The UST tobin tax of 0.35% is very high and prevents efficient arbitrage that brings UST to peg with other USD stable coins.
Proposal is to change UST Tobin Tax to 0.01% to 0.05%.
UST has lost peg to other USD stablecoins on May 8th, 2022.
The UST Tobin Tax of 0.35% 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.
Market tried to recover peg, but failed twice, and the rate stabilized between $0.9955 and $0.9965.
The 0.35% tax rate is a reason that prevents effective market arbitrage, and makes it costly to restore peg.
The trading cost for most active exchange are all lower than 0.1%. Depend on the trading volume of the trader, this can be reduced 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 Terra Tobin Tax of 0.35% is huge compared to exchange with efficient fees.
Would propose reduce Terra Tobin Tax from 0.35% to between 0.01% and 0.05%
The Terra Tobin Tax will need to be on par or below other trading fees, to promote effective arbitrage (not significantly higher)
Otherwise, the community could continue to see peg loss. These peg loss will be hard to recover, due to the Tobin Tax
There are a number of news channels reported the de-peg of UST.
It can become a reputation challenge to UST, if the pegging mechanism does not restore the peg effectively.
UST continue to range trade between $0.9955 and $0.9965.
There are no immediate sign to revert back to between $0.999 to $1.0.
Burned UST during the last two days estimate about $60m (https://terra.smartstake.io/history)
A large amount of UST ($1-2B from drop of Anchor deposits) is floating on the market, and not being burned.
With large amount of UST in the market, and not many have ben burned, this will continue to pressure the UST exchange rate.
Unless market sentiment changes significantly, the current de-peg situation likely will continue.
Tobin tax has no relationship with UST stability.
min_spread value has relationship with UST stability.
There are no reason to decrease UST tobin tax unless you want to front-run the forex swaps ^^
If min-spread is the issue, should min spread be reduced?
From terra station, it appears min-spread is at 0.5%.
Can this be reduced to 0.05%?
If trading cost for mint/burn is high, it is not possible to arbitrage using Terra’s algorithm peg.
its all about protecting arb-process from front-running. even in traditional index-based products has ±1% spread some times don’t think that will helps a lot
These are the prices that are coming 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)
The Terra Burn/Mint is intended to use market price of LUNA/USD to determine the market price for Mint and Burn 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 trade would not be possible to bring the peg to be within 50 bps, yet at the same time bear 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.
Belief and confidence are subjective. Without arbitrage, there could be a long period of time of loss of peg of UST
Looking at TerraStation, it does appear Burning UST and Minting LUNA only has min_spread fee, which is 0.5%
This is even a bigger spread that prevents efficient arbitrage.
Thanks for the information and pointer.
Will start a new thread on for min_spread reduction.