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Stable coins work on the principle that the issuer has the equivalent value of the minted coins as backing and will always trade these coins in or sell them for

Stable coins work on the principle that the issuer has the equivalent value of the minted coins as backing and will always trade these coins in or sell them for their dollar value. Therefore, nobody has the incentive to sell below their value, as they could always trade them in with the issuer, and nobody wants to buy above their value, as they can always buy them from the issuer. As the issuer (theoretically) has the whole market value as backing, you can also be sure that the price never drops. Now, in practice, having billions of dollars flying around is both very hard and unpractical. Therefore, issuers can use different stuff (like investments) as backing or, as in this case, just don't have anything approaching the necessary value at all.

mcintyre1994 4y ago
This is fundamentally different though, they never claimed AFAIK to be backed in that way like eg. USDT/USDC do. It's supposed to algorithmically maintain its peg, by being swapped with LUNA. I think the idea is that if it drops below $1 then people will swap it for LUNA, which burns the UST, reducing the total supply and increasing its value. And likewise you can swap LUNA for freshly minted UST, I think - so if it gets above $1 people will do that and the increased supply will push the price back down. I don't understand what was expected to happen if LUNA dropped 50%+ as it has, and as all non-pegged cryptocurrencies historically sometimes do. I might be missing something but it seems like this sort of peg can only hold if that LUNA token has low volatility.
- polygamous_bat 4y ago
  That is exactly what was so Ponzi about UST/Luna in the first place. It all works well and fine as long as the value of Luna keeps going up, since you have excess backing for every UST created. However, soon as Luna starts going down, your entire ecosystem is at an existential risk. This mechanism was further prolonged by Anchor, a DeFi protocol that "guaranteed" a "stable" 20% return on deposited UST. What it practically did was encouraged people to buy and hold UST, thus (a) providing much needed liquidity for creators of Luna/UST to cash out into other stablecoins or real money and (b) kept the musical chairs running, since as long as the greater fools kept buying and capital kept flowing into the ecosystem, the stability of UST/Luna wasn't challenged. These people should be in jail, IMO. UST/Luna was a technologically advanced Ponzi scheme, which also "solved" the age old Satoshi problem of "if you, the creator, have a few billion dollars in Bitcoins, but not enough people/liquidity in the market to sell it to, how do you cash out?"
netheril96 4y ago
Your are talking about normal stablecoins. UST is an algorithmic one. Quite different.
- Sebb767 4y ago
  You're right, I confused it with USDT. Sorry!

mcintyre1994 4y ago

This is fundamentally different though, they never claimed AFAIK to be backed in that way like eg. USDT/USDC do. It's supposed to algorithmically maintain its peg, by being swapped with LUNA. I think the idea is that if it drops below $1 then people will swap it for LUNA, which burns the UST, reducing the total supply and increasing its value. And likewise you can swap LUNA for freshly minted UST, I think - so if it gets above $1 people will do that and the increased supply will push the price back down. I don't understand what was expected to happen if LUNA dropped 50%+ as it has, and as all non-pegged cryptocurrencies historically sometimes do. I might be missing something but it seems like this sort of peg can only hold if that LUNA token has low volatility.

polygamous_bat 4y ago
That is exactly what was so Ponzi about UST/Luna in the first place. It all works well and fine as long as the value of Luna keeps going up, since you have excess backing for every UST created. However, soon as Luna starts going down, your entire ecosystem is at an existential risk. This mechanism was further prolonged by Anchor, a DeFi protocol that "guaranteed" a "stable" 20% return on deposited UST. What it practically did was encouraged people to buy and hold UST, thus (a) providing much needed liquidity for creators of Luna/UST to cash out into other stablecoins or real money and (b) kept the musical chairs running, since as long as the greater fools kept buying and capital kept flowing into the ecosystem, the stability of UST/Luna wasn't challenged. These people should be in jail, IMO. UST/Luna was a technologically advanced Ponzi scheme, which also "solved" the age old Satoshi problem of "if you, the creator, have a few billion dollars in Bitcoins, but not enough people/liquidity in the market to sell it to, how do you cash out?"

netheril96 4y ago

Your are talking about normal stablecoins. UST is an algorithmic one. Quite different.

Sebb767 4y ago
You're right, I confused it with USDT. Sorry!