According to Terra research governance proposal :

[Proposal] Tiered repayment: 1:1 USDC refund to all UST holders up to a certain cap per-wallet using LFG funds, favouring small wallets

Hey everyone. I would like to suggest a tiered repayment system for the first batch of users.

The events that unfolded in the last few days have deeply affected all of us, and I’m sure we can agree that small to medium sized traders have been affected the most. Families have lost livelihoods, students and working professionals have lost years of savings, and lower-calibre ‘investors’ have even lost other people’s money. In a few weeks, everyone will talk about how obvious this event was, but in truth, it was very hard to see coming. LUNA was a blue chip coin and Anchor was a state of the art DeFi protocol.

It is clear that LUNA cannot be salvaged and will be used as exit liquidity to retain some of UST’s peg, which is its purpose anyway. At some level, Terraform Labs and the Luna Foundation Guard have a responsbility to get UST as close to $1.00 as possible. This will be a tough task given the sheer amount of money that’s left to repay.

I think when it comes to analyzing stakeholders, we should put the small trader first. Someone I know in my circle committed suicide last night due to the LUNA crash. Many people are suicidal, and I’m sure we’ve all seen the posts online. This is taking a disproportionate toll on smaller investors, so I believe we should prioritize paying them.

Advantages of paying small holders first

  • Reduced sentiment impact: given that small holders make up the vast majority of the community in terms of numbers, it will greatly improve general morale and sentiment since over 80% of Anchor users will be made whole
  • Easier to manage remaining creditors: once most of the creditors have been sorted out in a lump payment, the remaining creditors (institutions and multi-billionaires) will have greater mobility as solutions can be discussed and executed in a tight-knit group
  • Most effective use of funds in the interim: with only $1B or $1.5B, the majority of affected users in terms of numbers can be made 100% whole instead of making all users 10-20% whole.

I am speaking from experience here. I witnessed a site with investors getting hacked, and there was a lot of community turmoil. Ultimately, the site owner paid back most people with a small amount of funds, which made the majority of people happy and they came back to use the product. The larger shareholders were issued a debt token which is slowly being paid off. What was most interesting to me was that the stakeholder who lost the most amount of money (over 50% of the project was his) seemed the most chill and compliant. You will find that multi-billionaires tend to be more calm, reasonable, and rational when it comes to handling monetary losses. It doesn’t affect their QOL that much. For us, this could be everything.

Proposed mechanism

The exact mechanism can be worked out and tweaked, but here is what I think will be best.

  • Take a snapshot of all aUST and UST holders on the Terra blockchain at the time the depeg happened. This will stop people from splitting funds into separate wallets after seeing this proposal.
  • Calculate the amount of money needed to pay out the bottom 75% of users in full. It shouldn’t be more than $1B or $1.5B given that the top 100 Anchor addresses have over 92% of the funds. I am not sure of the exact figures, but something like “all wallets with 250k aUST or less” should be a decent parameter.
  • These addresses can then be added to a redemption whitelist. On the whitelist page, addresses that are on the list should be allowed to swap their amount of aUST or UST directly for either USDC or USDT at a 1:1 ratio, limited to the amount they had during the snapshot.

Do Kwon said he is working on arranging some funds (to make UST collateralized), and I believe my method will be the most effective way of alleviating community stress, bringing the project back, and creating a more calm, malleable and navigatable way forward when remaining stakeholders have closer seats at the table within the captain’s chambers. Thank you for reading.

Edit: 14th May Proposal Update

After a long community discussion surrounding this proposal (over 700 comments), I have reviewed multiple perspectives from multiple stakeholders and we have decided to make three major amendments to the original proposal. This will make it a near-perfect solution.

  1. Only initial deposits made into Anchor will be eligible for the refund, not yield. This will free up a decent percentage of capital which can be redistributed to more people. We should prioritize giving back people the money they actually put in, and refunding Anchor profits would cut into that. This can easily be calculated on a per-wallet basis using the methodology from this tool 102. Put simply, if you put 20,000 UST into Anchor last year and now have 24,000 UST, your refund amount would be capped at 20,000 UST.
  2. All forms of UST on Terra would count in the first refund batch, including UST staked in LPs and pools like Osmosis. I received feedback from a lot of users that had their funds staked in these services, so we will not limit refunds to just Anchor and vanilla UST – it will include all UST balances on Terra across all services (as long as they can be tracked on the blockchain).
  3. Instead of paying out just small wallets, we will pay out all wallets, including whale wallets, up to a set cap per address. This solution seems to be a good balance between including whales and having more money to make smaller players whole. It will cut into the per-wallet amount by quite a bit, but it is a more equitable solution and mirrors real-world refund setups like FDIC insurance and bankruptcy proceedings. For example, with a hypothetical per-wallet cap of $50,000, someone with $5,000 in Anchor would receive the full $5,000 as a refund, and someone with $800,000 would be limited to a $50,000 refund. We should still be able to clear out debts for most Anchor users depending on how much money LFG has left.

Thank you to everyone for their suggestions and helping me amend this proposal to make it more equitable and reasonable. It is now likely the most realistic and most beneficial solution out there, and I hope TFL is able to join the conversation.

PS. I have changed the title of this proposal from Tiered repayment: airdrop USDC/USDT to small UST holders on Terra to Tiered repayment: 1:1 USDC refund to all UST holders up to a certain cap per-wallet using LFG funds, favouring small wallets. This better reflects the spirit of the amended proposal.


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