Introduction

There has been a lot of cause for concern about not being able to redeem a 1:1 ratio for when people redeem their LUNA into UST.

First, we will look at it from a general standpoint and then we will look at some more specific metrics.

Basic Metrics

Let's first look at what basic metrics can tell us. Let's look at how the UST and LUNA Supply and price look over time.

These graphs alone don't tell us much, other than give us an idea of the initial supply of LUNA, how it has increased over time, then how it has decreased upon increasing UST demand and vice versa. They give us an overall indication of where LUNA started. Initially, when the UST supply was <4M, each LUNA burnt for UST would yield back only about 0.0125 UST, that is if we assume a 1-1 supply ratio. Even though that is the case the price of LUNA was also different at that time.

More advanced metrics

Let's now look at some more specific metrics.

One of which a lot of people like to show, here on flipside, which is the price of LUNA and how it grew as the demand for UST (UST supply) increased.

At <4M UST supply, 1 LUNA was worth 0.31739, which is quite a lot higher than the 0.0125 value we calculated earlier. In fact, it's 25x more expensive, so for the algorithm to work and keep UST at peg without any other backing, if someone that bought 1 LUNA at 0.31739 at that time and burned it with the 1:1 ratio for UST, they should get 0.0125, which would be a massive upfront loss.

Obviously, this may be my misunderstanding of how the different parameters for the burn contract work, and not taking into account other factors. But I believe this is the main reason, why a lot of people would also claim that LUNA is a "ponzi"-like ecosystem.

Moving on, we can see something interesting, when looking at the (LUNA(t) - LUNA(t-1))/(UST(t)-UST(t-1)) circulating supply ratio.

What we can see is this 25x calculation that I was referring to (at the first data point). This here shows how much the LUNA to UST burn would yield in terms of premium. Moving from UST to LUNA and the loss on the other end.

All of these spikes are where differences in LUNA supply or UST supply would have not yielded a 1:1 redemption. This is not a UST peg discussion, but specifically the circulating supply diff ratio between the two assets.

It looks to me, that everything before July 3rd is an unacceptable claim ratio. For that reason, we can stipulate that the amount of UST required to back the LUNA burning mechanism 1:1 is ~ 2.36B in UST circulating supply. Anything bellow that would cause these spikes.

Summary

From the graph above we stipulated that ~2.36B in UST would be the circulating supply, below which the burn mechanism would not work as intended. The current Bitcoin buying strategy to create a 0.98 : 1 ratio has LFG currently at 2.26B in $. This puts them 145.2M away from meeting their goal of having a reserve in times of chaos.

IF and only IF, I understood this mechanism correctly or mostly correctly, it seems like LFG will be able to meet this goal very soon and when they do, I do not see any more causes for concern, at least in the near future.