"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. "
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.
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.
One thing I don’t understand here: where does the smart contract get the information of the current luna/usd exchange rate? It can’t be an api call surely, it must be on-chain somehow.
Do I understand this correctly: there's no inherent incentive to put the "correct" price, they just need to agree with each other. Essentially playing "Guess 2/3 of the average" but it's just "Guess the average".
Miners put the price (in dollars) in the blocks, and the medium price is taken as the price. You get penalized if the price you put in is 1 standard dev. or more off. You get 1% less of the block award you would get normally.
I know the thing is crashing and burning as we speak, but that seems like a crazy single point of failure for something claiming to be decentralized...
There is also the point that once trust in this ecosystem erodes, there will be tremendous pressure on Luna as people try to get rid of both their Luna and their Terra, and whatever you did to achieve 7 may just suddenly disappear. The spiral that's happening now.
And what coins do is in effect marketing for all other coins. If one stablecoin crashes, trust in others will erode.
> 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. "
Their solution was to staple a HYIP scheme to the side of it-- a service where you can deposit coins and get a 20% annual return.
> 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.
This made me genuinely laugh out loud! But not just because it's funny, but it's also the essence of all digital coinage.
How do you ensure you have enough Luna to maintain the exchange? If you hold enough Luna but then the price of Luna goes down, where do you get your extra Luna from? A run on your promise kills you.
Eh, but minting Luna increases the supply of Luna and thus devalues it, therefore a run means that the price of Luna increasingly drops as you mint more, meaning you have to mint more Luna, it heads to zero, you're dead. It's the opposite of stable, because a run actually accelerates itself. What am I missing here?
The balance is ostensibly that you do get some tangible rewards for Luna. But when the expected value of those drops below the outstanding balance as well, you still have a death spiral.
You print luna and 'burn' terra. Or when people get terra you print terra and burn luna. The luna tokens supposedly have value because they get a share of the transaction fees.
The printing of luna when people sell terra should be offset by luna having been burned when the terra was printed. Ideally (when the price of luna is growing) then you print less luna at sale time than you burned earlier when the terra was printed. This decreases supply of luna, making luna worth more.
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.
Because it's an intentionally obtuse Ponzi scheme. You can stake Terra on Anchor protocol which was advertised as up to 20% yoy return for lending your Terra. This creates demand for Terra, which in turn creates demand for Luna, as you can only mint new Terra by burning Luna. As long as there are newcomers buying into the ecosystem, Luna will increase in value.
Luna gets the returns from the assets the 'real money' was invested in. Terra doesn't.
The people using Terra give up their returns to Luna holders for the convenience of a universally acceptable exchange medium that is pegged to something else of value that isn't universally acceptable.
As with all leveraged investments to problems occur when the underlying real assets fail to perform as expected. Or at worst don't exist at all.
But could I trade Terra outside of this system? And say to my buddy, here is 50 Terra, and he expect it to be 50 dollars? And wouldn’t that also create an economic impetus to trade it a like a stock?
>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.
The vote is still proved by maths. Sometimes you want to just be able to poll the community. For example you may want to have your project translated into Spanish so you create a proposal to pay someone from the community fund $500 for translating the project's site and documentation.
"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. "