In relation to $UST and #bitcoin.
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This thread covers:
β’The current $BTC - $UST collaboration.
β’ The new mint/burn model between $UST and $BTC.
β’ The implications.
β’The current $BTC - $UST collaboration.
β’ The new mint/burn model between $UST and $BTC.
β’ The implications.
If you didn't already know, @LFG_org, an organization aiming to help build the decentralised economy, has been building a $BTC reserve for $UST.
Their current balance sheet exceeds $3bn and has the primary purpose of buying $BTC (not yet all bought).
Their current balance sheet exceeds $3bn and has the primary purpose of buying $BTC (not yet all bought).
So, why does $UST need a $BTC reserve?
The simple answer to this, is to reduce risk.
During volatile markets, there is a chance that we will see an exodus of funds out of $UST.
In its current model, during these contractionary periods, $UST is burned to mint $LUNA.
The simple answer to this, is to reduce risk.
During volatile markets, there is a chance that we will see an exodus of funds out of $UST.
In its current model, during these contractionary periods, $UST is burned to mint $LUNA.
The minting of $LUNA puts downward pressure on its price and in extreme circumstances can result in $LUNA entering a death spiral. This is a case where:
1. $LUNA is minted
2. Price drops
3. $LUNA is minted at a faster rate due to low price
4. Price drops further
5. Repeat
1. $LUNA is minted
2. Price drops
3. $LUNA is minted at a faster rate due to low price
4. Price drops further
5. Repeat
As you can probably tell, this is a significant risk. This is why most other algorithmic stablecoins have failed.
To counter this death spiral, we need to cut down $LUNA minting during these contractionary periods.
To counter this death spiral, we need to cut down $LUNA minting during these contractionary periods.
Through building a $BTC reserve, we are able to do this.
During periods of extreme contraction, $UST can be redeemed for $BTC, rather than $LUNA.
This allows for significant withdrawals from Terra's Stablecoin economy while effectively removing the risk of a $LUNA death spiral.
During periods of extreme contraction, $UST can be redeemed for $BTC, rather than $LUNA.
This allows for significant withdrawals from Terra's Stablecoin economy while effectively removing the risk of a $LUNA death spiral.
But the plans go further.
There will soon be a smart contract built on Terra which will include two key mechanisms:
1. Mint 1 $UST through depositing $1 worth of $BTC.
2. Burn 1 $UST to receive $BTC at close to a 1:1 ratio.
There will soon be a smart contract built on Terra which will include two key mechanisms:
1. Mint 1 $UST through depositing $1 worth of $BTC.
2. Burn 1 $UST to receive $BTC at close to a 1:1 ratio.
It's worth noting, there will be a premium paid when redeeming $BTC (1% maybe?).
So you'll be burning 1 $UST for $0.99 worth of $BTC.
This premium is put in place to make sure $BTC is only redeemed when $UST is "significantly" de-pegged ($0.99).
So you'll be burning 1 $UST for $0.99 worth of $BTC.
This premium is put in place to make sure $BTC is only redeemed when $UST is "significantly" de-pegged ($0.99).
This mechanism will have 3 key implications:
β’ Increased $UST peg security
$BTC reserves will significantly decrease de-peg risk
β’ Reduced $LUNA burn
A % of new $UST minted will effectively be used to buy $BTC rather than burn $LUNA
β’ Huge amounts of $BTC being locked up
β’ Increased $UST peg security
$BTC reserves will significantly decrease de-peg risk
β’ Reduced $LUNA burn
A % of new $UST minted will effectively be used to buy $BTC rather than burn $LUNA
β’ Huge amounts of $BTC being locked up
There is a trade-off between building reserves and burning $LUNA.
The more reserves we build, the lower the risk on $UST and the lower the likelihood of a $LUNA death spiral.
But for every % of $UST minting we put toward building a reserve, there is a % decrease in $LUNA burn.
The more reserves we build, the lower the risk on $UST and the lower the likelihood of a $LUNA death spiral.
But for every % of $UST minting we put toward building a reserve, there is a % decrease in $LUNA burn.
For example, putting 80% of $UST minting towards building a reserve would result in a huge backing for $UST.
This would make it the safest decentralised currency available, but it'd also leave just 20% to burn $LUNA.
This would make it the safest decentralised currency available, but it'd also leave just 20% to burn $LUNA.
On the other hand, we could use just 20% of $UST minting to build a reserve, and 80% to burn $LUNA.
This would still result in a hefty reserve while preserving significant amounts of $LUNA burn.
This would still result in a hefty reserve while preserving significant amounts of $LUNA burn.
I believe a reserves-to-burn ratio too high would result in capital inefficiency, as the $BTC reserves are only used for $UST redemptions when there is a "significant" de-peg.
In all other cases, $LUNA is redeemed.
In all other cases, $LUNA is redeemed.
A lot of people will focus on the one downside; a lower burn rate for $LUNA.
But look at the upside. These changes should:
β’ Reduce the riskiness of both $UST and $LUNA by several magnitudes.
β’ On-board the bitcoin maxis and other DeFi ecosystems en masse.
But look at the upside. These changes should:
β’ Reduce the riskiness of both $UST and $LUNA by several magnitudes.
β’ On-board the bitcoin maxis and other DeFi ecosystems en masse.
This is what I've picked up from this twitter space:
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