Bail out $UST holders while bootstrapping a (partially) collateralized stablecoin

Hey everyone.

I’m Secret Network’s founder and a fellow Luna/Terra supporter. Been thinking a lot about what transpired this week and how we can maintain the vision of a truly decentralized stablecoin while helping bail-out UST holders.

The proposal is described here: A (partially) collateralized cross-chain stablecoin based on UST - Secret Contracts and Secret Apps - Secret Network. I will also copy-paste the text below to make it easier to have a parallel discussion here as well, as needed. This is by no means a finalized idea, it’s a very rough WIP draft that merits discussion. It might also be completely broken.


While the details of the ‘right’ stablecoin model are to be fleshed out, many now believe that a partially or fully collateralized (algorithmic) stablecoin is the way to go. A big question is how do you get enough collateral to get started at scale.

I think that’s where the incentives of bailing out UST holders and bootstrapping collateral converge. I’m gonna assume there’s a partially collateralized/partially algorithmic stablecoin involved in this (S), with an accompanying volatile asset (V) (like Luna, Shade, Frax and other algorithmic coins have).

  1. Pre-launch: There needs to be some discount factor put on UST. For the sake of simplicity let’s assume a UST in this new model is valued at $0.4. Note that this amount should be determined by the protocol’s requirements - i.e., how much partial collateral the protocol needs to safely work (this will be clear in the next section).
  2. Launch: Each UST gets an option to buy S at a discount proportional to #1. In our example, this means that any UST holder can burn their UST and buy 1S = $0.6 (should be done in a relatively stable basket of assets to serve as proper collateral). With this, the protocol can amass a large amount of collateral thanks to the large supply of UST, which accompanied by a proper partially-collateralized protocol should provide the necessary stability. The options should have an expiry, e.g., 6 months.
  3. Since a lot of people may not want (or be able to) supply the funds necessary, the option itself should have a liquid open market. This would allow people to essentially ‘sell the right’ for a certain discount (e.g., if the value of the underlying is set as $0.4, then maybe the option goes for $0.35 or whatever the market decides).
  4. Improving/avoiding initial bank-runs: Depending on the protocol, this may not even be necessary, but if once we settle on a partially-collateralized stablecoin protocol we feel that it may not be robust depending on the starting condition (i.e., early liquidity dumping their S tokens because their discounted UST suddenly has some value again), then we can improve the model in several ways to make it more robust:

a. Only give 1:1 tokens based on the collateral supplied. For example, if a UST holder pays $0.6 in collateral, then they get 0.6S tokens immediately. The rest are given with a lockup + vesting, which allow the protocol to get to its steady-state first.

b. Like (a), but instead of giving the rest in S tokens, give it in V tokens with some discount to offset for the fact that this is a volatile asset.

I’d love to get feedback on this and get the discussion rolling. IMO, this is a way to both make UST holders whole, while continuing from where Terra left off.

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@dokwon @JumpCrypto is there any BTC left to help bootstrap and collateralize something like this?

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