Introduction: Understandig mint/burn mechanism

One of the most important role of LUNA is maintaining its stablecoin peg. The Terra protocol adjusts its supply automatically based on the market’s condition.

Take the scenario of 1 TerraUSD (UST) trading above the $1 peg. LUNA holders, in this case, can swap $1 worth of LUNA using and sell it for 1 UST. Then, users can sell this for its equivalent dollar value and profit from the difference. In this regard, the protocol effectively decreases the supply of LUNA and increases the supply of UST, which, with enough volume, could eventually pull it back down to $1.

On the flip side, when the price of UST goes below the $1 peg, the protocol incentivizes users to burn UST in exchange for LUNA. This expands the LUNA supply and reduces UST, driving its value back to $1. The volatility in UST’s price is, therefore, absorbed through the minting and burning of LUNA tokens. In addition, the market has been able to respect the peg even at times when it went as high as 30% from $1.

Burning and Minting Analysis

Due to UST is the most important stablecoin in Terra ecosystem (more market cap), only this token is considered when making any metric comparision.

At first the Luna burns/UST mints are calculated and compared to the UST peg to 1$ to try to analyse how losing this peg relation could affect the burn/mint mechanism.

As we can see, there does not seem to be a correlation between the burn/mint mechanism and the UST peg to 1$. In my opinion, I believe that both metrics should have a strong relationship. Let's imagine that the UST price drops significantly below/above the $1 parity, that would create a great arbitrage opportunity to take some money, so many burn/mint events would occur and probably the ability to burn & mint be insufficient for demand. Due to that it will be necessary for the Terra ecosystem to bring in their Reserves to prevent the Luna price from droping. So, users will exchange their UST coins for any reserve assets.

So since we can't see a chart-relation between mint/burn and UST peg 1$, we conclude that probably the Terra ecosystem has never been insufficient for the demand in that timeframe.

To go further, I will analyse the burning/mint mechanism versus the price of Luna and the volatility of Luna.

As seen in the graphs above, there seems to be a relationship between the price of Luna and the burning/minting mechanism. I can see that the higher Luna's price the less Luna in the UST mint/burn. Checking the chart where the volatility of Luna is compared, I can't see much correlation with the mint/burn mechanism. That seems strange to me, because as said before, the more volatility in the price the more arbitrage possibilities appear to make money, so more burn/mint events will occur and maybe the ecosystem would not be able to maintain its equilibrium.

So, as far as I am concerned, during the period analysed there is no scenario in which the burn/mint mechanism has not been sufficient for demand. However, if this scenario were to be reached at some point, as mentioned above, the Terra ecosystem reserves would act to try not to break the equilibrium of the Terra ecosystem, as they would provide a redemption mechanism for tokens that do not belong to the Terra ecosystem.

Conclusions

To sum up, the burnt/mechanism has been analysed and compared to different metrics to try to identify secenarios where the demant of burn/mint was not enough. Nevertherless, this scenarios have not occured during the frametime analysed.

Yet, some scenarios where the ability to burn & mint be insufficient for demand have been explained.