Please correct me if I am wrong, I just want to understand the possible outcomes:
Currently UST is under 1$, so someone can burn that 1 UST and get the amount of LUNA equivalent to 1$. E.g. if UST is 0.1$ and LUNA is 0.001$, then you get 1000 LUNA for every UST you burn, right?
Why someone will burn their UST?
To get profit you should sell newly minted LUNA, so someone must be willing to buy those LUNA from you. The LUNA price naturally drops, e.g. to 0.0005$. So the next UST will be burn for 2000 LUNA, which is then sold, etc.
Assume you wish to burn your UST only if you can get profit from that.
If you can burn UST and sell your newly minted LUNA => you repeat.
If you cannot sell LUNA to anyone, you’d burn 1 UST (0.1$) and get 1000 LUNA (worth now 0.5$). This is less than 1$ but still a paper profit. UST was burn, so UST price increses a little bit.
Even if the LUNA’s price become close to 0, the last burning cycle will still replace 1 UST with about 1$ of LUNAs. So there will “always” be an incentive to burn. Except…
This process stops when LUNA price is falling faster than the burning mechanism can absorb.
E.g. if you just burn 1 UST (0.1$) and get 1000 LUNA but it’s price dropped before you sold to less than 0.1$.
If the speed of price falling is faster than the repegging mechanics, noone will even bother to burn UST for a loss.
> So the first possible solution is to halt selling LUNA.
Btw, how the LUNA price in $ is calculated for correct minting?
Ideally, we must have some hard collateral, that is provided in an AMM Liquidity Pool along with LUNA. So that the LUNA’s price in $ will be computed algorithmically and therefore never fall to 0.
> So the second possible solution is to create such a pool that determine the LUNA price depending on the remaining collateral automatically (classic AMM should be just fine).
E.g. if too much sell pressure => the price of that collateral in LUNA will increase to almost infinity (there is a maximum supply issue, but let’s keep it aside for now) => the collateral price in LUNA will also accelerate exponentially, so it will always overcome the selling speed at some point.
The last threat I see is that if noone wants to burn UST anymore for some other reason.
In that case UST will just continue depegging on free markets. What are possible reasons?:
- burning UST it is not easilly accessible?
- it is not free of charge?
- something else?
What am I missing?
Is there such a pool (LUNA+Collateral) already?
Can we control the selling speed and halt it automatically to let the burning to catch up?
Can we accelerate the burning speed automatically to catch up?
Looking forward to read your thoughts on this subject, and maybe some answers…
Thank you in advance!