USTC Revitalisation and Incremental Peg to $1 through the implementation of a Peg Divergence Tax on Transactions both on and off chain

Governance & Proposals
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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.

Implementation

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

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%.

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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.

Conclusion

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.

Negatives:

  • 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

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Brilliant idea, well understood, thanks Redliner.
I hear Duncan is also incorporating this idea into his multi-part proposal.

A question:

Has to be implemented by everywhere USTC is traded including off chain

Is it strictly all or nothing? Example: Some exchange incorporates USTC into their listing and does not use the system outlined - do we have safeguards in place for such an instance?

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Nice work, Sir. Thanks.

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Reading through this prop the first time I can’t find anything wrong, and best of all there is no minting.

This approach should appeal to both USTC and LUNC holders alike and allow us to slowly but safely collateralise USTC with BUSD.

Can USTC also be collateralise with other stable coins as well, such as USDC?

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Usdc can lose peg at any time, Binance already removed usdc - for example, also usdc profitability is zero. This is stupid. It’s better buyback-burn very cheap ustc.

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when will this proposal be presented for voting.? This was what I was thinking too. this is the best way to repeg it. gradually raising the peg is the best idea.

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I like the idea. I’m not keen on using off chain tax, anything like this will need to be run by Binance. Otherwise potentially it will get crushed.

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I was a strong advocate for collateralization with BUSD rather than BTC when Alex had proposed his plan because it would help us establish a strong link with Binance and that a stablecoin like BUSD would be less volatile than BTC is.
Better yet, we could even lock some of that collateral and stake it with Binance when their BUSD Staking program is offering returns of 10 percent as they do from time to time(given that the locked collateral can be retrieved at any time, we would still have access to it if needed during emergencies, even though we would lose the interest earned).
As such, the value of USTC would continue to grow over time, as some of the collateral would be earning interest.
I am in full support for this plan. I hope negotiations with CEXes go well!!

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Excellent, what I have always thought, the only viable way to re-peg UST is at its market price. That’s the way, thanks!

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A promising proposal. My biggest concern is the off-chain implementation. What do you think would make an exchange hesitate from adopting this plan? How would you persuade them otherwise?

Well done getting the conversation started!

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So yes that’s one of the major caveats to this working. If we don’t have our capital controls everywhere liquidity will just flow to wherever is cheapest to trade and we won’t have control over it.

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It will actually work on all trading pairs with USTC. So whether its USTD or BUSD it would accumulate it when trades are below peg.

@Arman - This needs a bit more work to go to governance. This is the discussion stage. If there’s enough support for this on agora, I have a means of contacting Binance to see if this is something they’d consider.

@Rummy - For sure wouldn’t go ahead without having Binance on board. The reason we need the offchain tax is we have 0 collateral to defend the peg otherwise.

@JCP.ESQ - I’ve approached this with the view that it needs to be profitable for Binance to implement this. They’re already burning their own money with the LUNC trading fees.

I think looking at the amount of profit generated by the tax Vs what Binance ordinarily would bring in there’s plenty of room to negotiate. This would be a mutually beneficial business proposition. The only losers are the people who want to sell below peg. If trading stays above peg, Binance takes their regular fees, the protocol takes nothing

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I’ll just preface what about to say by congratulating Redline on his thorough and well-put proposal. :pray:

In a perfect world it would function as intended… but alas, we don’t live in a perfect world, and the system outlined above is too frail and vulnerable to the same attacks that already slew USTC (Kwon’s LFG had a massive warchest, and yet they failed to defend the peg - how are we to do the same with nowhere near the amount of funding they had access to?). The “aglostable” design needs updating - anyone attempting to repeg USTC has to implement further redundancies that will make the overall system far less likely to suffer the same fate which already killed it once.

As I said to Redline on Discord, I don’t believe his plan can stand on its own legs due to 3 major flaws:

1) lack of initial capital to start up the system and prevent mutiple depeg events
2) the plan hinging on securing offchain cex cooperation (without it, it’s a no-go)
3) lack of protective redundancies wrapped around the token’s swap mechanics

From our public discussion on Discord:

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The fact remains that without startup capital we’d be playing dice each time a possible depeg event occurs. And we simply can’t risk that… not with everything’s that happened already. Also, IMHO we shouldn’t put any USTC repeg plan into action without at least +2 additional protective mechanisms tucked beneath the primary redundancy layer (swaps/arbing).

Until those issues are solved, it’s a NO from Rabbi. :-1:

Shalom! :pray:

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The proposal sounds simple and in my opinion, an excellent one. Perhaps the following suggestions could help promote this proposal.

  1. Adjusting the peg to work as a safe guard measure. That is, If the peg is too hard to maintain, the peg value can be adjusted algorithmically to a more realistic level, that the community agrees with.
  2. Using Algorithmic stabilization: Using algorithmic trading strategies to automatically buy and sell the USTC in response to market conditions. We need some form of liquidity to do this. One way is by creating a Decentralized finance (DeFi) platform: Creating a platform for decentralized finance (DeFi) that allows users to lend and borrow the cryptocurrency, can help in the overall liquidity of USTC in the market.The lending and borrowing function within the DeFi platform can attract market makers, who can provide liquidity.
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@RedlineDrifter I really like your ustc re peg idea. So how long it takes for go to the governance? If pass so can you make a proposal for voting?

Regards

Ricardo

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To add to this, it would be best if this repeg proposal went hand in hand with LUNC-LUNA parity. That way all the dApps that moved to LUNA 2.0 can move bac and take advantage of the gradual repeg and thus quickly bring back utility to LUNC. As such, we do need parity as well if we are to maximize on the benefits this proposal will bring.

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@RedlineDrifter now is the best time to buyback/burn very cheap ustc/debt. Further, this may not be. Reduced ustc supply, would greatly simplify everything.

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I usually when I read these proposals
I am always very fascinated.
Because I care about LUNC and I believe that having a community stablecoin is important.
But I always notice in all the proposals articulated to date for the USTC Repeg the lack of a calculation, Fundamental. And I wonder if you know What is the difference between current supply, total supply and maximum supply of USTC. And if you have the Knowledge that USTC does not exist as a standard CW20.
Before bringing it to a Dollar Repeg it would be better to Create or Recreate USTC I think… USTC under LUNC network doesn’t exist Let’s do it.
But it exists only on 11 chains like TerraUSD (Wormhole)…
You need to bring USTC back to LUNC chain first
Thinking about the Market Capitalization
of USTC and of $217,121,781 and the USTC 9,801,922,670 Circulating Supply it is possible that no one can think that these Wtokens must be reported first under the LUNC network as a standard CW20 native contract. Before talking about any form of Repeg . Why a Token with the Market Cap of $217,127,781 should have a Circulating Value of
217.121.781 and not 9.801.922.670 if it has to represent 1$…Or did I miss something

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I am concerned we are in this mad rush for a repeg. Not saying it’s a bad thing (eventually), but don’t run before you can walk.

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So this prop addresses that. We start at $217,127,781 mcap and peg of $0.0217 and work to mcap of 9.8b but a peg of 1. We would be incrementally increasing the peg as USTC gets collaterised by the protocol.

@Peter_Sutton This prop isn’t finished. There’s a lot of variables around rates that would need to be agreed before I’d put it to vote. Expect at least a V2 of this prop.

It’s important to recognise too though that the value of LUNC is inherently derived from USTC and the other stables and that we need as a community to solidify around a direction going forward. Ie have a plan/roadmap. The best way for us to reduce LUNC supply is the fix USTC.

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