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Matt Levine did a great write up of algorithmic stablecoins here: https://www.bloomberg.com/opinion/articles/2022-05-11/terra-flops https://www.bloomberg.com/op

Matt Levine did a great write up of algorithmic stablecoins here: https://www.bloomberg.com/opinion/articles/2022-05-11/terra-flops https://www.bloomberg.com/opinion/articles/2022-05-11/terra-... "1. You wake up one morning and invent two crypto tokens. 2. One of them is the stablecoin, which I will call “Terra,” for reasons that will become apparent. 3. The other one is not the stablecoin. I will call it “Luna.” 4. To be clear, they are both just things you made up, just numbers on a ledger. (Probably the ledger is maintained on a decentralized blockchain, though in theory you could do this on your computer in Excel.) 5. You try to find people to buy them. 6. Luna will trade at some price determined by supply and demand. If you make it up on your computer and keep the list in Excel and smirk when you tell people about this, that price will be zero, and none of this will work. 7. But if you do a good job of marketing Luna, that price will not be zero. If the price is not zero then you’re in business. 8. You promise that people can always exchange one Terra for $1 worth of Luna. If Luna trades at $0.10, then one Terra will get you 10 Luna. If Luna trades at $20, then one Terra will get you 0.05 Luna. Doesn’t matter. The price of Luna is arbitrary, but one Terra always gets you $1 worth of Luna. (And vice versa: People can always exchange $1 worth of Luna for one Terra.) 9. You set up an automated smart contract — the “algorithm” in “algorithmic stablecoin” — to let people exchange their Terras for Lunas and Lunas for Terras. 10. Terra should trade at $1. If it trades above $1, people — arbitrageurs — can buy $1 worth of Luna for $1 and exchange them for one Terra worth more than a dollar, for an instant profit. If it trades below $1, people can buy one Terra for less than a dollar and exchange it for $1 worth of Luna, for an instant profit. These arbitrage trades push the price of Terra back to $1 if it ever goes higher or lower. 11. The price of Luna will fluctuate. Over time, as trust in this ecosystem grows, it will probably mostly go up. But that is not essential to the stablecoin concept. As long as Luna robustly has a non-zero value, you can exchange one Terra for some quantity of Luna that is worth $1, which means Terra should be worth $1, which means that its value should be stable. All of this is, I think, quite straightforward and correct, except for Point 7, which is insane. If you overcome that — if you can find a way to make Luna worth some nonzero amount of money — then everything works fine. "

ezzaf 4y ago
An important distinction between Terra (what is being described there) and Tether (what this thread is discussing), is that Tether claims to be backed by real assets.
- robocat 4y ago
  There is no strong distinction in backing: USDT just has a slightly more believable story. Also the price of a stablecoin can shift from it's peg, even if it has 100% backing, when there is latency/congestion/spread/volume for the arbitrage trade. That said, there is a whole heap of plenty of evidence that USDT is not backed by dollars 1:1.
prox 4y ago
So why would one want to have Luna when you got Terra? I know Terra is backed, I know Luna is speculation, not any different from doing a roulette game.
- charcircuit 4y ago
  >So why would one want to have Luna when you got Terra? There are 3 different things: Governance related, market module related, and staking related. You can spend 50 LUNA to submit a governance proposal. The second is to stake your LUNA. When your LUNA is staked the first benefit is that you can vote on governance proposals. Proposals can be onchain changes such as modifying a parameter or an offchain change which people should respect even if there is nothing technically forcing them to follow it. There is a limited amount of UST that exists so what happens if more people want UST? You can burn LUNA to mint new UST. In times where the demand for UST is strong enough to make UST go above $1 it may be profitable for someone to burn their LUNA to mint UST. Every transaction has gas fees. Any swaps between stable coins have a tobin tax. Using the market module to exchange UST for LUNA has a spread fee. All of these fees are collected and then distributed to the stakers. To help protect against times when the protocol is less active the fees are actually spread out over time. Right now every 5 blocks 5/9400000 of the reward pool is paid out to people staking. 9400000 is how many blocks there are in 2 years.

ezzaf 4y ago

An important distinction between Terra (what is being described there) and Tether (what this thread is discussing), is that Tether claims to be backed by real assets.

robocat 4y ago
There is no strong distinction in backing: USDT just has a slightly more believable story. Also the price of a stablecoin can shift from it's peg, even if it has 100% backing, when there is latency/congestion/spread/volume for the arbitrage trade. That said, there is a whole heap of plenty of evidence that USDT is not backed by dollars 1:1.

prox 4y ago

So why would one want to have Luna when you got Terra? I know Terra is backed, I know Luna is speculation, not any different from doing a roulette game.

charcircuit 4y ago
>So why would one want to have Luna when you got Terra? There are 3 different things: Governance related, market module related, and staking related. You can spend 50 LUNA to submit a governance proposal. The second is to stake your LUNA. When your LUNA is staked the first benefit is that you can vote on governance proposals. Proposals can be onchain changes such as modifying a parameter or an offchain change which people should respect even if there is nothing technically forcing them to follow it. There is a limited amount of UST that exists so what happens if more people want UST? You can burn LUNA to mint new UST. In times where the demand for UST is strong enough to make UST go above $1 it may be profitable for someone to burn their LUNA to mint UST. Every transaction has gas fees. Any swaps between stable coins have a tobin tax. Using the market module to exchange UST for LUNA has a spread fee. All of these fees are collected and then distributed to the stakers. To help protect against times when the protocol is less active the fees are actually spread out over time. Right now every 5 blocks 5/9400000 of the reward pool is paid out to people staking. 9400000 is how many blocks there are in 2 years.