Terra | UST | LUNA | An Opportunity for Wizards and Warriors of DeFi
In light of the crypto black swan event of the past week concerning the Terra network, UST and LUNA, Do Kwon announced a plan two days ago that will result in a new fork of the Terra network that will have 1 billion new Terra tokens.
The key to remember is that this new network will have zero technical connection to the existing UST and LUNA tokens. In fact, Do Kwon has indicated that UST will not be part of the new network’s vision, certainly not for the time being.
While UST has been the central narrative of Terra’s growth story over the last year, the Terra ecosystem and its community is what is worth preserving… while UST has not been successful the Terra community will find ways of iterating on the idea at some point in the future.
His focus is clearly on the existing protocol, the community and developer network, and the Terra brand itself. And let’s face it, everyone knows about Terra now, even the Fed!
The old network is functioning and may continue to be supported by the community (think ETC and ETH). But that’s largely irrelevant in this conclusion.
What’s important here is the plan as communicated, namely the distribution of new Terra tokens to existing LUNA and UST holders. LUNA holders both before and after the depegging event are being looked after. 40% will go to the snapshot of holders just before the depegging event. 10% will go to those who held tokens at the final moment of the chain halt. Whether this includes those on CEXs is unknown, but I don’t see why not as those CEXs have a share of the supply and should rightfully be compensated and distribute to their users accordingly.
However, UST holders are only being compensated if they hold at the time of the new network upgrade. While I was rather perturbed by this decision, and CT has been inundated with countless people up in arms about this plan because they sold after the attack, or they don’t feel people attempting to profit from a depegged stablecoin should be compensated, this plan actually makes the most business and community sense given that value has already exited the Terra economy. I’ll break it down…
The War Room
Bear in mind that some of the best business minds and advocates of DeFi and decentralised protocols were locked in war rooms brainstorming for days on a solution. I can imagine the calculations, whiteboards, number crunching, and scenario debates that must’ve taken place. As a lead of a highly technical and algorithmic protocol myself (Schnoodle ĐAO) as well as working in investment banking for most of my career as a senior software developer on trading, risk, and pricing systems, I know all too well how it can be behind closed doors.
The message from Do Kwon was this:
UST holders need to own a large share of the network, as the network’s debt holders they deserve to be compensated for the tokens they have been holding to the end.
Aside from the slightly bad grammar, the message is clear: “to the end”. This is called being economical with the truth; but what does this really mean for UST holders?
BuT iT’s No fAiR to ME!
Let’s say you’re in the group that sold all your UST to cut your losses. You now have the opportunity to buy them back at a significant discount. I swing traded UST during the chaos in a desperate attempt to recover my losses with moderate success, but I made the decision today to buy back all the UST that I originally held plus more, and I have offered to give away a small portion of this just to get the message of this article out faster, before the network upgrade takes place.
What about those who bought after the depegging event? Well, these are new holders providing the buy pressure. No economy should ever decline new entrants.
It’s all about business rebuilding
I have discussed the entire situation with my wife Rebecca constantly during this whole debacle. We have an incredible relationship, and she has supported me throughout, no matter what decision I made, and no matter how much money I gained or lost. She is likely going to give birth next week, and her mother arrived from Mauritius yesterday to help with the birth. So, I have had to delicately balance my devotion to her, crypto, and my project Schnoodle ĐAO. But I want to thank my incredible team, Jamie Ford, Alex Doak and Kote Akhaladze for holding the fort and continuing to BUIDL and manage everything while I handle the wider situation.
This morning, I told my wife I’m reinvesting in UST because it would mean, at its current value, I would have more UST than I started with. And for the first time she was confused about my decision. She was worried that I was speculating on hopium, and was concerned for my mental state should that risk go wrong. But then I explained everything above, and she understood everything, and gave me her full blessing. My wife is an expert in sales — that is her profession. And she realised that Do Kwon had successfully drawn up a plan that covers all the major attack vectors in crisis management:
- He is acknowledging the problem and communicating (this could be better).
- He is rewarding loyal and returning customers despite the bad situation.
- He is attracting new customers with an appealing incentive.
- He has put on time pressure to buy with the new network upgrade being the epoch.
In other words, holding UST now regardless of its value should give you confidence in that you will be compensated in the new plan. Of course, this requires faith and trust that the plan will be delivered. But, don’t forget the legal, regulatory, and social aspects of this entire matter. Changpeng Zhao (CZ), the CEO of Binance, said something very important in a tweet thread.
Minting, forking, don’t create value. Buying back, burning does, but requires funds. Funds that the project team may not have… I would like to see more transparency from them. Much more! Including specific on-chain transactions (txids) of all the funds. Relying on 3rd party analysis is not sufficient or accurate. This is the first thing that should have happened.
With pressure from the CEO of Binance, the Fed (who have the ability to enter Singapore if necessary), the Korean and Singaporean governments, the police, and even crazy people who know where he lives (his wife has apparently already been visited by a strange man), it’s highly unlikely they would try to hide or run away with the funds even if they wanted to. Mt. Gox tried, and they were eventually caught up with.
So, in my view, this is a good situation if decentralisation and the DeFi community pull together in what seems to be a legitimate project that was attacked by Wall Street who exploited its algorithm and central peg support process. If UST holders at the time of the new network upgrade receive Terra tokens, and Terra fulfils their moral and business duties (with or without pressure from the aforementioned parties), then people will trust the brand and the process, and value will enter the new system backed by existing funds, as CZ has alluded to.
If they somehow U-turned and decided to support the existing chain by finding a solution to repeg UST with the current LUNA minting algorithm (death spiral) disconnected, and using existing funds to collateralise UST, then this is also a good outcome for UST holders.
All of the above will take time, and this is a scary and uncertain time for everyone involved, especially those who are trapped in unrealised losses. Patience and nerves of steel are critical here. Like I said in a tweet yesterday, this is goblin town, and only wizards and warriors will survive. Warriors are those who fight through it and HODL. Wizards are those who trade the charts by buying high and selling low, and they may even trade the LUNA and ANC charts for additional opportunities. The weak apes will be the ones who lose during this period (those the wizards will take from).
If you want a glimpse at what’s going on behind the scenes, take a look at the Terra Stake ID platform where you can see some very interesting proposals that will come to a conclusion in the next few days.
If these don’t instil at least some confidence that the community is coming together to actively find viable solutions, then you must be an actual bear. 🐻
TLDR
As always, be careful out there, but the upshot of this article is the following:
- UST holders at the time of the network upgrade will be compensated with new Terra tokens prorated from 40% of a 1 billion supply.
- OG UST holders who have already sold have an opportunity to buy back in at a discount before the network upgrade takes place (you may or may not be up on your original stack depending on when you cut your losses).
- UST holders who bought after the depegging event are new customers. Don’t punish them. They are providing the sell pressure.
- There will be losers in this whole debacle. It’s a zero sum game. Be a warrior or a wizard. Don’t be a goblin.
