Helping UST maintain peg

Can’t Terra incentivize the buying up UST by temporarily (when say UST is >.99) auto”staking” that UST, in essence the UST would rapidly reward the staker as long as they hold it, with Luna which will be locked up in staking just like regular Luna. The more below peg the more rapid the reward. This would come from the new Luna being minted by the UST price being below peg and can even be added to by the community pool. This would rapidly increase demand for UST so they can get the Luna rewards. Because as I understand it UST is below peg bc of an oversupply of it(people selling) right? So people, in search of really great Luna rewards would rapidly buy up UST until it is closer to peg and the Luna they get for doing that would be staked with normal 21 day unlock period. This increases the total % of Luna staked which is great for overall stability and keeps people in the Terra ecosystem. You could ask why would people want rapid Luna rewards for holding and buying UST when the market crashes? Well everyone wants a stable stablecoin when the market crashes right? Why not have a stablecoin that gets you staking rewards too? So USDT, DAI, USDC users can flock to UST in a crash for rapid Luna rewards or at the least a very stable stablecoin. And it basically incentivizes people that are true believers and here for the long term to “help” UST survive. More % of Luna gets staked (which can’t be sold right away such as in a market crash) and more demand for UST helps it maintain peg and the closer the peg is to $1 the more confidence people have in the ecosystem growing. The more believers the easier it is to maintain the peg. Does this makes sense or no? Having a go at trying to contribute.

@Papi suggested

Ok , so forget that, we can just fund these rewards with community spend proposals . Hold Luna/USDT , and Luna/USDC and get luna mir and anc rewards , all funded from respective community spend pools. This would allow the community spend to help support liquidity for huge demand and contractions. Rather than how it’s currently handled with the stability reserve. This wouldnt replace the stability reserve but it could take off a bit of the burden. Would be interested to hear TFLs take on this. Could roll this out quickly and might help the current pressure.

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Ok this is the general idea:

The price of LUNA in this current market is affected by two things :

  • Price speculation
  • It’s function as a reserve to help maintain the UST(and other stable coin) peg(s)

The current structure of this ecosystem begins to buckle when there is a huge demand to withdraw out of the terra ecosystem as this creates downward pressure for UST and for Luna. While i dont think the system is broken i think that in extreme situations the LUNA sell pressure caused by the stability mechanism comes with some inherent risks around liquidity . (Please bear with me im on my second pass of the the stress testing whitepaper)

To help soften the downward pressure and provide more stability to the peg and the eco system i think it is worth while to consider a mechanism in which Luna/ non terra stable coin pairs are incentivized.

And so the suggestion here is to build out a trustless yield farms that incentivizes Luna/USDC, Luna/DAI, Luna/USDT pairs.

Will probably make the most sense once we’re bridging non terra native assets on to terra chain but this could be deployed on ETH and BSC via wrapped assets. The idea here is this could act as a dynamic back stop where the community could intervene to help incentivize liquidity to help support the ecosystem in times of turbulence.

As far as the structure of rewards i think a base rewards should be offered in luna token , this could be 15- 20% APR , then if needed this could be scaled via community spend proposals from any of the terra native dapp communities , the idea here is that if we got to a point where it was needed we could bootstrap LUNA liquidity by incentivizing it with terra native dapp gov tokens.

This incentivized liquidity pool would of course work along side terra’s existing stability mechanism.

Edit: Here’s a link for the stress test report Stability Stress Test

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Hey mate, pretty new to labs and kinda new to crypto in general.

  • Firstly, with the assumption that we’re trying to create additional utility for LUNA so that people see a valid alternative to selling, have you thought of any alternatives to incentivised liquidity pools?

  • Being rewarded in LUNA (which is already what the fearful investor will be scared of holding) will mean that only those who are already in it for the long term will utilise this product.

Apologies for coming at you with the questions and providing no answer myself, haven’t yet been able to think of one.

Good reads, thanks.

Having Luna/stablecoin pairs will indeed help the peg, since the loss of peg is due to people selling their UST either to cash out entirely or to buy other coins. An oracle-based Luna-stablecoin pair allows people to sell their Luna outside of the LUNA/UST mint/burn function. It is essential for arbitrage functioning. However, we already have this, atleast cross-chain, as liquidity on central exchanges.

In my mind, the only reason to incentivise Luna/stablecoin pairs on Terra itself would be to reward the use of Terra. In that sense I believe it’s better to reward Luna/stablecoin pairs with swap-fees only, relying on the growth and traffic of the network to provide attractive yields. SOL/USDC pairs on Solana are rewarding over 100% APR in these volatile times.

Further incentivising could be done with by a protocol with its own token so that Luna supply doesn’t get fueled by additional staking rewards. Especially since the normal arbitrage functioning in a Bust scenario already mints Luna to keep the peg and further Luna dilution would not help. What’s more, yield farming with Luna rewards would pull investors away from Luna staking and it’s price-dampening 21-days unstaking period.


Since UST peg trends down because of two factors, let’s explore solutions for both.

  • Cash-Out: Some want good old fiat for their UST. Here we need an off-ramp. Good thing these protocols are coming. Don’t know how they run in the background but let’s assume they either buy/sell Luna on a central exchange and use their own protocol-specific treasury to maximise profitability or they just use the CEX UST/USDT market directly.
    If client wants UST = Buy Luna for USD, Burn luna to mint UST.
    If client wants USD = Burn UST for Luna, Sell Luna for USD.
    or
    If client wants UST = Buy USDT/USDC for USD, Sell USDT/USDC for UST.
    If client wants USD = Buy USDT/USDC for UST, Sell USDT/USDC for USD.

None of these actually help the peg in a bust. Scenario 1 burns UST, but this doesn’t get reflected on the UST/Stablecoin pairs unless arbitrage opportunities are executed. Scenario 2 sells UST, decreasing UST value.

However, I believe the majority of UST holders don’t want fiat. The crypto degens want stablecoin yields or other coins and will move around/redistribute and the average joe who would actively use one of the on/off-ramp anchor saving protocols wouldn’t check the peg enough to worry about it.

-Buy other coins: Real problem is UST holders who want to buy crypto as it sells-off and can’t do so on Terra or who want other stablecoins when they see the peg break due to UST-selling. For this we need three solutions, each reducing the impact of UST/stablecoin selling.

  1. Terra exchange where crypto assets can be traded directly to a UST pair. keeps UST in the system
  2. Stablecoin multi-pool liquidity aggregator. Spreads UST volatility
  3. Easier arbitrage through something similar as Harpoon Protocol. Incentivizes Peg-stability

Number 1 will find fruition this year with Loop AMM
Number 2 is already being done on MilkShake and Nerve but could use a Terra version IMO.
Number 3 doesn’t exist as far as I know off. One can do it manually but an automatic protocol would be pretty convenient.

Happy to discuss it further,
Cheers

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This was interesting, thanks.

It feels to me that all of these useful elements you mentioned are dealing with secondary and tertiary effects, but still miss dealing with the primary effect.

A stablecoin’s main job is to be stable, regardless of how and where people use it, trade it, cash it out, etc. And the primary mechanism for that is minting/burning via Luna. This needs to be rock solid and dependable, so that everything else you mentioned is building on bedrock. This is fundamental.

And I don’t see that issue addressed here: that the maximum mint/burn rate was set to a specific number (As I understand it? And in response to a bad actor mining too quickly, as I understand it?) rather than allowing that value to adjust dynamically to the market conditions.

As an engineer, this feels obvious to me: use a feedback control system (e.g. proportional control, PID control, etc) to set this maximum mint/burn rate dynamically so that the UST peg can be maintained without fail. Without truly stable “stablecoins”, the rest is a house of cards that can still come crashing down in a crisis. This is fundamental, and it seems to me that not having this nailed down harms the safety of and trust in the entire ecosystem.

I’ve heard it stated cleverly like this: “the main thing is to keep the main thing the main thing”.

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Hey Scott,

Hmm interesting, have you found any documentation on this? I know we increased the minting capacity in TIP36 and there another post on minting aswell “Liquidity Parameters - 2”. I’d bring up the feedback there aswell!

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Thanks, Ilo!

No, I’m very new to Terra Luna. 1 month, as an investor.

But I’ve been digging to understand things more deeply, after my surprise at seeing UST lose its peg this week.

Thanks for pointing me towards TIP36. After reading that, I guess what I’m proposing might be the implementation of an algorithm to increase minting parameters (Basepool and PoolRecoveryPeriod?) automatically and dynamically, rather than manually voting on it each time. A proportional control system seems like a natural fit, to me.

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Really nice write up here .Thanks! Im glad we’re having these discussions. I think long term your right, loop and other terra native AMMs will be well positioned to solve this problem in the near future. And once such a buffer is in place i hardly doubt we will see such extreme peg volatility like we’ve had recently as this will provide a nice cushion to help stabilize luna in the event of a temporary mass exodus from the ecosystem. Also with Terra native AMMs this also simplifies UST peg arbitrage as it could in theory be done all within the terra ecosytem which would then ripple to external exchanges and markets ultimately cushioning the impact of UST depegging.

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I agree that main problem is disconnect of Terra ecosystem from Ethereum ecosystem. when we say UST broke peg we probably looking at Curve pool on Ethereum. That pool is only $50M in value with $2B of UST in circulation. I would say not representative. We need to understand what UST was sold for and why? if it’s like someone said to buy other alts then we do need more UST/alts pair on Ethereum to add this use case. otherwise once you’re out of Terra , nobody needs UST on Ethereum and peg breaks. everybody looks at curve pool for broken peg even though UST doesn’t belong there.

Hey Cryptofan,
yes, in DeFi it is Curve and Uniswap, along with Terraswap who hold the most volume.
However, KuCoin trumps them, as you can see here:

So this screams to me: UST leaving Terra via KuCoin for other purposes not found on Terra.
And so a DEX on Terra is way more important than alt pairs on ETH IMHO.

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Hey Scott,
Have you tried coding these new parameters?
If you put up a good proposal and talk to the stake pool operators, there’s a decent chance it will come through!

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So, on another thread going on this topic , i suggested we lobby kucoin for UST margin support.

While initially focused on Luna liquidity , being able to buy UST on margin, on Kucoin , could also provide a dynamic buffer against peg deviation as it will allow users to use margin to basically bet on the UST peg going back to 1$, and in doing so, they would actually speed up that process.

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+1 on lobbying kucoin!
OkEx also has stablecoin margin

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