To me fixing ustc , lunc and all the stables we have in this ecosystem is like solving a math equation
There are many problems in this that we need to address :
1-USTC = 1$
2-Other stables peg to their price
3-Reduce lunc supply
4-Increase lunc and ustc price and volume
5-Make a profitable system in terra for development
There are many solutions right now for example build a new token peg to 1$ and start all over again or just leave USTC and use USDC and wait for the burns and L2 dapps to burn these tokens supply down
But I thing the best solution is reroute the debt we have and use this inflation
IMO inflation is a gift to lunc holders to make millions of dollars and also as you can see inflation and debt is a measure in economy to balance the economy
For example look at USA , China, Germany, Japan and others
They all have national debt and they pay interest on it. As a normal person you think this is a bad thing(sometimes it is a bad thing if it gets out of control) but it is not and government use this to control their currency value and also their economy
But how will this help us to fix USTC and LUNC?
Our debt
I think everyone knows how much debt we have and the amount of lunc tokens and we have to pay this debt
There are several ways to pay this debt
1-wait for the burns and reduce the supply which it is impossible IMO
2-create a new token and start over again which I think it is impossible again cause terra is not USTC but it is the ecosystem behind our stables and it is SDT and all stables on terra so fixing one will do nothing IMO
3-reroute the debt from USTC and SDT(SDT is the heart of terra IMO cause it is a mirror of SDR)(we can do this without 1$ of new investment and also there is no risk of USTC delist due to regulations and also no need to go to CEX for listing our new token)
Reroute the debt
Before I start to explain this solution I want you think of this as a changing parameters in equations when you don’t have the exact value
For example if you want to calculate the power in electrical circuit you should do this : P=VI but if you don’t have the exact value of the V then you should replace V with IR then replace it in P formula which it will become P=I²R
So by what I said there is no need to build a new mechanism we just need to inject USTC inflation to somewhere else and fix USTC
So we will choose few stables we have and swap USTC to those tokens(I personally prefer the currencies which there is no regulation on algo-stablecoins)
And reduce the supply of USTC
There are some rules in this
1-swapping only allowed by governance and users can not swap their LUNC or their stables and those tokens should be locked somewhere like CP so they don’t distributed by OP rewards(if I am not mistaken rewards contain a small amount of stables)
2-the stables we choose to use should not be under any algo-stablecoin regulation(we can find them easily)
3-the stable we swap to should be somewhere locked so it don’t get into users hand because we can not defend the peg
4-swap should only happen by a governance vote until we change and add some parameters because again we can not defend the peg when users swap between lunc and ustc so we will calculate how much we can back in our treasury by both fiat and different crypto and then put it up for a vote to swap the specific amount from LUNC to the target stable
How this mechanism works is simple we just swap USTC and LUNC to other stables until we reach a certain supply that the price of ustc become 1$
We have two approaches one is to swap ustc at depeg price to the targeted stable ar peg price and the other is swap USTC at depeg price to depeg price of targeted token.
So this is not actually a repeg plan but it is a way to reduce both LUNC and USTC supply
Also just because we will not go under algo-stables section there will be no problem with the regulation and there is no risk of delist
But some of you might say this is useless because we don’t have the entire USTC supply so this is where the actual works begins
Repeg solution
I suggest we swap as much as USTC we have to other stables and lock them in a CP like wallet to reduce the supply of USTC and lock them out of users hand because if we mint them they will be mint at peg price but users must not use it because we can’t defend the peg and in the same time we should create a collateral for EUTC and mint EUTC and let the users use it
EUTC should only mint by governance and users only be able to use it not burn/mint like what it used to be
Also we should create a stable collateral to prevent any delisting and regulation.
Also we should choose stables that their country have no regulation on stables so the chain don’t face any problem with law firms
Again the swap should be as same as how tether mint their tokens first we buy
collateral and then we mint the amount we should
The token that we store debt in it don’t need any collateral we should only hold them somewhere no one can use it after we fix USTC we can swap them back to USTC.(the reason I want to swap is this process will burn good amount of the supply and if we simply burn that supply not only we gain nothing from it but our chain will face default)
If we fail to find a token to swap to we can simply create an index token like SDT and swap both lunc and ustc into it because last time I check we have good amount of every stable in our system(last time I checked they worth 7bn at peg price)
This solution need no new coding everything we need is already existing
For example the code for stables and index stable are already there we only need to name it and choose the peg price
This solution also creates revenue for OP due to the nature of multiple swap that will occur.
This solution only works when we do everything offline because there are many problems with the MM so this is some kind of a closed loop to fix SDT,USTC and other stables.
Technical part of what we should actually do and the calculations
First of all we need a token to do the job USTC used to do until we peg it to 1$. This token contains LUNC,USTC,SDT and EUTC(the community can decide to choose other tokens if they want but the reason I choose these is because IMO they are the core stable of terra and without them we can’t fix this specially SDT)with different amount and weight .This token only works when ustc is depeg and we will hold it in our system until we peg ustc to 1$ and when ustc hit 1$ we should swap all tokens to ustc (when we swap between this token and USTC not only we will fill OP but we might burn EUTC and USTC and it will benefit our system and the swap should be free of charge because the users should not pay for our system internal swap)(to understand what I mean by amount and weight you have to search SDR by IMF)(we can keep this mechanism in our system if we face depeg again we switch to this and see USTC and depeg stables as a risky assets)(we should also create a basket token like this for EUTC and SDT too)
By this we can create an index token equal to the peg price of our stables and reduce the supply
The community is free to change everything in these formulas like the quantities and the tokens
After we peg ustc we should hold this token in our system because this token will become the last line of defence to the system collapse and whenever any of our token depeg we can fix it with this because an index token is a basket of many tokens and if the price of one of them fall the system can calculate the weight and amount and increase or decrease these parameters(these calculation can be easily applied to SDT and EUTC because we need to build the basket token equal to them)
Introducing ETF to LUNC
As most of you know ETF means exchange trade product and I want to introduce one of them because I think not only this will reduce the supply of LUNC and our stables but it might create a supply shock to all cosmos coins and tokens
I don’t know if this is a good idea or not but I really like to do this and the community can decide if they want it or not
I think a decentralised ETF is needed in crypto market
I don’t know if this can be done or not But we can introduce staking for this token and maybe convert the reward directly to our native stablecoins(we can talk about it later right now I only want to reduce and lock LUNC supply out of circulation)
All of ETFs should include LUNC
The math formula for ETF token be like this(it is similar to what we did above
Creating this token is optional because this can drain lunc liquidity so we should do it very carefully and I just wanted this to be in this paper because I really like this idea
Introducing index tokens to LUNC
The most important part of my solution to the LUNC problem. Introducing tokens like DXY,EXY,BBDXY,Fed trade-weighted index,… to our ecosystem
The reason I keep saying SDT is the most important part of our chain and there are several reasons for doing this is reducing the dominance of USTC in our ecosystem. We provide USTC in our chain but users can hold this too if they choose and because DXY is a basket of several tokens we will reduce the dominance of USTC in our system.
This might help us with the regulations because we are not providing a stable coin but we are providing the purchasing power of a stablecoin.
We can treat stablecoins as risky assets because 1$ will be 1$ forever but the purchasing power of USD will fluctuate so it is like holding a risky asset like many others(DXY = 98.64 at the time of writing this paper)
We will see the importance of DXY when we want to face the problem with USTC dominance because this token is made of other stables so we might be able to reduce the weight of USTC in our system
I just introduced one of them but by the time we saw demand we can add others
DXY is made of other stables with a specific weight and amount just like SDT
So we have the mechanism to build such token
First DXY is made of Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, Swiss Franc.
Swap and fees for swapping between LUNC<>stable and stable<>stable
The LUNC<>stables don’t have a problem so I think we don’t need changes in that but swap stable<>stable might need a small change so we use the old system to swap from stable to another stable using SDT just like the old system but I suggest that we should pay the fees by DXY token and users who want to swap between stables should hold DXY and if they don’t we will add extra fee for swapping the small amount of the stable to DXY internally to pay the fees also I suggest adding to add few other rules
Monitor the pair from forex market and compare it to the onchain pair
Monitor SDT/SDR pair
If the pair from forex market is equal to the pair onchain and SDT amount is equal to SDR then the user should only pay the fees but if they are not equal and there is a difference due to fluctuations in our token peg then the user should pay a fee
All said above is not a mechanism to keep the peg price because I think there is something that we can’t control and it is time and no matter how much we play with these formulas the time factor will ruin such peg mechanism so despite the face that I can create a formula to observe CEX price and compare it to the on-chain price and then take the fees I will not because of the factor of time which we can’t control
Using liquidity , market cap and seigniorage to keep the peg
There is a very good development in our community and it is providing liquidity to the DEX so I decided to use this to create a liquidity depth in our chain and use market cap and seigniorage as two parameters to keep the peg
It is like combining the old system to new things and the reason for this is because market cap is just a fake thing and a very wrong metric IMO but liquidity , LPs and liquidity depth is what make a project unique.
First we should have a 1:1 fiat back but IMO it is also a wrong thing what if someone swap and pass the amount we can back and then attack USTC so we make our system in a way that we calculate the amount we should allow to mint by our LPs and and mint it by seigniorage and also use marker cap as metric like what we had in the old system but the real thing is in out depth liquidity
And this is IMO is the triangle of our stable peg with the help of other things like DXY , ETFs , index token equal to 1$ , SDT and our swap Spread on every trade
The IL losses and fees generated from the LPs
This is system is not risk free so it is better to calculate the amount of IL across our pools because the price of LUNC is fluctuating and many of our pools are made of LUNC/other tokens
About the LP fees they are very dynamic so we should see how much daily trading happens on our pools
Euler and Runge-Kutta methods to predict price
This can be applied to all tokens I really don’t know if this works or not(I think some big firms use it) but I wanted it to be in this prop it may help change the way the crypto trading is and I think we need to deploy a smart contract to use this information to put buy and sell on our tokens in DEX to make money and maybe bypass the IL losses
I think Runge-Kutta is better but I really like Euler so I decided to put it in this paper
Before I start the Runge-Kutta part I want you to know that Runge-Kutta is more accurate but as I said I like Euler and I want to have his name in my paper So
The calculation for Runge-Kutta is
As you can see the formulas are mostly the same between Euler and Runge-Kutta but Runge-Kutta is more accurate with more precision
Introducing inverse contract and artificial or virtual pools to LUNC for low market cap low liquidity low supply stablecoins
There is not much to talk about or complex thing to explain
As most of crypto investors know in this type of trading we will going to trade USD/risky asset and the the profit is in the risky asset
So I wanted to add this too but in a different way and users can swap between our stables but then they receive the amount in LUNC
For example if I trade 10$ to X amount of Euro and chose to use the inverse contract then I will receive X amount of LUNC = X amount of Euro
The calculation remain the same and I think there should be no extra fees so all the swap fees will be the same (we will use the same swap mechanism in here too)
About providing low market cap stables that we can’t technical LP because they have small volume and many other problems so instead we will create artificial pools inside our chain for these stables and the users should hold USDC or EURC with 10% buffer of total value they want to mint because attackers can attack LUNC and our stables by these tokens and they should know if they try to depeg them and over mint them we will take the peg difference from their collateral
One more thing these stables will be used to park debt and inflation from important stables so later we will separate the users funds form our debt parking space by calculating how much USDC and EURC we should have to back all of our stables(debts that we will park here will not have any collateral)
Some of these calculations can be changed or removed based on community decisions and I also try to add or update these because I think a algo-stablecoin mechanism should update because we live in a world that everything keeps evolving and what works today might not work tomorrow
About the swap fees I am not a fan to tax users by gas fee to infinite so I think we should have an upper and lower limit of 5 cents for swaps and halt the system if they pushed beyond 5 cents and use the basket tokens for swaps until we manage to peg USTC and others and also the good thing about this is we can do all the stuff offline
About the fees I think everything should be paid by SDT or DXY