A Path to Recovery for Luna Classic
co-authored by Alex Forshaw (twitter @4lex_4sh4w_TR)
On August 26th, at 6:35pm EST, the Luna Classic blockchain running “v22” created and accepted block number 9,910,990. At this very moment, governance was restored as citizens of the Classic ecosystem could delegate, stake, and subsequently vote for the future of the chain. While this is reason to celebrate, the recovery is only just beginning. August 26th marked the start of a long and difficult path to recovery that still lies ahead. In this article, I would like to discuss some of the various initiatives that are being paved by different community members and frame them into a single roadmap that illustrates where the community is focusing their efforts.
A Path to Burn
Vegas was the original author of proposal 3568 that described a 1.2% tax and burn on all transactions of LUNC. Terra Rebels implemented the tax/burn by repurposing the stability tax code as accepted in proposal 4159 (distribution of v22) . Thus, taxes can be charged and burned for on-chain activity such as sending between wallets and smart contracts that interact with the chain. To activate this code, a governance “parameter proposal” will need to be passed that specifies the exact amount of tax to be charged and the associated tax cap. This proposal is imminent.
The burden of the tax and burn would be shouldered by the core users and projects on the chain. In the past, the community has voiced with resounding unity that they are willing to play their part, but undoubtably the tax will take its toll if the burn remains only on-chain. Our code cannot enforce taxes on off-chain activity (like trading on CEXs) which is where the majority of the volume of LUNC is taking place. Thus one of the primary goals of the burn implementation and execution is a signaling to the exchanges that the core governance community can and will execute a tax and burn, and desire the same to happen on the CEX. As mentioned by CZ of Binance, “They don’t even burn for on-chain transactions, right?”
The upcoming parameter proposal will be to burn on-chain transactions and would be the commitment and solidarity that the community needs in order to ask the CEXs to come on board. In fact, some CEXs (such as MEXC) have already started to burn in response to the original proposal.
Behind the scenes, the tax and burn requires changes to some of the core applications that interact with the blockchain (such as terrastation wallet). We have open lines of communication to members of TFL that are working help us integrate the changes that have offered as pull requests (by Marventus, andrexbass, Yogabba), and are awaiting their response.
Given the state of the applications, a parameter change proposal will be created on or before September 10th. If the tax and burn should pass, the target activation epoch is 94 (block height 9,475,200), on or around September 20th.
A Path to Repeg
When TFL disabled the swap between LUNA and UST on May 13th, the blockchain “defaulted” (stopped making payments on a loan), and the 10.3 billion remaining USTC in circulation became approximately $9.5 billion bad debt. Terra Classic’s position today is akin to an emerging-market country like Argentina in the wake of a debt default: the “creditors” (USTC holders) must collapse the bad debt, while getting compensation meaningful relative to the current USD value of their holdings, making them as whole as possible under current (severe) constraints. This is commonly referred to in traditional finance as a “debt restructuring” or a “debt-for-equity swap.”
From a business perspective, a debt restructuring to resurrect the decentralized algorithmic stablecoin makes sense if and only if:
- its key pillars (decentralized reserves and capital controls) can be failure-proofed to a far greater extent than “old Terra Classic” was,
- those efforts don’t break the back of the LUNC community, who would likely fund it, and
- its reserves can forestall a death spiral even in the event of total failure of the capital controls system.
But perhaps most importantly, by resurrecting — and drastically improving — the decentralized stablecoin, we can turn one of crypto’s biggest defeats into the most stunning turnaround in digital asset history.
We can, within our modest means, throw a life-raft to those of us unlucky enough to hold UST over LUNA at the time of the crash, and bring them back into the fold — at a customer acquisition cost that any new protocol would envy.
We can represent the broad-based interests of the Terra Community, without cynically abandoning our large tribe of USTC holders who today own 9.8 billion NFTs backed by nothing more than the hope that either we, or LUNA 2.0, will eventually assume a portion of their restructured debt.
Many of us who invested in Terra before the crash loved the idea of a decentralized stablecoin because we felt that a crypto-economy running on fiat-stablecoin rails was, in fact, no more decentralized than the fiat economy we all fled. For all its many faults, UST was the only distributed system that came close to breaking today’s faux-decentralized DeFi-on-fiat-rails industry paradigm.
And while other stablecoins such as Maker’s DAI have blazed a trail of genuine decentralization, full convertibility, and currency stability, they’ve done so at the cost of extremely high (160%+) collateral requirements, which structurally inhibit their ability to grow. Because money is the ultimate network-effect product, we don’t think overcollateralized stablecoins can ever scale up to paying for a cup of coffee in 5 years. We believe that a stablecoin backed by decentralized reserves and algorithmic capital controls offers superior scalability, uniqueness, and product-market fit.
After months of exhaustive analysis, we believe we have located sufficient community assets to accomplish all of these objectives without the need for outside funding, and we have also made revolutionary improvements in Luna Classic’s capital controls needed to justify this effort. A restructuring of Terra Classic’s $9.5bn of bad debt, which offers USTC holders material consideration for their current USTC holdings and represents the best efforts of the LUNC community, will underpin a sustainable renaissance of the Terra Classic ecosystem. Ultimately, this could lead to an exponentially faster burn of the LUNC supply by reversing it through the mechanism by which it was originally minted.
A Path to Utility
While there have been some very important dApps that have recently expressed a desire to come back and build on the classic chain, the reality is that some are still sitting on the sidelines, and some have left for Luna v2 or other ecosystems all together. We face the opposite problem of most web3 layer-one protocols: instead of having a huge hoard of tokens to incentivize adoption and 0 outside users, we have hundreds of thousands of active users, but little room for additional token incentives.
The strongest attractor for utility is our community. In the past thirty days, we have averaged over 8,000 new wallets every day, and a total number of wallets surpassing 5 million. To put this in perspective, Cardano, a top 10 market cap crypto currency has approximately 3.5 million wallets and a growth of 2,300 new wallets per day. New efforts are underway by members of the community to engage with builders and are working tirelessly in the background to keep them informed. For example, TerracVita (twitter @TerracVita) is one of these efforts that have reached out or made contact with nearly all of the previous projects that were building on LUNA before the depeg. After hearing about these conversations they have been having, it is clear that interest is high, but resources are scarce.
In response, our resident visionary, Zaradar, has laid out a detailed plan on how to pivot our core blockchain technology. To summarize, instead of staying stationary and attracting projects to us, we will evolve to meet the projects where they are. We have introduced “rogue-1”, our newest TestNet, based upon the Luna v2 core. It is only in its infancy but it does contain the stablecoins and all the necessary upgrades in cosmwasm and ibc to communicate with the rest of the cosmos ecosystem. Furthermore, any dApp, NFT, or other projects being built on Luna v2 will not require any additional development and will inherently be compatible with both blockchains. The core implementation will require a new genesis and rewrite of the market and oracle modules which will take some time. Thus, we see this effort as a future improvement to be completed in 2023.
A Path to Recovery
One of the most common questions that I have encountered in the past several months is, “why are you doing this?” Unfortunately, this question reflects the mistrust and skepticism that plagues the crypto community. To answer this question, I am reminded of destructive natural disasters that cause fatalities and billions of dollars in damage. In the wake of these disasters, volunteers respond to help the survivors rebuild and restore their community. Most people would think it absurd to ask one of the volunteers why they are helping.
So, my question back is, “if you could help, why wouldn’t you?” If there ever were a need for volunteer workers in a digital disaster, this is it and the time is now. The Terra collapse is comparable in scale, where over $60 billion in value was destroyed and people lost their lives and their livelihoods. Let’s not lose sight that behind the technology there are people, and ultimately that is the foundation driving this recovery.
Finally, for those on the outside looking in, the articles and stories you are reading about the perils of LUNC are true. What we are doing is crazy. We are building on a platform with a failed reputation, trying to fix a problem that we did not create, and restructuring a debt of $10 billion dollars that does not belong to us. One might say what we are doing is down right lunacy. However, from what I have witnessed these past couple months, the LUNC community is one-of-a-kind and united from overcoming trial after trial. We believe that there is a path to recovery, and it could ignite a comeback of biblical proportions, a David and Goliath story that happens once in a millennia. Here, we present a glimpse of that roadmap - one that is so crazy, it might just have a chance.
