USTC problems background
Since May 2022, USTC & Terra had been plagued with several problems that made the stablecoin lose the 1:1 peg to US Dollar. Many solutions have been proposed to stabilize the value of the stablecoin such as :
Full Buyback Buying back the entire supply of USTC is the most efficient way to restore the price. However, the problem lies in the capital needed to buy back the whole supply.
Destroying/burning USTC It might sound easy to destroy/burn the existing supply of USTC so the price could increase with less USTC supply in the market. However, it requires huge capital and also takes a long time to establish a destruction mechanism.
Locking USTC While the option to lock the entire supply of USTC seems reasonable, it doesn’t once it’s done. The whole supply must be released in the end after the lockdown is over.
If none of the solutions proposed above could solve the problems, is there a way to lock up all of the USTC while at the same time gathering a lot of capital, avoiding to do buybacks intermittently and eventually destroy them all? Yes, there’s one method that can achieve such effects, hopefully adopted by the community.
The logic of the method proposal is to refer to the Lido protocol on ETH, and map USTC to a new stable currency stUSTC on the Terra network. Afterward, re-establish the connected LUNC. By mapping debt into new stablecoin assets, TERRA achieves both debt lock-in and not a single chance to lose its liquidity, restarting the peg, and the ability to generate tax revenue enough to recover debt. It can be said to kill three birds with one stone.
Steps to recovering the $1 price
1. Establish an exclusive pledge agreement, priced at the real-time market price of USTC, and pledge to generate a new stable currency stUSTC. For example,
If the current market price of USTC is 0.04$, then 25 USTC can be pledged to generate 1 stUSTC.
2. In this way, 1 stUSTC equals 1$, link LUNC to stUSTC, and use LUNC to stabilize the price of stUSTC. Since stUSTC is a USTC, pledge is generated. There is no redundancy of stUSTC in the market, so LUNC can stabilize its price in the early stage.
3. Use LUNC to distribute dividends to USTC pledgers, set the dividend interest rate, and motivate USTC holders to generate their own USTC pledges to Stablecoin stUSTC.
4. When the market demand for stUSTC expands, and if 1stUSTC is worth more than 1$, Terra will destroy LUNC and mint stUSTC until
1stUSTC equal to 1$. On the contrary, when the market demand for stUSTC decreases, at this time 1stUSTC is worth less than 1$, Terra will destroy the stUSTC cast and build LUNC until 1 stUSTC equals 1$.
5. Restart the Terra ecosystem based on stUSTC. Since the price of stUSTC is stable at 1$, Dapps can restart and enter a step to stimulate the expansion of the demand for stUSTC, therefore accelerating the burning of LUNC.
6. Tax the miner arbitrage, 50% of the tax is used to buy back USTC and destroy it until 1USTC=1stUsct=1$. Remaining 50% tax receipts are used to return to the treasury to build asset reserves and after USTC is fully converted to stUSTC, seigniorage will become Terra’s main financial sources.
How did the $1 price of stUSTC stabilize?
Like USTC before the crash, stUSTC is still an algorithmic stablecoin, stabilized by LUNC’s 2.2 billion market cap. The stablecoin can only be generated by staking in the early stage of stUSTC so there is no redundant stUSTC in the market before that. People that want to get stUSTC can only be done in two ways: staking or minting. Pledge is to lock USTC’s debt, and minting requires burning LUNC.
How can the applicability of stUSTC be maintained and expanded?
As a new algorithmic stablecoin, if it cannot expand its applicability, especially the history of USTC’s collapse, it will cause people to become confused. The profit will be sold immediately, causing stUSTC to stay in a small size range.
Three ways to solve the problem
First, strive to ensure the stability of its currency value and strictly control its issuance scale until the market value of stUSTC is equal to the total value of the asset reserve.
Second, Restart Terra ecology, such as Anchor, to expand the application and circulation of stUSTC.
Third, Establish a complete asset reserve machine system, so that the total value of the asset reserve is always ≥ the total market value of stUSTC (over-collateralization).
What level should the initial release size of stUSTC be limited to?
This question is very critical and includes three parts:
First, based on the current market value of LUNC, when the minting mechanism is turned on, How much selling pressure of stUSTC (stable coin) can it carry? Due to throughput constraints, despite its current market cap of $2.2 billion, it is very likely that it can only withstand the selling pressure of 500 million US dollars before it generates a death spiral.
Second, based on the current market price of USTC, even if all USTC participates in the pledge, it can only generate less than 400 million USD stUSTC. Is this scale within the scope of LUNC’s maximum commitment? If it is, then no need to worry. If not, then the need to limit the size of staking for USTC is high.
Third, the quantitative team needs to stress test LUNC to test the maximum carrying capacity of its stablecoins, and then adjust the issuance regulations of stUSTC.
The mode is always controlled below the maximum capacity of the LUNC. To be conservative, the recommendation is 50% of the maximum capacity.
Why use LUNC to pay dividends to USTC stakers and how does the finance cover interest costs?
Now there are two voices in the community, one is to directly burn the remaining 1.8 billion USTC in the LFG wallet, and the other is to issue an additional 100 million LUNC to buy back and destroy USTC. Both approaches are somewhat extreme but there is now a way to achieve both, by exchanging 100 million USTC into LUNC in batches at the real-time market price, and this part of LUNC is used to distribute dividends to USTC pledgers.
In this way, we not only realize the repurchase and destruction of USTC, but also reduce the pressure of additional issuance of LUNC and expand the use of LUNC value. It can be said to kill two birds with one stone.
Why tax miner arbitrage? What percentage should be taxed?
After staking to generate a new stable currency stUSTC, arbitrage trading will become the main trading method of Terra in the early stage. So the system needs to collect fees from a large number of arbitrage trades to generate finances. As for how much this tax ratio is appropriate, should it be higher than 1.2%? There is no conclusion here.
stUSTC just expresses the mapping relationship between it and USTC.
In fact, it is already a new stablecoin and can be named with any names the community wants. The best advice is to rename it to UST.