Update on Luna Tokenomics
+
How to predict when depeg will end.

Bringing back my “death spiraling Luna” model. Turns out it was accurate. All of those “Didn’t age well” jabs at it Didn’t Age Well.

1/24

Prerequisites: you must understand how Luna rewards work and have a basic understanding of the death spiral model (links in next tweet).

Or just read this thread and then go back to these later.

Crash courses:
[1] how luna accrues and distributes fees.
[2] death spiraling luna
[3] counter cyclical fees + real FUD for Terra.

[1] https://twitter.com/pedroexplore1/status/1494379344382369794
[2] https://twitter.com/pedroexplore1/status/1506396351311097865
[3] https://twitter.com/pedroexplore1/status/1507482833593450498

Lets begin! —>

Here is where we are at. Luna and UST have both expanded and contracted ~7% respectively.

Let’s discuss the value of Luna.

The sheer speed of this contraction has left thin order books and hurt investors. Perfect recipe for Arbs!

Terra has a virtual AMM which wants to hold Luna and Stablecoins in perfect balance.

When a sellers burns UST for Luna, in unbalances the pool.

This makes the next trade have a less favorable UST to Luna price. Same as any AMM like Uniswap.

The uniqueness of Terra’s AMM is this imbalance decays over time.

The variable is called TerraPoolDelta and it drops by 63% every 36 blocks -> asymptotically to zero.

Right now delta is at 5401034127083 which translates to 18% UST -> Luna fees.

A quick check of UST price reveals that UST trades at $1 miss the swap fee (1-2% error). Why would Arbs not let the Fee drop?

Because to them these two are equivalent:
- Buying UST at 0.80 from you and getting 0.82
- Buying UST at 0.97 from you and getting 0.99

They get 0.02

So the true determinant of these swap fees and hence the price of UST is how quickly participants want out of UST.

The average swap fee has been 13.27%. This is charged in Luna. Where does this Luna go? Well it gets distributed to stakers over time. I can tell you exactly —>

The 7.1M Added to the Oracle pool looks like this.

You can see the wallet that stores these fees here:

https://finder.extraterrestrial.money/mainnet/address/terra1jgp27m8fykex4e4jtt0l7ze8q528ux2lh4zh0f

Let’s appreciate this graph.

Dotted lines = expected Luna or UST left to distribute IF 0 fees were collected since Jan/22.

Note how actual UST (Red solid) is >>> expected UST (Red dotted)?

That is because SO MUCH UST was being minted which gave extra UST in fees!

Now note how Luna actual and Luna expected (yellow lines) were exactly parallel?

That is because no Luna fees are accrued during expansions!

But now we have a lot of contraction and high swap fees. This is juicy for the value of Luna.

How much? Let’s find out —>

Here we see the MINIMUM APR from staking Luna over the next two years (based on current Luna staked, 286M).

Unlike Ethereum or Polkadot, these are fees already captured by Terra, actual revenue, not some target inflation.

Here is the same Data in graph form. See how it curves up to the left?

That is because there are stablecoins (1.2B UST) being distributed to stakers.

So as Luna price drops, APR goes up because it has some non-reflexive rewards.

VS Ethereal staking is 4% regardless of price.

A valid counter here, is getting stable coins is useless if UST is worth $0. True, but the argument also necessitates the total failure of the blockchain which is a different argument. IF it does not fail this is the APR.

Either way, 0.05 Luna per Luna is 5% yield natively.

ELI5:

1 Luna staked will give you:

0.05 Luna + 1.8 UST per year. MINIMUM. Regardless of price.

So as Luna price drops that $1.8 becomes a bigger percentage vs Luna price!

Sanity check. Model says 15% minimum, actual APR is 20%. Why? Because MORE fees are coming in per minute. Hence the “minimum”.

Phew almost Done!

Next how long will it depeg?!

1.4B has exited over 33hrs or 1.3 days. Let’s check that with my death spiral prediction in my old post…

Based on actual average swap fee of 13.27% and the liquidity of the virtual AMM (the TerraDeltaPool) we should be able to burn $1.2B UST per 1 day.

We have burned 1.3B in 1.3 days.

This is good news because since model worked so far, it might also work to predict the future…

Quit rest-stop at the rest of the death spiral model.

Average price of Luna mint so far was $24 which predicted a 7.1M added to the oracle pool. Actual value was 7.1M.
So far so good!

Expected staking APR at $27 was 11%, but actual price at $18 so we get 20%.

Predicted = 1.2B UST per 1 day.

Actual = 1.3B in 1.3 days.

So our burn / day prediction is close enough so far! 20% off.

The ONLY question is how much UST needs to burn?

The following is an untested assumption and I need community feedback…

UST issuance is currently 17.14B. But the 24hr average price is $0.85.

I say 17.14B * ($1 - $0.85) needs to burn to return to $1.

That is 2.57B.

The fee tolerance for this is 15%.

Which gives us a re-peg date of 1.79 days.

What will Luna look like in such a scenario. Again it depends on the AVERAGE mint price of Luna. Here is the model for the total 3.871B UST we need to burn.

REMEMBER final Luna price is not necessarily = to average luna price. So APR might be higher or lower.

Length is totally depended on swap fee required and amount of UST that wants out. Here are 4 more scenarios.

This gives you a foundation. But it's only a small part of the story. Sentiment, meme, market feeling will all come into play.

The argument that Luna gets more valuable and that it hasnt broken yet Vs the market sentiment of 17b ust. Truly anyone's guess.