Terra's restructuring consensus
Insiders for the win.
Terra’s community (insiders) are rallying around a very pro-insider plan.
What might The Sanest Plan(tm) entail?
As someone who would benefit significantly from this proposal, I think this plan has several major flaws.
It justifies a massive redistribution on the basis of a “[network DDoS] attack” which based on what we know today is total bullshit.1 A couple of key system flaws, not an attack, killed Terra.
By giving terrible treatment to people who bought in mid-crisis, it completely eliminates one of Terra’s core ingenuities — risk symmetry.
Kwon is a visionary genius, but his hubris killed Terra. Any solution needs to remove Kwon from a leadership position and significantly reduce his protocol ownership.
I sold most of my non-Terra crypto to buy into LUNA and UST at around $25. People like me provisioned Terra with capital at the darkest hour at which Terra still had a fighting chance to survive. People like me are completely screwed by this proposal, which gives LUNA and UST buyers who rallied to LUNA’s aid 1/4th the status of OGs who took no marginal risk to defend the protocol at all during the crisis.
At the same time, people who bought LUNA post-delegation halt at $.01, even if they had the best intentions, were not provisioning any meaningful capital to the protocol (even if they wanted to). Any buying beyond that point was not only probably on spec, it didn’t move the needle at all in terms of serving the protocol’s needs.
Maybe you are thinking, “Screw fairness. The network needs to survive. Insiders need skin in the game.” Ok. I agree. But risk symmetry needs to be preserved too, or nobody will buy any equity instrument of a Terra algostable ever again.
If some redistribution were necessary, what would be the “fair time” to snapshot?
There’s only one time that’s unambiguously fair: the moment validator delegation was halted (May 12, 12:14PM EST). LUNA was trading at $.01 at this time. Once you couldn’t stake the network anymore, there were obviously 2 classes of LUNA: staked LUNA, heavily controlled by insiders, now printing money (because swap tax revenues were so high) and unstaked LUNA, which was worthless except as an option on all LUNA holders being treated equally (which had just been grossly violated).
But before you cry too hard for the insiders, know that they, as stakers of the network, were reaping the vast majority of the swap fees for themselves. Probably ~20% of all the LUNA hyperinflation after May 12th (which created 98% of LUNA outstanding today) accrued to stakers simply due to their staking privileges, which they barred outsiders from when they disabled validator delegation. (Total # of LUNAs staked went up by ~100% over the course of the crisis, some of which was external, but a large % of which probably came from the stakers themselves.
As the ratio of total LUNA to staked LUNA exploded, so too did the staking yield accruing to LUNA’s privileged stakers, who, as designed by the system, took a 20% vig for running an extremely overclocked printing press.)
My point is: people who staked the network in size did just fine, relative to the 0 incremental risk they took. Actually, they did way better than just fine. They are the last people in the room who deserve special treatment; they already treated themselves royally. If they took marginal risk by buying LUNA from $30 to $.01, they deserve to be compensated for that loyalty, just as I do.
If you’re an outside investor evaluating being a Terra2.0 angel investor, know that any bail-in which favors insiders to the proposed extent will destroy the risk symmetry of the system.
Now, maybe LUNA v2 doesn’t care about risk symmetry anymore since they don’t plan on having an algostable.
1, I think that’s a lie.
2, Terra v2 would be reborn with an unforgivable original sin: as a bunch of insiders who screwed everyone else.
Which, in turn, will incentivize a large minority (maybe a majority) of insiders to use the angel investors as exit liquidity.
Which risks a second, more prolonged death spiral as insiders take the gift and move on.
(I assume that LUNA insiders are split between never launching an algostable again— because nobody’s going to step in and defend a peg mechanism when they know their likelihood of being robbed by the protocol increases the more danger the peg is in—and others who either haven’t given up the dream, or advocate a deeper restruturing that dispenses with enough UST bad debt to re-launch after mechanisms are tweaked.)
Obviously, if LUNA 2.0 tries another algostable after implementing a totally risk-asymmetric redistribution that favors insiders along the lines of The Sanest Plan, LUNA 2.0 deserves to be shorted to zero.
Insiders will bail at the first sign of the next crisis. They’ll know better than anyone how badly intra-crisis Terra defenders were treated the last time around. The best case of defending Luna v2 in that scenario would be a blockchain rewind (breaking even) and their worst case will be zero. They’d sell hard and early, if they even bothered to wait around.
They could even do it with bots, so that the remaining insiders would have a (lame) excuse to clean out the next wave of suckers.
Meanwhile, as of this writing, there’s $2B USD worth of UST in circulation (at $.18 UST/USD) and USD $1.8B of total LUNA market cap. The USD-denominated “bad debt,” at UST’s current market cap, is just $200M. It seems like TFL is gradually buying back UST around these levels with their remaining UST and retiring it (which would explain the silence of Binance, Gemini, and all the Multisig members around the use of BTC that would otherwise create explosive legal liability.) As I have argued already, the only path to viability is retiring UST debt at 15 to 20 cents on the dollar. It’s happening as we speak. Terra will be back—as a battered but strengthened champion, significantly decentralized and capable of turning its past blunders into stepping-stones to greater greatness—or as another zombie scumchain shambling forward on the basis of insider privilege, bagholder pillaging, and a sad, fraudulent “but it wasn’t really our fault” genesis narrative.
Ok, so the LFG Foundation officially blew all their liquid reserves buying UST at $.75-.80 on the dollar. (Their remaining reserves are probably assets in bridges and other 1 year+ locks which can’t really be used here.) Then they declared network dictatorship by staking the total staked from 285M to 604M (staking 221M at distressed prices to the various validators, and banning further staking).
Which form Terra v2 takes will be a 3-way negotiation between Kwon, other Terrans, and Terra angel investors. [edit:] Kwon made another key mistake by blowing his reserves in the absence of any external bailout syndicate (that deal had fallen apart the previous day). Understandable, yes, but that decision was also disqualifying, as was the decision to hide it for 4 days while seizing control of the network.
I hope Terrans choose wisely. They created a great product that’s badly tarnished, but recoverable. Shame if they were to let something even worse happen to it.
Given the evaporation of LFG’s reserves, the asset/liability mismatch is more serious than I thought, and it would be foolish to touch Terra until after LFG’s staking control has been surrendered.
I don’t expect to write much more about Terra. This was a very expensive lesson for me in the value of decentralization, the danger of centralized cults of personality, and many other things.
The scant evidence of an attack on Terra is just a pickup in automated trading behavior from large accounts — which is to be expected when the volatility of the UST peg blew through all historical norms. This is a bullshit narrative peddled to maximize insider favoritism.