Making Algorithmic Stablecoins More Stable: The Terra-Luna Case Study

We study the dynamics of the Terra-Luna collapse occurred in May 2022 by creating a simulation environment that embodies both the free market buying-selling transactions and the Terra-Luna protocol exchange features. The parameters used during the simulation generate the conditions necessary for triggering the deviation from the peg of the stablecoin UST, along with the subsequent collapse of its value to almost zero. Then we present three proposals to increase the stability of algorithmic stablecoins and we employ the simulation environment to show how they could help stabilize the algorithmic stablecoin’s peg.