This is my proposal to fix current difference between oracle price and terraswap price. I just thought of this and seems like a good idea in my head, please stress test if this has any unintended consequences
the problem – currently there is a large difference between terraswap price and oracle price, because there isn’t enough incentive to mint, and no pure way to arbitrage the price difference
When Terraswap Price > Oracle Price, you can mint at oracle price, and burn at terraswap price
When Terraswap Price < Oracle Price, you can mint at terraswap price, and burn at oracle price
actually you never need to mint at terraswap price, since you can always buy at terraswap price, so you can just do:
you can always mint at oracle price, and you can burn at the higher of oracle price and terraswap price
This provides a quick and direct way to arbitrage any difference in price immediately, providing an incentive for people to make sure that the oracle price and terraswap price is always similar.
There could be some cushion like terraswap > oracle price within 1% or something like that.
I would just like to end by saying that I do think the problem is in fact that there is no risk-free way to arb between the terraswap price and oracle price. You can bet on mean reversion but there is uncertainty involved – you don’t know when it will play out and meanwhile you are getting 300%+ yield instead for liquidity mining. So we need to either 1) create a risk-free way to arb terraswap/oracle prices, 2) incentivize minting and burning more, or 3) (unpopular) decrease incentive for liquidity mining.