
Repegging USTC is no easy task, while on-chain transactions and swaps can be maintained algorithmically in a de-peg scenario, without off-chain implementation USTC relied on arbitragers maintaining the peg. If arbitragers failed to hold the peg USTC then relied on TFL(Luna Foundation Guard) having enough funds in reserve to defend the peg. When both these defence mechanisms failed the price of USTC crashed causing LUNC to mint into oblivion. This leaves us in the situation we are today with LUNC, a hugely inflated token that’s utility derived from the stability of USTC now gone and 0 capital in reserve to buyback or defend the peg.
There’s also a misconception that a stablecoins utility comes from its ability to be stable at $1USD. This is not the case, whether it’s one cent or one dollar, its utility comes from it being stable at a set value. So, I’m proposing we peg USTC to around its current market value by applying a peg divergence tax on both on and off-chain transactions and incrementally pull peg back to $1USD over time. Not only does this bring instant utility, it incentives dApps to use USTC over any other stablecoin as they stand to make more profit.
The Peg Divergence Tax
The peg divergence tax works by taxing slightly more than the spread (the difference between the selling price and the peg price). The taxes retained by the protocol are then used to buy back USTC to maintain the peg. In the beginning the tax is always on the seller side to incentivise buying and it always accumulates the more desirable asset. To work it needs to be applied to both on and off-chain transactions. At the beginning the depeg events may occur until the protocol has retained enough assets to buy back to the set peg.
Mathematically how the algorithm will operate:
For the worked examples I’ll be using a peg of 1USD and a profit multiplier of 1.1.
X = (Target Peg Price)
Y = (Market Price)
T – (Tax/Transaction Fee)
M – (Profit Multiplier)(optional)
Scenario 1: Where the price is below 1USD or (Y<X)
T = ((X-Y)*M)
Worked example : X = $1.00, Y = $0.99 , M = 1.1
T = (($1-$0.99)*1.1)
T = $0.011
Example: Seller creates a sell order at $0.99. Buyer pays $0.99 BUSD. Seller receives $0.979 BUSD. Protocol retains $0.011 BUSD.
Scenario 2: Where the price is above 1USD or (Y>X)
T = ((Y-X)*M)
Worked example : X = $1.00, Y = $1.01 , M = 1.1
T = (($1.01-$1.00)*1.1)
T = $0.011
Example: Seller creates sell order at $1.01. Buyer pays $1.01… Profits are dependant on protocol purchase price. LUNC holders are incentivised to swap into USTC (using liquidity pool of USTC bought back by protocol)
Scenario 3: Where the market price equals the peg
If (X)=(Y) let T=0
In this instance the tax does not come into effect and is dormant.
Phase 1: We re-peg USTC to around its current market value. This gives instant utility to the network by allowing dApps to immediately begin selling services/products on the Terra network in USD values.
Phase 2: We start the incremental pull back to 1USD peg by disabling the tax mechanism where the price is above peg, and just apply the tax to any deviation below. What this does is allows the price to deviate above peg but not below. As the price of USTC increases we repeg at incrementally higher values until we reach 1USD.
This incremental peg makes USTC more desirable than any other stablecoin to build on/invest in. The reason for this is when service/product providers convert their profits from stablecoin to FIAT its redeemable for the same value, USTC will be the only stable that will have the ability to 50x.
Phase 3: Use the USTC obtained by the protocol during buybacks to provide a liquidity pool which would allow unidirectional LUNC>>>USTC swaps without any minting. This serves to reduce LUNC supply without increasing USTC supply.
Phase 4: Once we’ve reached 1USD peg, we relax the algorithm’s parameters to allow for limited arbitrage to occur again and increase utility further. The algorithm is not switched off, it’s just lying dormant, and will reactivate in the event arbitragers fail and prevent any further de-peg scenario.
The profits generated by the algorithm should be used to further develop the Terra Classic ecosystem and speed up both the re-peg to 1USD and to burn down the supply of LUNC.
A percentage of the profits should be retained for the following purposes:
- To provide a liquidity pool so that we can re-enable swaps between USTC and LUNC but without minting. Swaps would be available while liquidity is sufficient.
- A liquidity pool to buy back USTC at times of low taker and high maker volume. This will allow capital to move more freely and incentivise network utilisation.
- CEXs should be compensated with a percentage of the profits generated. If they implement our code and help save USTC they deserve to be compensated.
- To compensate developers, app builders and incentivise further development and building of community owned utilities.
- To buy back and burn both LUNC and USTC and speed up recovery of our network.
Case Study : Binance BUSD/USTC Trading Last Quarter 2022
To prove it would beneficial for both LUNC/USTC holders and the CEXs to implement the protocol and give some indication to its feasibility I modelled it against the last 3 months trading between the BUSD/USTC trading pair on Binance. Binance has the highest trading volume of both USTC and LUNC and for the last quarter USTC has had an average price of approximately $0.025 BUSD. I’ve modelled the date based on a rate multiplier of 1.1 and three different peg levels of $0.02, $0.0225 and $0.025. Fees shown are those retained by Binance as they are currently implemented at a rate of 0.002%.
The above values show profits retained by the protocol with divergence tax applied to trading data as though it had no effect on the trading volume or prices and did not buyback of USTC. We should assume that the tax will have a massive reduction on trading volume below peg and to reduce these figures accordingly. During the month of October the price of USTC never fell below 0.025 so the protocol would not have come into effect and would have retained no profits. If we were to assume a 90% reduction in trading volume below the set peg levels we would still have retained over $52,000 at a peg of $0.02, over $1,593,000 at $0.0225 and $5,448,00 at $0.025 over 3 months of trading. If we then gave even 10% of these fees back to Binance they would have increased profits of approximately 16%, 38% and 67% for the respective peg levels over the same time period.
Given that we are going to whitelist Binance wallets I believe we should capitalise on the close relationship and be the first blockchain to have their capital controls implemented algorithmically both on and off chain. But this is not a utility and should not be viewed as such its more of a failsafe.
This approach should appeal to both USTC and LUNC holders alike and allow us to slowly but safely collateralise USTC with BUSD. It also doesn’t require any minting, funds from the Oracle/Community Pools or an external liquidity provider so there shouldn’t be any major initial negative price action.
It doesn’t interfere with any of the other proposal that have been put forward so far by the community and if anything it should augment them.
This proposal requires more work and discussion around buyback rates and tax multiplier rates.
- Most likely will have a dramatic reduction on trading levels below peg.
- If the markets react badly and without and current onchain utilities to drive demand it could result in stale/no trading.
- If there isn’t sufficient demand at/above peg and you need to sell you will be taxed quite aggressively offramping.
Has to be implemented by everywhere USTC is traded including off chain