Introduction

Stablecoins are cryptocurrencies that attempt to offer price stability by mimicking the price of fiat currency. Since the value of a currency is influenced by its network activity, prices are not static and tend to move away from the peg. Different stablecoins adopt different mechanisms for maintaining the peg, either using a collateral reserve of fiat, crypto, or none.

Terra USD (UST) is a stablecoin native to the Terra blockchain which maintains stability without a collateral reserve. Instead, Terra maintains its peg with an elastic supply of UST. All things held equal, contracting UST supply will result in higher price levels. Conversely, expanding UST supply will result in lower price levels.

This elasticity is implemented using Terra's native token, LUNA, through a seignorage system where LUNA is burnt to mint to UST when UST rises above the peg. In the same way, UST is burnt to mint LUNA when UST falls below the peg. Thus, in theory, LUNA is meant to absorb UST volatility. This means that LUNA price, as a result of LUNA's elasticity should have an impact on UST stability.

The purpose of our research is to evaluate whether the above theory holds true in practice. Our method will follow the steps below:

• Visualize UST and LUNA price movements.
• Compare and make inferences on peaks and troughs.

Price Movements

The charts below show the average daily price movements of UST and LUNA for the past 90 days.

In the first chart, you can see the downward trend of LUNA from early to mid-May, 2021. In this trend, the price of LUNA fell from 16.56176 USD to 5.351693 USD. Similarly, the price of UST fell from 1.000436 USD to 0.997419 USD within a similar timeframe.

Similar trends occur throughout the price movements, however, a direct correlation cannot be assumed because, in the Terra money market, all things are not equal. There are other stablecoins in the Terra ecosystem that enjoy the stability derived from LUNA's elasticity. Also other network activities such as large trades are likely to affect prices.

Other Stablecoins

Price movements for two other stablecoins KRT (Korean Won) and GBT (British Pound) are presented below to see if the same trend holds for other stablecoins.

In the charts above, you can see that our explanations hold true for KRT but the reverse is true for GBT. This suggests that GBT's decrease in price may have triggered LUNA's fluctuation.

Findings & Conclusion

At the end of our research, here are our finds:

• The fluctuations in the price of LUNA do have some impact on the prices of UST, however, there is no direct correlation since other network activities likely to affect the price of UST may occur at the same time.
• Volatility is distributed across the Terra ecosystem since the same native token, LUNA, serves other stablecoins.