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The Terra UST stablecoin could collapse in a bank run effect. UST is backed by an endogenous collateral Luna. Current Luna marketcap has fallen to arguably < outstanding UST. We are now in a dangerous spiral: as users panic out of UST, this reinforces the Luna crash further.

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Do Kwon

@stablekwon

May 24, 2021

$UST is not explicitly backed by $LUNA - the system allows swaps between the two assets to achieve stability. As long as $LUNA has non-zero market value, the system can offer arb incentives to bring prices to the peg.

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This means: 1. It doesn't matter if mkcap(LUNA) > mkcap(UST), though it helps 2. The system has been working as intended with UST trading at exactly the swap spread parameterized into the protocol 3. Prop 90 (gov voting now) allows absorption of 17x more UST sells than now

8:06 AM · May 24, 2021Twitter Web App

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Whether or not it is explicit collateral (like in Maker) or not, the Luna market cap is effectively backing it. You're describing the ability to maintain close to a peg even if Luna were to go to zero, but that is just playing out a bank run collapse

Ariah Klages-Mundt

@aklamun

May 24, 2021

fwiw I don't want to see Terra fail (and it yet may not). This is why I reached out first and didn't share this until others had already done so. These are just the risks as I see it