I think a Q/A should be included here, too. If you got further questions and/or concerns, just post.
Q: Can this cause further LUNC hyperinflation?
A: No. The minting from swaps is limited to a certain amount, based on the tax burns of the previous period.
Q: Is this re-pegging USTC?
A: No. USTC is a speculative asset and this idea treats it like that. It is valued at market price for the swaps.
Q: What about Binance burns? They stopped burning when we minted previously.
A: We exclude manual burns (sent to the anxu wallet) from the calculation of the mint allowance. Only burns from the tax and MM swap fees will be included.
Q: What is the “mint allowance”?
A: It is the amount of LUNC and USTC that is allowed to be minted during a period. The actual swapped amount can be higher, because the allowance is increased again by swaps to the other side.
Q: ??? Can I have an example?
A: Sure: Imagine 1 USTC is worth 200 LUNC. During the previous period we burnt 500M LUNC by the tax. At a 80% allowance, this would allow the MM to mint 400M LUNC during the next period. So if now 2,000,000 USTC are swapped to LUNC through the MM, this would mint 400M LUNC in turn, effectively disabling further swaps in that direction. But if swaps now happen from LUNC to USTC (e.g. 100M LUNC for 500,000 USTC) then these 100M LUNC would again be allowed for minting.
Q: But isn’t that pointless then?
A: No, each swap incurs a fee of 0,35% which is distributed to burn (50%) and Oracle Pool (50%). The more swaps, so the more often the mint/burn happens, the more fees are generated.
Q: Okay, but what amount of swaps can we expect? Wouldn’t everyone only swap their USTC rewards to LUNC?
A: That could happen, but even then it would in turn lower the USTC supply. But when you look at the LUNC/USTC ratio during the past months, you realize that the value fluctuated mostly between 190 and 230 LUNC per USTC. This suggests that people use both directions on trades.
Q: Right, what volume can we expect then?
A: That is very hard to estimate and will depend on the on chain volume and also on arbitrage. The LUNC/USTC pairs on our DEXes had a volume of approximately 120-130k USD a month recently. Assuming this would be split equally between the DEXes and the MM, this would lead to a MM volume of maybe 30-40k USD worth.
Q: But you said USTC is valued at market value. How would arbitrage be possible?
A: The oracle prices on chain are reported every 30 seconds. Especially during high volatility, CEX prices can fluctuate quite quickly. Also DEX prices have shown significant volatility during past months, which might offer arbitrage options with the MM. It is not guaranteed though.
Q: What are the major risks? And how are they mitigated?
A: As said, the risk of hyperinflation is mitigated by very strict boundaries and limits. The risk of technical mistakes in the implementation shall be mitigated by thorough review and, if the community is willing to pay, a code audit (which would be recommended). In the unlikely case of a major flaw, 33.4% of validators could “emergency-halt” the chain for a hotfix. This is not expected to be necessary.
The likeliest risk is too high expectations which can then lead to disappointment.
Another risk is losing a portion of the LUNC burns (through MM minting) in case the MM would only be used one-way (USTC->LUNC). The equivalent of USTC then would be burnt in excess.
Q: Who is developing it? Is it ready? What is the timeline?
A: I (StrathCole) am offering to develop this voluntarily. As I do this in my free time, there is no fixed timeline possible. I expect the pure implementation (without the testing) to take 2-3 weeks. There is always the option that a team can quote for the work and get approval by the community to implement this instead.
Q: If you do it voluntarily, why do you need a proposal?
A: Because I cannot spend the time of development without a signalling proposal that shows this approach as shown is wanted by the community/governance. There have been a lot of reservations against minting of any form and also opening the Market Module. So approval for this is a prerequisite for me personally to start development work on it.
Q: How long will the tests take?
A: That is not foreseeable. As this is a critical part of the blockchain, we need to stress-test this approach in all possible ways. This includes simulated price manipulation, oracle feeder outages, price volatility, swap volume, etc. The more helping hands will take part in the testing and verification the better.
Q: As review/audit was mentioned, this is not free work?
A: No. The team that would quote for a review, or the audit company offering an audit would certainly request funds for that.