Howdy @Tobi and all:
Worth reading this thread on Luna/Terra about their recent decision to create a $1B Bitcoin collateral reserve: https://twitter.com/WestieCapital/status/1496223635396255747?s=20&t=MuCCzrcYmqy1tkeIFdMKoQ
If you think about Luna as analogous to Celo (and UST as analogous to cUSD), then:
- The Luna system currently has no well defined reserve collateral to support the price of Luna. It does, however, have the ability to infinitely mint Luna to maintain the peg of UST.
- The Celo system currently has well defined reserve collateral to support the price of Celo. It does not have the ability to infinitely mint Celo to support the peg of cUSD.
So:
- With Luna buying a $1B Bitcoin reserve they are doing what the Celo reserve is already doing.
- By considering the last resort mechanism in this report, Celo would be doing what Luna already is doing.
Miscellaneous thoughts:
- Maybe I’m missing something, but it seems crazy to me that Luna/Terra had no well defined reserve until now.
- There seems to be $10b+ of UST outstanding (with just this new $1B in collateral of Bitcoin) - so Terra is much less well collateralised than Celo (which is overcollateralised). [Note that the market cap of Luna is $20B, so in theory you could dilute out Luna and shift that $20B in value to back UST. The problem is, in a downmarket there’ll be reflexivity, so if Luna is crashing, there wouldn’t be a way to save UST by minting more and more Luna. This same limitation applies to the last resort mechanism that is being proposed around Celo {which is not to say the mechanism has no purpose, but it’s effect is limited}]
- The price of Celo (and UST) should theoretically have a floor that is based on the price of Bitcoin (and Ether for Celo), due to their reserves. [It’s a complicated relationship to calculate what that floor might be, but in theory I think there is some floor.]