Burn and Rebuild Luna Classic
On September 15th, Terra Classic governance proposal 4661 passed with a 99.88% “yes” vote to enable a 1.2% tax and burn on all transactions on-chain. The parameter was successfully activated on the following epoch of the blockchain on September 20th. Since then, we have burned over 2 Billion LUNC in the past week (compared to 4B in the past 4 months). In the following days as CEXs and dApps adjust to the change, we will continue to monitor the burn and share the results. But one thing to note, and celebrate, is Luna Classic is now officially deflationary.
Looking back from where we started, we have passed some major milestones including the installation of v22 and the delivery of the 1.2% tax burn. We have successfully transitioned from the emergency phase to the rebuild stage. Here we outline the three major objectives we are working on — rebuild the algorithmic fungible token, rebuild the project ecosystem, and rebuild independence.
Rebuild the Algorithmic Fungible Token (AFT)
As noted by Alex Forshaw, the past Terra swap mechanism was able to reduce the Luna supply by approximately 50% over an 18 month period. There were obvious flaws in the previous system (leading to the hyperinflation of Luna and collapse of UST), but nonetheless it is likely our best shot in drastically reducing the total supply.
There are several stages to the rebuilding the market swap. The first is the debt to equity swap in order to repeg the AFT to a dollar. Most people have heard of government “bailouts” where some entity steps in and covers the bill. While we could seek a bailout from an external investor or entity, the community would then be beholden to them, whether we like it or not. Decisions about the future of the chain and the AFT would likely be governed by this entity, thus, centralizing decisions and power. Therefore, the ideal situation is similar in principle to the burn tax — everyone in the community can shoulder the burden. This process would either require a certain percent dilution or community fund raising, but would immediately repeg the AFT to $1 and, most importantly, provide substantial immediate collateralization of the AFT. At the time of the debt restructure, the market swap would still be disabled. The repeg team, lead by Forshaw, are working on a significantly strengthened capital control system to dramatically reduce the odds of another death spiral. A large, on-chain, programmatic reserve, meanwhile, would be designed to retire the entire circulating supply of USTC at a volume-weighted average price of around $.50. This would not shield LUNC holders from significant losses in the event of a systemic crisis, but it would make a hyperinflationary scenario theoretically impossible. The timeline of this plan takes place in several pieces, with the first steps occurring before the end of 2022. Stay tuned for more details as they become available.
Rebuild the Project Ecosystem
In our previous timeline, we had proposed to explore technological parity with Luna v2 sometime mid-2023 in order to facilitate the growth of utility. We are excited to share that this has been fast-tracked; we are implementing this now. There were a series of fortunate events that made this possible.
Inter-Block Communication — Back in May when the depeg happened, the Inter-Blockchain Communication (IBC) protocol was shutdown between Osmosis and Terra. This software patch was delivered in a permanent way, meaning the re-enablement of IBCs would not be a trivial flip of the switch. As time went on, and the recovery of Luna Classic became a reality, users with trapped liquidity (about 41B LUNC and 158M USTC) vocalized their desire to reopen the IBC channel. Several weeks ago, Osmosis grants reached out to Jacob Gadikian (renowned Cosmos developer) to assist with the effort. Since then, we have been in close communication with Jacob and his team. Not only will Jacob be assisting with the reopening of IBCs but will also “clean up the chain”. As of our last meeting a week ago, we could expect these changes within the next few weeks. That being said, there is still a significant amount of testing and migration that needs to be done, so the deployment of the changes is still several months away.
Upgrades and Utility — The chain cleanup involves quite a number of changes. Some of the changes have already been proposed as can be seen in the following pull requests.
Other changes include moving to full compatibility with cosmos v45.8 and tendermint v0.34. This would bring the Luna Classic chain on par with Luna v2, enabling project dApps to develop once and deploy twice. With the technological gap closed, we expect to dramatically increase the number of projects supported in the Classic ecosystem.
There is one catch. Many third parties that have offered help have expressed that we should be completely independent of TFL. This leads us to our next objective.
Rebuild Independence
On September 14th, a warrant was issued by South Korean authorities for the arrest of Do Kwon and five other members of Terraform Labs (TFL). Naturally, many questions regarding the relationship between TFL, Do Kwon, and Luna Classic were raised and concerns about any connections were voiced. Similarly, Jacob Gadikian would conditionally help us if we stand as an independent blockchain. While the Luna Classic blockchain is completely independent, and no one person or entity has the control or authority to dictate the fate of this chain, there are some current off-the-blockchain dependencies that we would like the community to be aware of, and offer some ideas on moving towards full decentralization.
Light Client Daemon (LCD) — Many people do not know what happened behind the scenes on the evening of August 26th, when the community code revived the blockchain. A few days before, Vegas had a conversation with a member of TFL where they told him that TFL policy was to sunset support for the public infrastructure supporting Luna Classic. This was no surprise; their focus was building on Luna v2, and thus, public facing endpoints (like the LCD) would eventually shutdown. Vegas was also told that the costs of running this infrastructure was hundreds of thousands of dollars per month. We brainstormed some ideas; but, since the LCD was still up and running for the foreseeable future, and August 26th was right around the corner, we continued to focus our efforts on obtaining 2/3 voting power necessary to upgrade the blockchain.
On the morning of August 26th (8 hours before the blockchain breaking change), we received the news that TFL would not upgrade the LCD endpoint. This would not break the blockchain, but it would require major updates to the functionality of Terra Station. I had secured a full node synced to the blockchain and could use that temporarily as a fall back with some very inconvenient work arounds in the existing app. Also, my LCD node was not production ready, had limited resources, and certainly could not support the nearly 1.5 million operations needed to be serviced per hour.
In addition, dApps and smaller central exchanges that point to lcd.terra.dev to query information about the blockchain would no longer work properly. In a last ditch effort, Vegas attempted to contact Do Kwon, and Rexyz contacted LUNC DAO. Each reached out to their respective contacts. Within the next hour, we received word that Paul Kim from TFL upgraded the public facing infrastructure. Only an hour later, governance was restored, and everyone was able to interface seamlessly with the blockchain.
Today, it is crystal clear that we needed to host our own LCD and transition off TFL’s LCD endpoint. Over the past month, Terra Rebels and TerraCVita have been gathering information about traffic, hosting, and costs to run our own endpoints. For the short term, we are looking at a backup LCD and have gained information and support from validators, Allnodes, Setten, and Autism Staking. Backup nodes with redundancy and load balancing are in the final testing phase, but should be production ready soon. When announced, we will encourage everyone to transition to the new, community owned and run LCD. Thank you to the validators for supporting this initiative.
Terra Station Wallet- Terra Station Wallet is another critical application that we do not have full control over. This was evidenced last week when our front end team needed to correct some failed gas transactions on the platform due to the tax upgrade. We have been exploring different options, including creating our own “Rebel” Station wallet, as well as investigating third party wallets popular on the cosmos ecosystem, e.g. Keplr wallet. We have working prototypes and builds of each of these options, but will require further integration testing before they are ready for production.
Fund the Community Pool — Finally, independence comes at a cost. The backup full node will require funding to continue to operate, especially if it becomes the primary node and needs to service a significant portion of the dApps and CEX’s traffic. We need to attract more developers to support the chain and prevent talent from leaving. We need to incentivize projects and dApps to bring their ideas and build a rich, thriving ecosystem of activity to the chain. The easiest funding mechanism (just a parameter change) is to take a small portion of the burn to fund the community pool, and already, we are seeing spontaneous discussions around governance to raise funds for the community pool. Preliminary budgets show that even a small 5–10% redirection will be more than sufficient to build our reserves.
In closing, I would like to share our vision and major milestones we would like to achieve in the next year. Please note that the directions presented here are all proposed changes. Any alteration to the blockchain will require the community to pass a successful governance vote. Our roadmap is accessible in our website linked below.
