Terrausd

Hi Everyone

I have a very serious question about TerraUSD (UST) How can it maintain the value of one dollar. If only one dollars of Luna need to be burn to mint TerraUSD then if Luna’s price drop. TerraUSD is undercollateralised. So for example if mint a bunch of TerraUSD at Luna = 1 dollars. Then later Luna = 0.8 dollars. Then I want to redeem my TerraUSD for Luna. What happen? I am so confused.

Thankyou

Hey @Kudos, great question!

Terra’s stability mechanism does not require that the price of Luna stays the same or increases after Terra is issued. It will in fact work under conditions where Luna’s price drops significantly. What you need to observe is that Terra remains stable insofar as enough Luna can be minted to buy back the required amount of Terra, regardless of what the price of Luna is at that moment.

To understand the dynamics in greater depth I recommend that you study this paper by Marco Di Maggio and myself, where we stress test the stability mechanism under conditions where Terra demand and Luna price drop by 90% or more. Our findings are that the only condition where Terra’s peg is at risk is when both (1) Luna supply is inflating rapidly and (2) cash flow per Luna is decreasing rapidly. We show that those conditions are possible but highly unlikely in most scenarios.

Great thank you so much I will study the paper.

You’re welcome!