[Proposal] Help UST Pegging. Increase estimated minting capacity to $1200M

Summary

UST has lost peg to $1 for multiple days starting from May 8th, 2022.

UST peg has not recovered from more than a couple days now.

There are a large amount of UST withdrawal, but burning of UST is slow.

Proposal is to:

  • Increase BasePool from 50M to 100M SDR
  • Decrease PoolRecoveryBlock from 36 to 18 Blocks

This will increase minting capacity from $293M to ~$1200M

Motivation

Starting from May 9th to May 10th 2022, about $8B UST were withdrawn from Anchor Protocol ($14B.- $6B = $8B)

During the same period, only ~$1B UST were burned

With slow recovery of UST price, the market is losing confidence of UST peg, where traders and speculators keep pushing both UST de-peg, and push down LUNA price in an aggressive way.

Traders and speculators are taking advantage of the information that UST peg restoration will burn billions more UST and mint billions more LUNA.

Traders are front running and selling/shorting more LUNA and pushing LUNA price down. When the UST Mint/Burn peg trades eventually happens, these Mint/Burn will happen at a worse price, resulting more-than-necessary LUNA being minted.

To address this front running, and to protect Terra/Luna Ecosystem, here is to propose increase of BasePool size and decrease of recovery block, to increase total daily minting capacity 4x.

Proposal

Terra protocol has gone through a number of changes on BasePool size and PoolRecoveryPeriod

Current parameters are here:

https://lcd.terra.dev/market/parameters

In the recent months, UST circulation supply has increase to a peak of $18.7B on May 7th, 2022.

A market shock on May 8th, 2022, with broad based sell off across all cryptos, has pushed LUNA market cap to drop below UST market cap.

This has further triggered huge withdraw of UST from Anchor Protocol. More than $8B UST has been withdrawn from Anchor in less than 2 days.

While investors withdraw UST quickly, the UST burning speed is much slower. About $1B UST were burned during the above period when more than $8B were withdrawn.

The slow burning speed creates an extended period of UST de-peg.

LFG Effort

It is applauded that Luna Foundation Guard (LFG) is making an effort to engage with trading firms to bring back the peg, and is working towards buying more BTC. Nevertheless, the market have its own way of working.

If LFG go with more leverage, the speculators would only try to push the boundaries and push the liquidation of the known counter party.

The UST and LUNA has its own pegging mechanism, using Mint and Burn. However, the majority of the current market movements (de-peg of UST and price drop of LUNA) are not from this Mint and Burn, but from speculative trading activities.

Even LFG has $3.5B bitcoin in capital (current value probably much less), running against the market will be dangerous for Terra.

In extreme situation like this, Terra cannot save both UST peg, and save LUNA price at the same time.

LFG’s limited capital is risky, compared to speculative traders from everywhere.

Remember 2008? when each and every Investment Bank were attacked, one by one, until they were bankrupt, or got acquired, or got huge external funding.

Speculators does not stop, until they know there are no weakness to exploit.

Allow more efficient UST burning and LUNA minting, will in the short term put pressure to LUNA price, but will be an effective way to bring UST back to peg, which will eventually stabilize LUNA price.

Yes, billion of UST will be burned, and LUNA will be diluted significantly. Nevertheless, there are no limit in LUNA supply, this market mechanism will actually work to bring stable UST and stable LUNA price (although likely at lower price point for LUNA).

If efficient Burn/Mint is not available for an extended period, this can leave UST to be out of peg for a long period, which will significantly undermine the confidence in the market, and continue to encourage speculators to push down the peg and can potentially crash entire Terra Ecosystem.

Front Running

When burning is slow, the traders know that billions more LUNA will be minted due to UST withdrawal.

The slow burning process incentivizes traders and speculators to front run a predicable and well-known phenomena, e.g. billions more UST will be burned, and billions LUNA will be minted.

Knowing billions LUNA to be minted, traders and speculators can push down LUNA price ahead of time before the market warrants so, and force UST Mint/Burn pegging mechanism to pay a worse price.

During this extended period of time when UST losses peg, more-than-necessary amount of LUNA will be minted to restore UST peg.

A speedy recovery of UST pegging will be beneficial to the Terra / LUNA community.

Please kindly consider, or suggest other perspectives.

Thank you.

Notes

The reason that $1B UST burning is higher than $293M capacity can be due to following:

  • When UST is de-peged, the arbitrage capacity is higher than when UST is near peg
  • Traders / arbitragers are competing for the arbitrage opportunity, and commit more capital than market equilibrium

References

Understanding Terra’s market module and redemption capacity

40 Likes

Agree with the proposed changes, and perhaps might suggest to reduce the PoolRecoveryBlock even further to restore arbitrage functionality ASAP. At this point, restoring the peg is much more important than the potential issues of not having any delta figure.

13 Likes

Thanks.

Updated PoolRecoveryBlock number from 24 to 18 blocks.

This increases total estimate capacity to $1200M

8 Likes

This has been submitted for voting.

Please help vote here:

9 Likes

Hi.

I don’t think I’ve seen you on here before.

I’m concerned that doing this will make things worse, and this is a proposal done while there is a fire.

Before voting I’d like some input from the other big brains who have been on here for a while

18 Likes

I have been a quiet investor on Terra Ecosystem for a long while now, and have a vested interest in Terra’s success.

Please do invite the big brains to the discussion. Always helpful to hear from the gurus.

Please also suggest any other views / perspectives.

Thank you

4 Likes

I think it could be a way to get the peg back to 1, the big assumtion is, that enough capital wants to buy luna with the prospects of being diluted by millions of tokens every day until the peg is restored.
If no one is buying prices will decline way to fast
At current prices around 400mil luna would be minted every day

1 Like

It will.

As long as LUNA can continue to issue new tokens, until UST peg has reached

1 Like

Those are my thoughts

2 Likes

QQ. These parameters are in place and kept low in order to prevent an attack on UST. How confident are we that increasing these parameters to these levels doesn’t open terra up to a different attack vector?

1 Like

Even if there are additional attack vectors for increasing virtual liquidity, those are problems that could be solved once the peg is back in place.

Currently the only way to restore peg is to align financial incentives for buying UST, and making that the largest is of utmost importance. Any other attack vector won’t be as financially attractive as this when the virtual liquidity pool is large imo

7 Likes

I agree with the proposal

2 Likes

These parameters has been adjusted a number of times in the past. All past adjustments have been to increase the pool size to help UST peg restoration.

The last adjustment has been more Feb 1st, 2022, at the time UST marketcap has been $11.25B (according to CoinMarketcap)

The UST market size has increased significantly since then. The market movement range has also increased significantly.

As ‘unifledh’ mentioned, the attacks won’t be financially attractive with the proposed pool size.

The virtual liquidity pool has built in mechanism to help peg.

1 Like

I agree with the recommendations put forward, restoring the peg is crucial, the vote for this proposal though is scheduled for 7 days, isn’t that a bit too long considering the situation we are in right now. I also understand time has to be allowed for a quorum to be met…

11 Likes

My understanding is if more than 50% of the voters has voted Yes, the vote would be considered passed.

If 40% voted Yes, then the vote will need to wait for the remaining voters, and can take up to 7 days.

Please help spread the message if you agree to the proposal.

Thank you

3 Likes

Here is a tweet of this proposal and the governance voting.

Please help spread the message if you agree.

Thank you

5 Likes

just registed but as a luna holder this has my support.

6 Likes

Agree with this proposal, voting has been completed.

7 Likes

Thank you!

2 Likes

Instead of this, I would like to propose Do to self surrender to the USA government for securities fraud.

2 Likes