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Bite-Sizing the Re-Peg
When Zaradar, Ed and I first scoped out what the optimal doable “USTC-revitalization” path might look like 3–4 months ago, we agreed that, if possible, the Terra Rebels needed to represent the interests of the entire Terra Classic Community (not just LUNC holders, but USTC holders too).
And it was extremely clear from the outset that, to accomplish both of those objectives at the same time, significant LUNC dilution would be required.
When LUNC’s market cap relative to USTC was much lower 3 months ago, the levels of dilution required (20%+) made it all but impossible. Then staking was re-enabled, LUNC’s 500–800% bull run started, and the massive expansion in the LUNC:USTC market cap started to make a lot of previously impossible things, seem very plausible.
During those 3 months, the LUNC community grew massively in size, the USTC community probably shrank, and the newer LUNC holders overwhelmingly felt they shouldn’t be on the hook for a debt that was defaulted upon as of May 13th.
So in hindsight, I think I became too married to a “perfectly elegant solution” to an outdated problem, which commingled 2 separate and independently solvable ideas (1 — launching an AFT with 60% BTC backing, a dynamic decentralized reserve, better capital controls, etc.; 2 — bringing USTC holders back into the fold) into one 20-page hairball of financial engineering.
After reflecting on community feedback I wonder if it makes more sense to break this proposal into 2 separate proposals.
What would a UST-successor AFT look like? How would it work? How should we design a product that people want to use, that fulfills use cases the big regulated stablecoins don’t, that also won’t blow up in everyone’s face again? How can we collateralize it without minting new LUNC? How would the “losers” under this approach (stakers and validators) be compensated for seeing the Oracle Rewards Distributor temporarily emptied? (Although having a functioning AFT would also start replenishing that reserve, as opposed to its current state of gradual depletion).
How can we bring USTC holders back in from the cold, in a way that’s advantageous to our ecosystem (nicely treating the ones who stay, and aggressively taxing those who’d take advantage of our generosity by immediately dumping their USTN, such that the ecosystem doesn’t actually lose money on the ones who’d leave)? This would certainly require new LUNC minting.
Re: 1, the resources at our disposal today (ex-USTC) are clear: 325bn LUNC (USD $90M) sitting at various community distribution points. This LUNC could be sold to float an initial $150M worth of AFTs at a 60% BTC collateralization ratio, with no extra LUNC minting required. And it could be airdropped to LUNC holders, who deserve the airdrop because they’re the ones underwriting it anyway. Maybe some extra should go to validators, who would have to rely on weaker income for a while as AFT adoption picks up.
I still strongly believe that doing something to help USTC holders is smart business, smart marketing, smart politics, and smart ethics, and I’ll explain why soon. But it’s clearly a separate, more debatable question, and deserves lower priority than, “How do we design and launch the best AFT possible with the resources we have at our disposal today to re-launch the Terra Classic economy.”
What do you think?