Proposal Name: "USTCV2: A Partial Reserve Stablecoin Upgrade Program Based on LUNC and Cross-Chain Collateral Baskets"

General
1

First, the core principle: partial mortgage, gradual transition

1. Partial mortgage principle: The newly minted USTC (which can be called USTCV2) is supported by two parts:

(1) Collateral component: a basket of mainstream cryptoassets.

(2) Trust and algorithms: The ecological trust represented by the burning LUNC.

2. Backward compatibility: All existing circulating USTCs (V1) are fully recognized and can be exchanged and used 1:1 with the V2 version. The system updates the V1 contract to point to the new V2 casting logic.

3. Risk sharing: LUNC holders provide trust and security to the ecosystem, and cross-chain asset providers provide price stability, sharing the benefits of system development.

Solution Architecture: A Cross-Chain Partial Mortgage Engine

1. Module 1: Building a “Terra Vault” and a Mortgage Basket

1.1. Create a cross-chain vault contract: Deploy a smart contract on TerraClassic as a “Terra vault”. The contract can receive mainstream assets from other chains (such as ATOM, ETH, wBTC, USDT, USDT, etc.) through IBC and cross-chain bridges.

1.2. Define the mortgage basket: the type of asset accepted by the vault and its initial weight are determined by the community governance (e.g. 30% ATOM, 30% ETH, 20% wBTC, 20% USDC, etc.).

It can also be achieved by automated machines using AI agents.

1.3. Transparency and audit: The asset balance of the vault must be available in real time and subject to regular third-party audits.

2. Module 2: New USTC’s “mixed casting” mechanism

This is the core of the scheme. Users have two paths to forge new USTCs:

2.1. Path A: only burning LUNC (algorithm path - low priority)

The user burns a certain amount of LUNC and can cast new USTC.

Key: This path has an extremely high casting cost (to be determined) and a daily casting cap. This ensures that the path is only used in extreme demand, avoiding excessive risk to the system.

2.2. Path B: Wrapping LUNC + Mainstream Coin (Hybrid Path - Main Path)

The user must provide both assets to cast 1USTC:

Mainstream Coin Collateral: Deposit 0.8 dollars worth of community-approved mainstream assets into the Terra Vault.

LUNC “Safety Pad”: Burns 0.2 dollars worth of LUNC at the same time.

Formula: 1USTC = 0.8 dollars (Mainstream Coin Collateral) + 0.2 dollars (Burning LUNC)

3. Module 3: Redemption Mechanism and Risk Liquidation

3.1. Redemption: USTC holders can destroy 1USTC at any time and redeem mainstream assets worth 0.8 dollars (in proportion to the basket) from the vault.

Note: The user redeemed 0.8 dollars of assets, not 1 dollar. This 0.2 dollars difference represents the “stability premium” of the system and the finality of the LUNC being burned.

3.2 Sustainability of arbitrage:

(1) When USTC > 1.02 dollars: Arbitrageurs will use Path B (main path) to cast new USTC and sell it on the market. This process adds collateral to the vault and burns the LUNC, which is good for both.

(2) When USTC < 0.98 dollars: The arbitrageur will acquire USTC at a discount in the market, and then exchange the assets worth 0.8 dollars through the redemption mechanism. If he can acquire USTC for less than 0.98 dollars, he can make a profit.

This process destroys USTC, reducing supply and supporting prices.

3.3. Clearing line of defense: The redemption mechanism naturally sets the price floor of USTC (about 0.8 dollars). Because as long as the USTC price is lower than the value of the vault collateral, a large-scale arbitrage redemption will occur, shrinking supply until the price rises. This completely says goodbye to the risk of “zero” of the old algorithmic stablecoin.

4. Module 4: Economic Flywheel and Value Capture

4.1. Agreement income:

Spread: The user paid 1 dollar for the asset at the time of minting, and can only get back 0.8 dollars when redeemed. The difference of 0.2 dollars is left in the agreement.

The use of this part of the income is determined by the community governance, for example: 50% is used to buy back and destroy LUNC, and 50% is used to purchase more mainstream assets to replenish the vault.

4.2. LUNC deflation: Both Path A and Path B force LUNC to burn, creating sustained deflationary pressure on LUNC.

4.3. Growth of libraries: As USTC demand grows, the asset scale of Terra vaults will continue to grow, becoming the “central bank reserve” of the entire TerraClassic ecosystem, providing value and credit backing for the entire chain.

5. Restart the decentralized exchange

III. Summary of program advantages

A solid foundation of value:

USTCV2 is backed by at least 80% of real assets, solving the “no backing” problem of pure algorithmic stablecoins.

Avoiding the death spiral:

With 0.8 dollars of hard asset backing, USTC’s price will not collapse to zero even if there is a panic. The redemption mechanism becomes a stable ballast.

Empower LUNC, not replace:

The LUNC is a “necessity” for minting new USTCs, and its combustion mechanism ties demand to deflation, rather than being replaced by new money.

Sustainable agreement income:

The spread of 0.2 dollars creates a strong cash flow for the agreement, which can feed back the ecosystem, buy back LUNC, and form a positive cycle.

Clear arbitrage boundaries: arbitrage behavior is limited to the range of [0.98 dollars, 1.02 dollars], and is supported by real assets and agreed profits, no longer a castle in the air.

IV. Challenges and Solutions

Challenge 1: Initial liquidity. How to attract users to deposit their first mainstream asset?

Plan: Launch the “Genesis Vault” campaign, and early depositors can receive additional LUNC rewards or a share of future agreement income.

Challenge 2: Cross-chain security. Cross-chain bridge security risks.

Solution: Prioritize the use of the safest, battle-proven cross-chain bridge, and adopt multi-chain asset distribution to spread risk.

Challenge 3: Complexity. This model is more complex than pure algorithms.

Solution: Develop an extremely simple and easy-to-use front-end interface that hides complex mechanisms in the background, making the user experience as simple as using ordinary stablecoins.

Conclusion: This plan successfully transforms USTC from a failed “global currency” experiment to a more pragmatic and powerful “DeFi-native fractional reserve stablecoin”. Instead of pursuing unrealistic grand scale, it focuses on providing the TerraClassic ecosystem with a safe, reliable, and true-value-based medium of exchange and store of value. This may be the most feasible path for USTC and LUNC to rebirth under the premise of respecting history and facing the future.

2

Hello and thank you for your proposal however I do believe it increases risks in a bigger scale than expected I’ll explain why;

This proposal reduces USTC’s catastrophic risk but introduces new, predictable, and exploitable economic and technical vulnerabilities. Many “fixes” create concentrated incentives for rent-seeking, oracle manipulation, bridge attacks, and liquidity extraction rather than robust peg stability. Major vulnerabilities and exploits are as follows;

  1. Peg arbitrage & profitable sandwiching

- Fixed 0.8 collateral / 0.2 burn split creates a persistent 20¢ spread that arbitrageurs will exploit.

  • If minting yields immediate sell pressure (arbitrageurs mint via Path B when price >1.02 and dump), front-running and sandwich attacks can extract predictable profit by manipulating onchain transaction ordering.

  • Large market players can profitably mint and dump repeatedly before onchain redemption and rebalancing update the vault state, creating cyclical sell-pressure and oracle lag profit.

  1. Bridge and crosschain risk (catastrophic)

- Vault depends on crosschain bridges and IBC for custody. Bridges are proven, highly exploitable attack surfaces.

  • An attacker who compromises the bridge or its multisig can withdraw the “0.8” collateral, leaving redeemed holders unable to claim assets while USTC still circulates effectively a run to zero or insolvency event.

  • Even partial bridge delays or canonicalization problems allow double spend windows where assets appear backed on Terra but are withdrawn on origin chains.

  1. Oracle manipulation & price-feed attacks

- The scheme relies on onchain prices to trigger mint/redemption/arbitrage. Manipulation of the oracle can:

  • Falsely show USTC >1.02 so attackers mint, sell, and drain collateral.

  • Falsely show USTC <0.98 to prompt redemptions that empty the vault or trigger liquidation cascades.

- If basket weights are rebalanced or governance actions rely on oracle inputs, coordinated oracle attacks can profit hugely.

  1. Liquidity risk & insolvency spiral

- Vault collateral is only 80% backing. In a market crash, the collateral’s USD value can drop rapidly (e.g., ETH -30%+), creating undercollateralization. Attack paths:

  • Price crashes + redemption runs: Users redeem 0.8 in assets while the market price of the basket has fallen below 0.8 vault becomes insolvent.

  • Margin squeezes: Large holders short USTC while simultaneously dumping basket assets on other venues to depress collateral value and force redemptions into loss.

  1. Governance capture and treasury extraction

- The 0.2 spread is a recurrent cash flow and becomes a target for governance capture.

  • Validators, early depositors, or concentrated token holders can route protocol income to insiders, buybacks that enrich insiders, or run exit scams.

  • “Genesis Vault” incentives attract speculators and throwaway liquidity that can be withdrawn once insiders grab the spread.

  1. LUNC “safety pad” centralization & circularity

- Burning LUNC as “safety” ties protocol stability to a token whose demand is endogenously created by the protocol circular demand.

  • If LUNC market liquidity is low, Path A or B burns can move LUNC price, harming the market and enabling price manipulation where attackers buy LUNC cheap to game minting or arbitrage thresholds.

  • The economic benefit of burning LUNC accrues to existing large LUNC holders (they control supply dynamics), enabling rent extraction.

  1. Minting caps and race conditions

- Daily casting caps intended to limit abuse create predictable windows of high value competition.

  • Bots will race to consume minting capacity and earn risk-free profits when the peg moves, leading to MEV concentration and front-running wars.

  • Caps incentivize off chain arrangements where privileged parties coordinate to capture minting slots.

  1. Redemption mechanics create partial loss incentives

- Redemption returns only 0.8 of collateral value; holders realize an explicit loss vs. face value. That asymmetry:

  • Encourages shorting and complex arbitrage strategies where participants buy discounted USTC in secondary markets then redeem for 0.8 collateral if profitable, destabilizing market confidence.

  • Undermines the claim that USTC is a reliable “stablecoin” for payments or reserves it is functionally a hybrid coupon with embedded loss/gain opportunities.

  1. Liquidity fragmentation & contagion

- Accepting many collateral assets increases complexity and correlated risk.

  • If one asset in the basket (e.g., wBTC or ETH) is removed or suffers oracle/bridge issues, rebalancing can trigger onchain liquidations and gas price wars that cascade across chains.

  • Crosschain liquidation mechanics are messy and create windows where assets are visible as backing but not retrievable.

  1. Third party audits and “transparency” are weak guarantees

- Real-time balance display and audits are valuable but insufficient. Audits are retrospective and bridges/relays can hide or delay malicious transfers. Transparency does not prevent front running, reorgs, or timed exploitation.

  1. Regulatory, custodial, and legal attack vectors

- Collateral basket may include centralized assets (USDC, USDT). Regulatory freezes, custodial actions, or blacklisting can render portions of the vault illiquid, producing effective insolvency or confiscation risk for USTC holders.

  1. Complexity reduces adoption and increases attack surface

- Complexity increases user error, UX confusion, and smart-contract surface area for bugs. Each added module (cross-chain, governor, basket rebalancer, oracle, burn logic) is another exploitable component.

Below i can provide several concrete exploit scenarios (step by step)

A) Bridge drain + peg collapse

1. Attacker compromises bridge multisig or exploits bridge contract to withdraw or fake deposits.

2. Attacker mints USTC (or uses preexisting supply) and dumps on market.

3. Price falls; holders attempt redemption but vault lacks collateral insolvency and peg collapse.

B) Oracle manipulation + mint dump

1. Manipulate price or liquidity to show USTC >1.02.

2. Use Path B to mint large USTC at 1:1, immediately sell on market at inflated prices.

3. Real price drops; attackers keep collateral or exploit arbitrage loops before reorg/oracle correction.

C) Governance capture of 0.2 spread

1. Concentrated governors direct spread to addresses they control under benign sounding proposals.

2. Withdraw or convert protocol income into externally controlled assets, leaving protocol undercapitalized for redemptions.

D) MEV & mint cap front running

1. Bots monitor peg and rush to mint slots when price crosses thresholds.

2. Winning bots mint, sell, and capture spread; small users cannot compete and suffer slippage.

In conclusion the plan reduces the risk of an immediate “zero” failure but trades that risk for multiple realistic, high-leverage attack vectors (bridge compromise, oracle manipulation, MEV, governance capture, collateral crashes). Without far stronger overcollateralization, bridge minimization, oracle guarantees, anti MEV mechanics, and governance protections, the system will likely be exploited quickly and could still produce catastrophic losses for users.

3

Author:hrwsy

Hello, your risk warning is very sincere. For this, I will make some additions and explanations:
Basic idea:
Currently:
Stablecoins are used to link to real currencies and to give the nominal price of blockchain tokens; -USDT
Stablecoins are for the purpose of confirming rights and for participants to occupy the share of blockchain tokens without loss; -USDe
Algorithmic stablecoins, a price-stabilizing mechanism based on arbitrage; -UST has failed.
Algorithmic stablecoins have merit, but the leverage at one end, LUNA, is too weak to handle the risk of a run.
Improved USTC V2, replacing one end of the leverage with a slightly stronger basket of tokens;
Quantization of additions and exits on demand;
Arbitrage was changed to valuable arbitrage, i.e. borrowing and liquidity arbitrage, discarding seigniorage withdrawal.

  1. Explanation 1: About “peg arbitrage and profitable sandwiches”
    （1）The risk of a run exists in any financial system, and depreciation and liquidity estimates are poor. This is mainly due to the collapse of participants’ information too quickly. Introducing a queuing mechanism is one way to do this. That is, casting, destroying and arbitraging. When the risk of a run is triggered, an automated, non-human intervention queuing mechanism must be adopted, which will greatly mitigate the risk;
    （2）The ratio of 0.8 to 0.2 is dynamic. This is based on the fact that it is not anchored to $1. After all, the nominal price of the tokens changes violently, the lunc of 0.2 is composition-adjusted, and the 0.8 is also variable. To this end, we introduce minting on demand. The minting is discontinuous, and for the benefit of the system, it should be minted more when the market price is low, and less when the market price is high.
    2、Explanation 2: About "bridging and cross-chain risk (catastrophic) "
    （1）Bridging and cross-chain are risky, but they are also a hotspot of blockchain research. Currently, IBM 2.0 and others have certain advantages.
    （2）It is important to note that if participants can always redeem a portfolio of tokens with excess shares at the beginning of the minting period, the system will always work, given that prices are constantly changing.
    （3）I am averse to the risk of centralized custody, so I want an extreme approach where each USTC is individually encapsulated with a basket of tokens, which relies on a quantum model. Decentralized custody is also an option.
    3、Explanation 3: Oracles and Price Feedback Attacks
    The oracle is a research hotspot, and this problem will definitely be solved in the future. At present, it can be alleviated in various ways;
    (1) Delay problem: Our system is discontinuous, and latency is feasible.
    (2) Price manipulation: establishing a Nasdaq-like blockchain index, validator feeds, limited-scale oracles, and other mixed guarantees;
    (3) Believe in the power of decentralization and allow time for recovery from mistakes.
    4、Explanation 4: “Liquidity risk and bankruptcy spiral”
    If the mortgage basket or part of the price goes to zero, it should be noted that the share of stablecoins can always redeem more collateral in the worst situation of the market, and queuing up to withdraw according to the amount can ensure that the last person still has assets to withdraw, rather than first come first.
    5、Explanation 5:
    0.2 is used to maintain the nominal price and adjust the mortgage portfolio, not for arbitrage. Arbitrage only exists around 1 ± 0.2. We must give up the seigniorage incentive, and the minting should be paid to the system. The seigniorage market fluctuates reasonably.
    6、Explanation 6:
    (1) This system has a problem that must be addressed. USTC and LUNC are liabilities, not stores of value.
    Our goal should be to repay the debt, and there should be a limit to repayment of the debt. I expect the number of LUNCs to 1 trillion and the USTC to reach 1 billion size.
    (2) Centralized control
    It is true that the vast majority of current projects are centrally controlled and difficult to avoid. Increasing large self-destruction and freezing self-destruction, and spreading out nominal holdings, will increase selling pressure. At current prices, selling pressure is manageable.
    7、Explanation 6: “Coinage Limits and Conditions of Competition”
    No matter what kind of stablecoin, there must be a limit, and the introduction of a share-holding as mentioned above should be effective. This is different from USDE.
    8、Explanation 7: “Redemption mechanism creates partial loss incentive”
    This is a bit of a misunderstanding. Redemptions are by share and are equal to or greater than the denomination. Arbitrage is not directly related to 0.8 and 0.2.
    It is not feasible to short USTC, then buy it at a low price, and then redeem it in consecutive large quantities, because we can punish this phenomenon according to the multiple price mechanism.
    9、Explanation 8: “Mobility Fragmentation and Contagion”
    （1）Establishing a reasonable portfolio of mortgage assets is a complex issue, and taking a decentralized plan on schedule should include emergency measures.
    （2）The collapse we experienced should have the ability to record bad debts.
    （3）Options are also a measure.
    （4）Hedging risks is good, but it requires reliance on centralized institutions, market makers, etc. The recent 1011 has been a reflection.
    10、Explanation 9: “Third-party auditing and” transparency “are weak assurances”, “regulatory, custodial, and legal attack vectors”
    I hate third-party audits. Bitcoin doesn’t require audits. This is a priority for our system design. A simple and transparent system where code is law.
    11、Explanation 10: “Complexity Reduces Adoption and Increases Attack Surface”
    The complexity of logic does not necessarily reflect the complexity of implementation.
    Cross-chain is the basic module, regulator new, basket module new, oracle is the basic module, join and exit module new, exponential new, and so on.
    Based on native blockchain stablecoins, it should be worth exploring and researching. After all, tokens already have application scenarios and value.
  2. Explanation 12:
  3. Attackers disrupt bridge multi-signatures or use bridge contracts to extract or forge deposits. — A central treasury and multi-signature mechanism should not be established, and the collateral does not belong to any blockchain system.
  4. Use Path B to cast a large USTC at 1:1 and immediately sell it in the market at an inflated price. — The market should not buy it, but the market will solve it.
  5. The actual price falls, and the attacker retains the collateral or exploits arbitrage cycles before the reorganization/oracle corrects. - Multiple price mechanisms are solved, after all, the system is not continuous in real time.