Yes, so much has been said about USTC repeg… And so little has actually been done…
It doesn’t matter which “political” faction has what opinion on this subject, because I look at it simply, realistically, from an economic point of view.
The goal of this article is not to find a miracle way to achieve $1 repeg. The goal of this article is to draw attention to the basic axioms of economics and the “laws” that we cannot break on this path.
HYPERINFLATION
First of all, we must realize that we have become a victim of hyperinflation. Let’s recall – what is hyperinflation?
Hyperinflation is an extreme case of inflation. For the economy, this means the collapse of the monetary system and the collapse of economic ties. Money is devalued, it ceases to fulfill its functions – it is not a store of value.
COLLAPSE OF STABLECOIN UST
The cause of our crash and hyperinflation was the depegging between our the native cryptocurrency LUNA and the algorithmic stablecoin UST. We will not talk about the “depeg” technical details in this article, because this topic has already been covered much better by someone else before us – Please, google: how the Terra blockchain and UST stablecoin worked in the past and why this system crashed.
MEASURES TO CORRECT HYPERINFLATION
First of all, we have to accept the fact – BLOCKCHAIN is an ECONOMY.
What did countries that experienced hyperinflation do? Correct. Currency reform, new currency, crossing zeros, deflation…
After a period of hyperinflation, restoring economic stability and restoring confidence in the national currency is essential. Here are some key actions that could be taken after hyperinflation (in our “REAL WORLD”):
- Stabilization of monetary policy – Even before starting the recovery, it is important to stabilize the monetary policy. This may include the introduction of a stable currency regime, such as a fixed exchange rate to stronger currencies.
- Monetary policy reform – Reassess and possibly reform monetary policy to make it more transparent, predictable and trustworthy. This may also include strengthening the independence of central banks.
- Fiscal consolidation – The government should take steps to consolidate fiscal policies, which means minimizing public deficits and eliminating excessive spending.
- Structural reforms – The implementation of structural reforms can help restore economic competitiveness and increase productivity. This may include reforms in employment, tax policies and trade.
- Recapitalization of the banking sector – If hyperinflation has caused problems in the banking sector, recapitalization may be needed to restore confidence in banks and stabilize the financial system.
- Adjustment of the pension fund – Adjusting the pension and monitoring its growth may be important to prevent inflation from rising again.
- Support for economic diversification – Consider measures to promote diversification of the economy and reduce dependence on one sector. This may include supporting diverse and higher value-added industries.
- Support for international cooperation – If necessary, seek support from the international community. Financial aid and technical assistance can be crucial in restoring economic stability.
- Improving transparency and fighting corruption – Increasing transparency and an effective fight against corruption can contribute to restoring trust in institutions and the national currency.
- Support of social stability – When implementing reform measures, it is important to pay attention to social stability. This may include measures to protect the most vulnerable sections of the population.
Each case of crash and hyperinflation is unique, so it is important to adapt the measures to the specific conditions and needs of the country. A rapid, well-managed response and cooperation between all relevant actors is key to a successful recovery from hyperinflation.
There is so much inspiration in these measures that we could also use in the Terra Classic blockchain. Of course, we cannot implement them literally, but we are able to transform and apply these recommendations in a form that would benefit our “economy”.
Our problem is that we look for miracle solutions that go against the rules of economics and in fact do nothing to solve our main problems.
So…
What are our main problems today?
- DEBT – Our debt is in the billions of dollars. This is the basic problem why we can’t send USTC to $1 “tomorrow”.
- BLIND GREED – What is the most common motivation for people wanting a $1 USTC repeg? That’s right – profit. I’ll be honest – did you think you were going to accumulate thousands and thousands of USTC coins, then hit $1, sell it and make a massive profit? First, you’re not the only one who thinks this way – and that’s why it never happens.
- COLLATERAL – It will not work without collateral. Collateral = trust. If you don’t have collateral, you don’t have trust. We have several options for building collateral – Stablecoin MUST be backed by fiat currency, another cryptocurrency, commodity or other assets OR ANY VALUE…
- “HELL” ALGORITHM – UST was an algorithmic stablecoin that depended on LUNA. This is actually a dangerous situation, when you have to constantly rely not only on the demand for stablecoin, but also on the demand for native algorithmic cryptocurrency, which is actually collateral… You need to constantly increase the intrinsic value of these assets in various ways – locking coins, burning, other methods of reducing coins, etc. However, at the end of the day, there is a legitimate question – What is this stablecoin backed by? This means that we will always have to build some form of collateral.
- NUMBER OF COINS IN CIRCULATION – Yes, a decrease in USTC coins in circulation can help increase the price of a stablecoin. But it’s not enough to raise the price to $1 – we’ll never do that. And it still doesn’t solve the stablecoin stability issue.
- MARKET MODULE – This is the alpha and omega, the beginning and the end of everything. This gave us life, this also killed us. Why can’t we just turn on the Market module? The answer is simple – Because turning on the MM at this very moment would cause us to fire into a dead body.
What can we do?
We are in a situation where our debt is extremely high, the system is driven by blind greed, we have no collateral (and we are not creating it), we cannot use collateral in the form of LUNC coins (algorithm) and we cannot turn on the market module.
We have to follow the rules of the economy and therefore we should focus our attention on:
- FULL DEBT REPAY – “You give me” a few billion dollars, I’ll buy our debt, and I’ll try to fix the USTC, while we still won’t be sure the system will be redundant enough
- THE DEBT AND A LOW PRICE (+PRICE STABILIZATION) – Accepting the current USTC PRICE and attempting to repeg at this price and subsequently building collateral (TRUST)
- Method number 2 + controlled collateral building, controlled debt reduction and controlled stablecoin price increase
- Abandoning USTC completely and creating a new stablecoin + building trust = collateral. It is possible that we can transform the current value of USTC into the value of the new stablecoin.
- REVERSE SPLIT– yes, we have to delete the zeros in our bankrupt currency – this approach is not liked by many people, but in fact it is one of the ways to forcibly treat hyperinflation in a standard economic environment. No new value is created, but the current existing value is used, the community accepts the loss, and our debt (which we cannot repay) is artificially removed.
(Definition – In finance, a reverse stock split or reverse split is a process by which shares of corporate stock are effectively merged to form a smaller number of proportionally more valuable shares.)
Of course, the result of our effort will probably be some combination of these measures in some proportion. I don’t really know how we actually achieve that. But to be really, really honest, I rule out our ability to pay off our extremely high debt. This means that if our goal is really for USTC stablecoin to reach 1 dollar, then we will have to do – REVERSE SPLIT.
If you reject the REVERSE SPLIT and at the same time want to reach $1, you will need an enormous amount of money. I assume you don’t have this money. The alternative would be if someone would lend us this money – but that makes no sense, because: 1. no one will lend us money 2. the debt would remain here and interest would be added to it.
LET’S GET FREE FROM GREED
What is the other alternative without using REVERSE SPLIT? Accepting a low stablecoin price (much lower than $1) and trying to “anchor” the price.
DON’T YOU LIKE IT? I don’t like it either. But this is the reality we live in and these are laws we cannot break. Understand that economics has some axioms. Anyone who tells you that they have some miracle way to get the price of USTC to $1 without a reverse split – Either that person has several billion dollars that they don’t need, or they really won’t be able to do it.
People often don’t want REVERSE SPLIT because it is not possible to make money on it. They live in the illusion that they can create an increase in the price of USTC and make money from it.
Please do not spread this illusion because:
- We will never achieve such an enormous price increase
- We are never able to sustain such a price
CONCLUSION
If you see any idea for USTC repeg, always ask the question – Is this in line with the rules of economics? Does this system increase trust and stability or does it suffer from economic blindness and give us empty and unrealistic promises? Are we talking about creating value backed by something or are we trying to create value out of nothing? These are the questions that matter…
In conclusion, I would like to say – I definitely believe that we can restore the function of USTC. And I think it should be one of our main goals, because this topic has a huge potential for success for our entire ecosystem. At the same time, however, we should not forget about other measures to save the economy, while one of my favorite measures is – the support of economic activity and its diversification.
Simply put – let’s support development, build an Terra Classic ecosystem and CREATE VALUE…
Any type of positive value…
Good luck…
Mike P.