The UST to LUNA market swap (Burn/Mint) has a min_spread of 0.5%.
This spread is very high and prevents efficient arbitrage that brings UST to peg with other USD stable coins.
Proposal is to change UST to LUNA min_spread to 0.1%
UST has lost peg to other USD stablecoins on May 8th, 2022.
The UST to LUNA min_spread of 0.5% is a main factor that prevents efficient arbitrage that brings back UST peg to other USD stablecoins.
The UST has lost peg to other USD stablecoins on May 8th, 2022.
The lost of peg has been for 34 hours and no end in-sight.
Market tried to recover peg, but failed twice , and the rate stabilized between $0.995 and $0.996.
The 0.5% min_spread is a reason that prevents effective market arbitrage, and makes it costly to restore peg.
The trading fees for most major exchanges are all betow 0.1%. Depend on the trading volume of the trader, the fees can be further reduced and can be significantly lower. E.g. Binance has 0.075% trading fee for regular user, which can be reduced to 0.015% for high volume traders.
The UST → LUNA min_spread 0.5% is very high compared to exchanges with efficient fees.
Would propose reduce UST → LUNA min_spread from 0.5% to 0.1%
To promote effective arbitrage, the UST → LUNA min_spread will need to be on par or below other major exchange trading fees (not significantly higher).
Without effective arbitrage, the community could continue to see peg loss. These peg loss will be hard to recover, due to a high min_spread of 50 bps.
These are the market prices that are captured at the same time on Binance:
Binance: LUNA/USDT : $63.19
Binance: LUNA/UST : $63.46
Binance: UST/USDT: $0.9954
$63.19 / 63.46 ~= 0.9957
During the last 10 hours, the UST is consistently 40-50 bps below USDT.
Other market shows the same gap (FTX: LUNA/USD, KuCoin: LUNA/UST, KuCoin: USDT/UST)
Burn/Mint as Arbitrage
The Terra Burn/Mint function is intended to use market price of LUNA/USD to determine the market price for Mint and Burn rate of Luna and UST.
It is intended as the arbitrage method to bring UST to be pegged with USD algorithmically.
If the trading spread of Burn/Mint is 0.5% (50 bps), an arbitrage trader would be hard to bring the peg to be less than 50 bps, yet at the same time obtain a profit for doing so.
With a large spread (50 bps), the pegging of UST and USD within 50 bps would not be based on arbitrage algorithm, but based on people’s belief and confidence.
Human belief and confidence are subjective. Without arbitrage, there could be a sustained long period of time of loss of peg of UST.
A typical peg is consider 0.1% or less variation of the target asset price.
This is to propose to change UST to LUNA min_spread to 0.1%, for effective pegging between UST and USD
Please kindly suggest if alternate parameters are to be considered.