Terra Classic Makes Final Push Towards USTC Re-peg 

The Terra Classic proposal seeks to re-peg USTC in a long-term approach by charging divergence fees on trades and using them to buyback the asset.

The Terra Classic (LUNC) community is once again deliberating on a new proposal that aims to re-peg TerraClassicUSD (USTC) to the dollar. This proposal, put forth by a member of the community known as Redline Drifter, advocates for a re-pegging mechanism that involves implementing divergence fees on USTC trades that fall below or exceed the peg, with the collected fees utilized to repurchase the asset.

Proposal 11487 is a signal proposal submitted on the idea, and it seeks the support of the community to go ahead with the approach. The approach in question will implement two distinct measures to establish and sustain the peg, namely Divergence Fees and a Buyback Mechanism.

Proposal 11487 – Signal – USTC Incremental Repeg, Buybacks, Staking, Swaps

Is now up for vote on Station. If you agree with this proposal please vote yes and RT. Let's take back control over our money!https://t.co/WuAjDLeNwl#LUNC #USTC $LUNC $USTC #Repeg

— RedlineDrifter (@RedlineDrifter) April 22, 2023

Divergence Protocol

As per the Agora text, the divergence protocol will operate by imposing penalties on sellers attempting to sell USTC below or above the peg’s market value. The protocol will levy fees equivalent to the difference between the market value and the peg’s value.

For instance, if a seller places a sell order for 1 USTC at a price of $0.70, the buyer will pay $0.70 for the 1 USTC, while the protocol will impose a fee of $0.30, resulting in the seller receiving $0.40. The $0.30 fee will be utilized to uphold the peg, as the sum of $0.70 and $0.30 amounts to $1.

This mechanism must be implemented across all USTC trading pairs, including those with risk assets such as BTC. It should also be enforced across all markets, including CEXs and DEXs, to ensure widespread adoption. The only exceptions to this would be regular blockchain transactions such as wallet-to-wallet transfers and payments for goods and services.

Buyback USTC

The funds received from the divergence fees will then go into buying USTC to initiate and maintain the re-peg. The purchase mechanism will be automatic and will continuously accumulate USTC in profit.

The USTC accrued from the buyback belongs to the community and will be distributed in this ratio: 47.5% of the USTC will be sent to a new USTC staking vault which is aimed at reducing USTC’s circulating supply.

Once USTC is above peg, a new USTC/LUNC liquidity pool will be opened, and 47.5% of the accrued profit will go into this new pool in a one-way swap of LUNC to USTC. The remaining 5% will be evenly divided and sent to the Oracle Pool and Community Pool.

The Terra Classic Community Reacts

The proposal has sparked reactions from the wider Terra Classic community. At the time of writing, the proposal is set to close in two days and has not yet passed, despite 51.39% of votes indicating “Yes.” However, 21.61% of voters have opposed the proposal, and some prominent validators like Allnodes and LUNC DAO have abstained from voting.

Notably, some of the validators opposing the proposal have opined that getting centralized exchanges to agree to the divergence fee protocol would be near impossible. It bears mentioning that the proposal suggests sharing some of the profit with CEXs so as to encourage them to agree to the protocol.

If the proposal does not pass, it will join a list of previous propositions that were turned down by the community. While the community eagerly seeks to see USTC re-peg to the dollar, members have challenged the methods enshrined in some of these proposals. However, a signal proposal for the Ziggy USTC re-peg plan passed three months back.