A stabilizer fund is proposed and the mechanics for increasing the recovery price should flow with the UST’s market price to quickly clear out bad debt and return the peg.
Something has to change before completely wiping out LUNA with dilutive minting. Perhaps we can do this without making really bad terms for everyone. Let us try our best to find a way forward even if it may seem unworkable or impossible. A fail for Terra is a fail for DeFi everywhere. There is no time to rest for anyone in the DeFi community until Terra’s problem is resolved.
Whether the following hypothetical generic scenario could work does not matter (and we are not recommending it). It serves as motivation to be more robust.
- Borrow $10 billion for shorting
- Use $10 billion to short the source coin (eg UST) on one or more Centralized Exchange (CEX)
- Move $1 billion of the source coin into a wallet
- Find a liquidity pool on curve.fi containing the source coin and a destination coin (eg USDT) where its liquidity is far smaller than $1 billion (or adjust up the size to what is needed) and swap them
- Curve.fi reduces the source coin’s value as the destination coin’s liquidity evaporates (brownie-tutorial/lesson-18-applications-ii at main · curvefi/brownie-tutorial · GitHub)
- Keep the sell side pressure until the source’s crypto system buckles and crashes systemically
- Cover the source coin on CEX using random small sizes to appear as noise under the now large volume market panicked trades
- Slowly drain the source coin from curve.fi to wallet
- Cover short positions on CEX
- Rinse and repeat on the next victim source coin
The above is a more sophisticated version of front-running the oracle prices which exploits the fact that curve.fi’s AMM does not require external price sources for decision making, and that until government regulatory bodies come in the picture, that it is not yet illegal for the attacker to perform.
The Bitcoin Reserve Pool (Bitcoin Reserve Pool) concept was a nice pressure release valve to defend the peg but this implementation was never activated before the death spiral event. Even so, as it was proposed, the Bitcoin Reserve Pool would not have been able to absorb the magnitude of this financial DDoS, if you will, especially when major crypto asset classes, especially BTC, fell in value and extreme shorting pressure existed. A large depeg would have motivated panicked UST holders to sell for anything. The $0.98 BTC stabilization fund would have run out of fund very quickly and left investors to eat each other down to the bones. The curve.fi Wormhole pool (UST-3Crv) had been one of the largest liquidity pools but it was completely drained and its internal oracle pricing did not require any external inputs to determine UST’s lower pricing and this depeg kept very low pricing for days as long as the attacker remained committed to keeping more USTs for sale than other liquidity providers in the pool. There needs to be a cycle disconnection to this feedback loop.
Let us agree that during states of depeg we must do everything to save the peg, for without the peg, the Terra ecosystem cannot grow. Let us agree that saving UST requires clearing out bad debt fast. The suggestions we make should be in the spirit of saving the peg and not without consideration for the supportive market participants.
The intuition is to form a diversified stabilizer fund. Whether this stabilizer fund contains major crypto assets and stablecoins are details best determined by the community. Perhaps eventually we can find alternative assets that could serve as an indirect value instrument. Bitcoins have value because they are benched to the electric cost for mining ever more complex puzzles for coins and for validating network transactions. The indirect value is assumed in USD, SDR, or local denominations. For the purpose of this proposal, the existence of a stabilizer fund suffices.
Unlike the Bitcoin Reserve Pool, the fixed $0.98 BTC should be changed to the volume weighted average UST price (VWAP) in USD that the oracle sees across the exchanges plus a tiny amount higher (delta) as the price offered to panicked UST sellers during depeg events (<=$0.95). The VWAP+delta is to encourage bad debt sellers to buy from the LFG Reserve stabilizer fund (front-run) than off-chain markets and to avoid burning the stabilizer fund at the unmaintainable $0.98 BTC rate during large attack/panic volumes. As before, the LFG Reserve holds on to the USTs which effectively takes them out of circulation until the repeg. The LFG Reserve should repeg much faster. The favorably acquired discounted USTs could then be used to buy more stabilizer funds to increase robustness for the next time and to use some of the discounted UST acquired to burn LUNAs (the LFG Reserve’s UST will be used to supply the USTs for LUNA to UST swaps without minting new USTs).
In addition, during the depeg, all LUNA staking should be burned. Staking is an inflationary instrument and during a depeg that minting more LUNA is the worst thing to do. Confidence in LUNA drops and so does its price. Adding incentives for depegged UST holders to swap for more minted LUNA exacerbates the problem when both LUNA and UST in parallel falls in value. Any unnecessary minting should be stopped because the system is temporarily broken. LUNA stakes received should be burned. USTs received should be used to buy and burn LUNAs.
We should consider this proposal along with increasing the minting capacity that is supposed to help arbitrageurs before wiping out LUNA holders. We assume injecting fresh capital to the stabilizer fund to clear bad debt at near market discounts is a viable option to avoid diluting LUNA to oblivion.
- Airdrops for the remaining supporters when we get back to black
- Sequence of events that transpired to the death spiral (archive.ph)