Proposal: LUNC Forex Collateralized Stablecoin Module (CSM)

Proposals
1

Rebuilding Global Confidence in Terra Classic through Real-Asset Collateralized Forex Stablecoins

https://common.xyz/terra-luna-classic-lunc/discussion/1310045-proposal-lunc-forex-collateralized-stablecoin-module-csm

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1. Introduction

Terra Classic was once known for its ambition to bring decentralized stable assets to the world. This proposal marks the next evolution — transitioning from the legacy algorithmic Market Module (MM) to a Collateralized Stablecoin Module (CSM) that anchors value in fiat-backed and asset-collateralized stablecoins, beginning with EUTC, and expanding step-by-step into a global Forex ecosystem.

The goal:

✅ Rebuild stablecoin utility safely.

✅ Create on-chain arbitrage and volume.

✅ Reignite global adoption — starting in the European market, and expanding to Asian and emerging gold-based markets.

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2. Phase 1: Controlled Launch with Low-Supply Currencies

We begin gradually, focusing on low-supply, high-utility fiat stablecoins to limit systemic risk and test the CSM framework.

Phase 1 Assets

Stablecoin Region Initial Mint Cap Collateral Source

EUTC Euro 100,000/day Vaulted LUNC + USTC + Reserve Assets

CADC Canadian Dollar 100,000/day Vaulted Assets

GBPC British Pound 100,000/day Vaulted Assets

Each minted stablecoin must be fully collateralized by a combination of:

• Vaulted collateral (LUNC, USTC, and whitelisted stablecoins like USDC or PAXG or USDT and eventually EUTC following repeg)

• Dynamic mint cap to throttle growth and reduce exposure during initial rollout.

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3. Phase 2: Expansion Toward the Asian Markets

Once EUTC and other low-supply pairs stabilize, the next strategic expansion targets Asian reserve-driven markets.

Planned Additions

Stablecoin Region Strategic Rationale

JPYTC Japan Trusted fiat in Asia, strong trade volume

CNYTC China Gold-backed expansion synergy

SGDTC Singapore Crypto-friendly regulatory environment

AUTC Australia Gateway to Oceania and Pacific trade routes

These expansions build the LUNC Forex Network, providing native liquidity for global trade and on-chain Forex swaps directly within the Terra Classic ecosystem.

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4. Pool Pairing Strategy

Every CSM stablecoin will launch with dual-pair liquidity to guarantee on-chain utility and arbitrage opportunities:

• Stablecoin/LUNC (primary anchor pair)

• Stablecoin/USTC (stabilization and repeg utility)

Example:

• EUTC/LUNC

• EUTC/USTC

• CADC/LUNC

• CADC/USTC

This design ensures every Forex stablecoin generates both burn pressure and utility volume for LUNC and USTC simultaneously.

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5. Fees and Risk Mitigation

To ensure sustainability and reduce exploit potential, the following dynamic fees will apply during the initial 90–180 days:

• 2% Mint Fee → sent to community pool and reserve vault.

• 5% Redeem Fee → prevents rapid cycling and arbitrage abuse.

• Daily Mint Cap: adjustable parameter by governance to manage risk exposure and collateral depth.

This approach guarantees controlled growth while ensuring continuous community funding.

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6. Required Upgrades and Module Adjustments

To implement this proposal, the following upgrades are required:

6.1 Market Module → Collateralized Stablecoin Module (CSM)

Replace the current Market Module’s algorithmic mint/burn mechanism with a CSM that requires verifiable collateral backing before minting.

• Mint = Deposit USDC/paxg collateral to Vault

• Redeem = Burn stablecoin + pay redemption fee in USDC

6.2 Fiat Price Oracles

Integrate trusted multi-feed price oracles (internal IBC relays and onchain relays) to fetch live fiat rates for:

• USD, EUR onchain oracles

Adding :GBP, JPY, CAD, SGD, AUD, CNY and others to Ensures real-time, accurate conversion and mint ratios.

6.3 Vault Infrastructure

A smart vault system will:

• Lock collateral (LUNC, USTC, PAXG, etc.)

• Maintain over-collateralization ratios

• Track minted outstanding supply

• Automatically rebalance mint caps based on collateral depth and volatility

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7. Economic Impact

• Increases on-chain volume via LUNC + USTC pools.

• Adds new minting/burning pathways tied to real-world fiat demand.

• Restores trust in stablecoin minting via full collateralization.

• Positions LUNC as the global bridge asset for multi-currency swaps.

This model transforms Terra Classic into a global DeFi Forex hub, capable of hosting pegged assets for all major currencies while sustaining LUNC’s deflationary momentum.

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8. Governance Parameters

Parameter Default Adjustable by Gov

Mint Fee 2%

Redeem Fee 5%

Daily Mint Cap 100,000

Collateral Ratio 102-105%

Oracle Source onchain oracle USD + EURO

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9. Vision: LUNC as the Decentralized Forex Hub

By integrating fiat-priced, collateralized stablecoins directly into the Terra Classic economy, this proposal:

• Creates a decentralized Forex exchange layer on-chain.

• Brings real-world trade liquidity to LUNC.

• Positions Terra Classic as the chain of choice for currency-backed DeFi assets.

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10. Conclusion

The LUNC Forex CSM proposal revives Terra Classic’s original vision—this time with real collateral, transparent mechanics, and risk-controlled scaling.

Starting with EUTC, we build credibility through gradual growth, then scale outward into global currencies and Asian markets, ensuring LUNC once again becomes the beating heart of a decentralized, cross-currency financial system.

-Presented the Do Cookie and LUNCVERSE Validator Team

2

I do applaud this proposal and the idea behind it however it has some systematic weaknesses and why the broader forex/stablecoin industry dynamics mean this proposal won’t fix Terra Classic’s underlying problems. I’ll mention a few key points below :backhand_index_pointing_down:

  • Core vulnerability: mixing illiquid onchain collateral (LUNC, USTC) with fiat-backed promises creates circular dependency and exploitable feedback loops. If market confidence falters, LUNC/USTC price drops reduce collateral value and force redemptions or liquidations, amplifying a death spiral similar to Terra’s past failure.
  • Oracle attack surface: introducing many fiat oracles and IBC relays widens attack vectors. Manipulated price feeds or delayed feeds can allow profitable mint/redeem/exploit cycles (flash oracle attacks), enabling attackers to mint undercollateralized stablecoins or drain vaults.
  • Front running and MEV risks: predictable mint/redeem patterns, fixed daily caps, and large liquidity pairings invite sandwich attacks, oracle manipulations and MEV bots that extract value and destabilize pegs.
  • Collateral composition is unsafe: relying on volatile tokens (LUNC, USTC) plus centralized stablecoins (USDC/USDT/PAXG) mixes on-chain systemic risk with off-chain counterparty risk. If custodial stablecoins freeze or redeemability is restricted, on-chain liabilities remain exposed.
  • Incentives mismatch & governance capture: governance-controlled parameters (fees, caps, collateral list) are subject to capture. Validators/whales or insiders can adjust settings opportunistically to benefit insiders, especially during stress events.
  • Liquidity illusion: pairing new Forex stablecoins with LUNC and USTC creates onchain volume but not necessarily real-world fiat demand. Onchain arbitrage and volume can be transient, driven by speculators, not genuine FX flows leaving peg fragile when spec flows reverse.
  • Complexity increases systemic fragility: multi asset vaults, dynamic caps, rebalancing, and many currency oracles multiply failure modes and make audits/forensics difficult in incidents, slowing response and eroding confidence.
  • Fees and caps won’t stop determined attackers: high mint/redeem fees deter casual use but don’t prevent concentrated actors from exploiting mispricings. Caps can be bypassed via coordinated multi account strategies, crosschain bridges, or liquidity providers.
  • Reputational debt & trust deficit: Terra Classic’s past collapse means counterparties, custodians, and institutional liquidity providers will be wary of engaging. Without strong external custodial relationships, insurance, and regulated partners, fiat backed claims have limited credibility.
  • Forex industry structural problem: traditional FX relies on regulated institutions, settlement rails, central bank reserves, and legal enforceability. Onchain synthetic or collateralized FX that bypasses these fundamentals can offer convenience but cannot substitute for regulated fiat settlement and central bank backing limiting real adoption for large institutional flows.

Concrete exploit scenarios

  1. Oracle manipulation + flash mint → drain: Attacker manipulates on-chain fiat price feed (or delays), mints large volume of a CSM stablecoin at an overvalued rate using cheap LUNC collateral, swaps minted stablecoins into USTC/other assets, then cancels or reverses oracle price to create undercollateralization and withdraw proceeds, leaving vaults underwater.
  2. Liquidation cascade: sudden LUNC sell pressure (market panic or sell module) reduces collateral value, triggering mass liquidations due to marginal collateral ratios. Liquidators extract value, causing deeper LUNC dumps and systemic insolvency.
  3. Centralized stablecoin freeze: custodian (USDC issuer or exchange) freezes or clawbacks reserves supporting the vaults. On-chain stablecoins pegged to those reserves lose redeemability, causing run and loss of confidence.
  4. Governance capture exploit: insiders reduce collateral ratio or raise mint caps temporarily, enabling coordinated mint/redeem to extract community pool funds via fees and arbitrage.

Why this won’t fix the status quo?

  • It treats symptoms (lack of peg confidence) with more complexity rather than resolving the fundamental issue: Terra Classic lacks credible external collateral, trustworthy custodians, and legal/regulatory assurances that fiat-backed claims need. Without external institutional buy-in and audited, segregated custodial reserves with legal recourse, onchain promises remain weak.
  • Building a synthetic FX hub on a chain whose native token is used as collateral transfers systemic token risk into peg mechanics. That amplifies fragility rather than isolating it.
  • Market participants (institutions, regulated market makers, banks) will not route meaningful FX volumes into a fragile, easily manipulable onchain system without clear settlement rails, fiat custody guarantees, and regulatory clarity.
  • Even if early phases succeed, scaling to global FX exposes Terra Classic to geopolitical, regulatory and counterparty shocks (sanctions, bank runs, custody restrictions) that onchain code cannot control.

What would be required to make this credible? I’ll provide a brief example:

  • Replace LUNC/USTC collateral with fully segregated, audited fiat reserves or highly liquid, low volatility assets held by regulated custodians with onchain attestation and legal recourse.
  • Minimal reliance on native volatile tokens for collateral; use them only for governance, not backing currency.
  • Robust, decentralized oracle design with multiple independent attestations, time weighted feeds, and fallbacks to prevent flash oracle attacks.
  • Strict, transparent governance safeguards, multisig treasury controls, and independent insurance pools to absorb initial shocks.
  • Partnerships with regulated market makers, banks, and custodians to provide real world fiat settlement rails and credibility.

In short conclusion the proposed CSM risks repeating Terra’s core mistake: using endogenous, speculative assets to back promises of pegged value. It increases attack surface (oracles, MEV, governance), embeds centralized counterparty risk, and relies on speculative onchain liquidity rather than legitimate fiat settlement. Without replacing LUNC/USTC collateral with credible, legally backed reserves and securing robust oracle and custodial infrastructure with institutional partners, this plan will not fix the status quo and may accelerate insolvency risks rather than restore long-term confidence. Please don’t take this reply as a attack just a way to help better improve this proposal.