4/5. A Path to Debt Restructuring in a Safe and Secure Way.

5 min readOct 30, 2022

It is worth noting at this point, some previous considerations raised in other proposals by members of Terra Rebels and that serve as a starting point for the analysis of this section of this proposal.

“From a commercial perspective, a debt restructuring to resurrect decentralized algorithmic stablecoin makes sense if and only if:

- its key pillars (decentralized reserves and capital controls) can be fail-proofed to a much greater extent than the “old Terra Classic”,

- such efforts do not break the back of the LUNC community, which would likely fund it, and

- its reserves can prevent a death spiral even in the event of total failure of the capital controls system. Edward Kim (1)

“A restructuring of Terra Classic’s $9.5 billion in bad debt,… could lead to an exponentially faster burn of LUNC’s supply by reversing it through the mechanism by which it was originally minted.” Edward Kim (1)

“How can we bring USTC holders back in from the cold, in a way that is advantageous to our ecosystem… so that the ecosystem doesn’t actually lose money on those who would leave?” Alex (4)

We would be managing USTN (name of the new token proposed by Alex in his proposal) live on-chain from the beginning…, so we would have almost total control of liquidity on-chain, and our capital controls would be extremely robust. This will change over time…, but at the beginning, we would have almost total control over it. Alex (5)

But regardless, we would need more on-chain use cases for USTN to absorb USTN’s supply, such as launching new on-chain liquidity pools, a new Dex, etc. We would need significant infrastructure that does not currently exist. This will likely take more time to prepare, before the exchange is re-enabled. Alex (5)

A token outside USTC

In response to the points mentioned above, the creation of a token outside USTC was established. This token could be managed in chain and have total control from the beginning. And at the same time, it would be able to generate decentralized reserve funds and prevent the death spiral. The latter is achieved by the USTM token being linked more gradually with LUNC as we will see below. And by being, in turn, limited in time and to a possible reversion.

In addition to these functions of the USTM token, it can gradually absorb the debt generated from the de-peg, providing liquidity to bring USTC back to its equilibrium value of 1 usd. Balancing the parity between USTC tokens in circulation and market capitalization. And gradually being able to perform the reverse process that led us to the May 13, 2022 crash. On the other hand, by generating real use cases together with other stable and tokens, the exit of “those who would leave” will also be cushioned, which is advantageous for the entire ecosystem.

So, we would say that, by generating liquidity in volume and multiple uses in chain for both small investors and large capitals that wish to safeguard or expand their capital by making use of the different applications of the ecosystem, the necessary funds would be available for the restructuring of the debt and its payment in a gradual manner. This would be generated from the commissions obtained from the chain’s Decentralized Asset Market and from the genuine funds contributed by investors outside the chain in the purchase of USTC, thus increasing its current value.

The revaluation of USTC at $1 from the Community would be very beneficial for the entire ecosystem and its members. On the one hand, looking at it from the outside, it would give a great boost to TRUST (which would translate into a greater capital inflow to the chain), by making possible the Re-Capitalization of USTC without incurring a bulky debt on Lunc’s shoulders. And that, as we said before, does not correspond to it. On the contrary, it generates a gradual system of recapitalization of USTC according to the income obtained from commissions in a market of diverse utility, and in this way, restructure a debt without great risks or contracted debts, and that for this reason, the independence of action is taken away from the Community in the management of the entire Terra Classic ecosystem.

Another possible advantage of the Re-Capitalization of USTC is the ACCELERATION OF BURNS, if LUNC is re-linked to USTC only for the purpose of accelerating the reduction of LUNC’s supply, and not for the stability of USTC. LUNC would then be linked to USTC for the reduction of its supply, as well as linked to USTM for the same purpose. This is similar to how it was previously pegged to different fiat currencies to maintain fiat currency parity, but all such currencies contributing to LUNC supply reduction. This implies a much faster deflation and exponential growth in the value of LUNC in the short time.

A debt-free, gradual and safe re-linking for the ecosystem

The linkage between LUNC and USTM would be done in a unidirectional way as with USTC, that is, it would only serve from the beginning to burn LUNC with a preset limit as long as USTM tokens are generated and USTC capitalization and value increases, but with a security system that cancels the reverse process. In this way LUNC would be burned more efficiently until the full supply of the 10B initially targeted by the community is reached. To establish the rate of quantity of LUNC to be burned, the proposal made by Terra Rebels in Appendix 1 of the section Adoption of USTN (a) would be taken as a reference.

In the event of reaching parity between the USTC circulating value and the market capitalization, which would restore the $1 USD value of each USTC token, the capital contribution of the fund allocated in USTM for this purpose would be immediately stopped.

And thus, we would accomplish both objectives. Burn the excess LUNC more quickly and “re-pay” the previously generated debt but from a more sustainable way in time and with little risk. Not generating a debt with a high risk of non-payment and unjustified, nor centralizing the ecosystem for an unnecessary loan, nor overloading the community with a debt that has not been generated by itself.

This would be so, until such a time that the community decides to stop burning LUNC by acquiring USTM and that the USTC reserves are balanced at 1 USD. With this in mind, a greater flow of capital resulting from confidence would greatly accelerate the time to be back in the first positions of market capitalization and the payment of a “restructuring” of previously generated debt.

Aleph Arun

Continue reading the last part of this proposal here — A path to a decentralized global economy of enduring utility.