Terra Classic USTC re-peg proposal

Tobias Andersen
11 min readOct 9, 2022


1 => Executive summary

In May 2022 the Proof-of-Stake blockchain network known today as Terra Classic witnessed a “black swan” event that caused the collapse of Terra & Luna through a vicious death spiral which resulted in the printing of trillions of governance tokens, a massive “debt mountain” in the form of uncollateralized stablecoins and an exodus of significant intellectual property to competing blockchain networks. However as fortune would have it we were left with a key asset that if nurtured carefully could help bring about one of the most significant economic recovery in modern history and should you not have guessed it by now that asset is the people reading this document, investors with so called “diamond hands”, entrepreneurs betting on the future of our platform and the very large/diverse user base which in its totality can be doubt “the community”. In the close to 8 years I have spent in crypto I have yet to come across a more vibrant, emotional and diverse flock of people as committed to their cause as the “lunatics” and for better or worse I find myself proudly fighting against the dying of the light as a “die hard lunatic” in order to do what is within my power to help heal the community and fix that which was abandoned by its creators.

However stating the obvious is obviously no real feat and the question remains on how to successfully attempt another remise at the challenge of creating a truly decentralized money market, which can avoid the pit falls of “value subjectivism” and “monetary instability” while dealing with the aforementioned problems? Regardless of where one might stand ideologically on this question it seems clear that our options are limited, our timeline is growing shorter by the day and while we have seen many good ideas on how to remedy the situation, due to the wonders of Conway’s Law, they all fit largely on to one of two paths that can be travelled to achieve the much sought-after revival of Terra Classic and put our network back on a trajectory towards stable growth.

1.1 => Bailout USTC via quantitative easing (QE)

Path #1 leads us to the temptation of pursuing the philosophies of quantitative easing which has historically been the “magic fix” for most modern economies the last few decades. QE can be applied in many ways and countries such as Japan has taken it to the extreme in ways that most likely contributed to significant growth in commodities and crypto currency, during the last bull market, as retail investors fled their local markets in favor of inflation-resistant assets while the central bankers gobbled up $430 billion worth of equities without much to show for it.

Thus, it stands to reason that applying similar theories in what amounts to a Weimar Republic scenario would at best result in a slight bump in inflation and could worst case lead to a mass exodus of the remaining liquidity as “smart money” bets on QEs inability to guarantee an economic recovery. All the while the growth in M2 money supply will speed up the dilution of whatever value was created ex nihilo, due to the corrosive effects of inflation without any real growth in on-chain volume to combat it.

To further compounded the problem of applying QE strategies we have our $10 billion “debt mountain” waiting to teardown any bull-run with an avalanche of speculative “mercenary capital” which is patiently awaiting the re-peg of USTC to $1. A situation that would most likely result in a need for further QE cool-aid down the road and keep us on track to match the US governments record setting accumulated deficit of $31 trillion in order to sustain the growth cycle unless additional measures where put in place to artificially reduce the USTC supply, which could only be accomplished via successful governance vote(s) and even if passed the result would most likely be challenged legally in a court-of-law, dragging out the process for years to come.

1.2 => Recapitalization of USTC via quantitative tightening (QT)

Path #2 takes us on a much more painful journey that includes trials such as austerity in the form of “burn taxes”, interest rate increases on staking rewards by lowering the “reward weight” in exchange for increased “lock-up periods” (e.g. 90 days) and a massive effort to recapitalize Terra & Luna pools via “sweat equity” and “partitioned pools”. In essence a form of quantitative tightening of our primary M2 money supply that would lead to a significant reduction in circulating supply of both USTC and LUNC, while putting both “value networks” on a sustainable path to lasting economic recovery.

Combined with a razor-sharp focus on attracting fresh capital to the Terra & Luna pools via increased “end-user utility” and rewards on staking that coupled with a bump in the un-delegation period will ensure more predictable liquidity flows in the network it is my belief that we can create a more attractive environment for new businesses to “setup shop” granted that we can provide them with functional “volatility guards” that can allow their fledgling business models to mature and become self-sustaining “economic engines” that over time can help erode the “debt mountain” and fuel the economic recovery of Terra Classic in a way that is both organic and sustainable.

To enable such a reality we will need to implement a new on-chain feature called “partitioned pools” which will allow “dapps” to dynamically create their own “nested capital partitions” inside the Terra pool by paying a LUNC-based fee to the platform (a form of spam protection) which grants them an “empty partition” and their own “commodity token” with an initial supply of zero. These new “commodity tokens” would utilize a fixed or dynamic price point, measured in USTC, and could only be capitalized via LUNC and traded via USTC. To help keep the “partitioned pools” stable, while allowing “capital interoperability”, dedicated “remittance corridors” would be established and monitored by the ABS keeper which would throttle liquidity flows out of “partitioned pools” to ensure that it does not exceed a certain percentage of the overall liquidity in the Terra & Luna pools, thus providing a significant degree of overcollateralization to the two primary liquidity pools without creating excessive capital friction inside the individual secondary “partitioned pools” that service various virtual economies on our network.

1.3 => Conclusion

While implementing a QE strategy does have the ability to create a short-term growth cycle it would most likely not be sustainable medium to long-term, due to our waste over-supply of LUNC. Furthermore, any increase in primary M2 money supply would certainly make investment prohibitive for newcomers as they would be wary of future QE “hand-outs”. One could try to avoid this scenario by accelerating investment into growing on-chain utility, however due to the low success rate of start-ups in general and the short “opportunity window” in which QE will have a positive effect on the network this strategy amounts to a very high-risk gambit, with very limited rewards. In addition once the path has been trodden it will most likely lead to drinking more QE “cool-aid” and further diluting of existing investors as more LUNC is printed to protect the USTC re-peg efforts.

By now a wise man would probably suggest that it would be best to simply walk away from the situation, start over and leave the network to die along the thousands of other failed experiments that came before it. Whereas the fool would argue that which is already dead cannot die. In this story I am very much the fool considering the time and effort I have put into this project thus fare, however it is my firm belief that the only viable option for recovery is to walk the “hard road”, embrace our need for QT and roll-up our sleeves to begin a 3–5 year process of building our way out of “goblin town” with new on-chain features aimed at incentivize businesses to build on our network (see TR roadmap) and keep growing on-chain utility to the point where the current 10B USTC supply will no longer be sufficient to service the “reserve currency” needs of a “value driven” blockchain network backed by millions of users.

2 => USTC re-peg Proposal

In order to attract the long-term capital investment needed to “re-peg” USTC we need to establish an “anti-fragile” market maker system that will incentivize new businesses to leverage the existing platform infrastructure in a way that is inducive of “positive network growth” while being “prohibitive of economic instability” as it is the assumption that if we can continue growing our network effect while stabilizing the current price volatility via encouraging increased staking and on-chain utility then eventually the market will reward us with increased valuation and enough liquidity to both re-peg USTC and further expend our platform.

To accomplish this feat, we will need to implement a host of new features that can enable us to establish additional “capital controls” which will allow entrepreneurs to create new features on one of the few truly “community-driven” networks in the crypto space, without assuming any risk to their investors capital. All whilst granting them interoperability with existing network assets such as wallets, end-users, smart contracts, etc.

In exchange these businesses will pay a one-time fee to create their own “partitioned pools” that will be routed to the treasury, which in turn issues a new “commodity token” (denom) that can be utilized by its “pool of origin”. “Commodity tokens” will be subject to a special “utility tax” that would be split between the platform to fund the “tranche concept” that Alex has envisioned and the seniorage recipients as payment for utilizing various network features. There would also be a “swap tax” (also known as “tobin tax”) applied when “commodity tokens” exit the “partitioned pools”, into USTC, which would be subject to “capital controls” in the form of the “throttled rolling average” as measured by the ABS keeper, tax policies governed by the treasury (e.g. “reward weight”) and other volatility guards implemented on the platform.

2.1 => “Partial swaps” concept

For the “partitioned pools” concept to function and for us to “re-peg” USTC it is imperative that “partial swaps” (and eventually “full swaps”) between LUNC and USTC are enabled with a 10B “hard-cap” on the LUNC supply that ensures no one can swap into the Luna Pool if the transaction would break the 10B “hard-cap” set in proposal 3568. Paired with increased on-chain utility and consistent network growth this would allow value to start flowing thru the capital pools in a way that would yield tax revenue which could slowly help recapitalize the “platform reserves” while we prepare to expand our capability to provide virtual currency services to edge networks (IoT) and other 2nd layer use cases.

2.2 => “Partitioned pools” concept

“Partitioned pools” contain a new “denom” sub-type that enable us to extend the behavior of the Terra Pool, while maintaining backwards compatibility with the existing tokens, in such a way that will allow new “commodity tokens” to be created which can exist in tandem with the current “protocol tokens” (LUNC, USTC, etc). However, unlike the governance sanctioned “protocol tokens”, these would be more akin to “commodity money”, used primarily in closed financial systems to facilitate various forms of commerce and attribute behavior more akin to that of “sound money”. As such “partitioned pools” would always start with an initial supply of zero and they would be “shielded” in such a way that they could only be capitalized via the native governance token (LUNC) representing a debt-to-equity swap of sorts between the governing community and the private business seeking to “setup shop” on our network.

Once “partitioned pools” are capitalized beyond a certain point, which could be configurable via governance parameters, “remittance corridors” would open up to enable swapping from “commodity tokens” to USTC and from USTC to “commodity tokens” thus allowing USTC to act as a “reserve currency” to facilitate “value transfer” between individual “partitioned pools” of “significant size” whilst offloading the taxes on their end-users as “cost-of-doing-business”, which would be a sustainable as long as we are dealing with micro-payments and our overall transaction cost does not exceed that of competing networks.

2.3 => Remittance corridor concept

“Remittance corridors” are simply just “regulated swap channels” that are subject to “throttled rolling averages” as measured by the ABS keeper. Their goal is to allow a “regulated flow of capital” between various “commodity tokens” created on the Terra Classic network.

2.4 Tranche concept

The main goal of the aforementioned features is to help recapitalize the platform reserves to the point where it becomes plausible to fund the creation of a “tranche system” that can be managed 100% on-chain and protected using a range of “volatility guards” such as the ABS keeper, ML-based sentiment analysis, tranche triggered break factor increases and any other idea that would help provide “economic stability” to the network as a whole. As most of this feature have been outlined in great detail by the proposal put forth by Alex and given that it is still my belief that our many months of debating the merits of his ideas was always beneficial to both of us, even thou we never really gained consensus on the matter of printing more LUNC, I feel that it would be pointless to go into further detail on the subject and believe his idea can be combined seamlessly with the other features to provide a construction that is stronger and greater then the sum of its parts.

3 => References