# Background

Terra blockchain core has modules, oracle and market, which characterize the functionality of Terra

**Oracle module**

- The oracle module listens to oracle votes from validators and calculate exchange rates of each token pair
- The voting procedure is composed of two step, “prevote” and “vote”
- Terra uses SALT mechanism to hide the price inside the oracle prevote so that
**no one can expect the final exchange rates in advance** - Validators are using different price source for calculating oracle vote prices, but
**the number of sources are limited and fairly publicly known**

**Market module**

- The market module allows any Terra ecosystem participants to swap a token to another kind based on
**most recent**available exchange rates - There exists
**“Tobin Tax”(0.25%)**for any market swap, and “Spread Fee”(minimum 2%) for Terra<>Luna swaps

# Quick Summary

**Summary**

- An arbitrage trader created roughly KRW 17.4 million in recent 2 months, taking advantage of “bumpy” SDR exchange rates

**Strategy**

- Swap from ukrw to usdr when SDR exchange rate is under-priced
- Swap from usdr to ukrw when SDR exchange rate is over-priced
- When there exists enough frequency of SDR exchange rate swings which are wider than 2*TOBIN_TAX(0.25%), this strategy is long term profitable
- Note that the trader should pay 2*TOBIN_TAX = 0.5% per each trade round(buy&sell SDR over KRW)
- If the swing was 0.7% then the trader profits 0.7% — 0.5% = 0.2%

**Questions**

- The condition is enough frequency of wide SDR/KRW exchange rate swings(>0.5%) in very short time
- Then, question is, why SDR/KRW exchange rate is frequently shaking up and down?

# Analysis

**Accumulated swap activity**

A trader performed SDR-KRW swap trading for about 2 months, resulting in roughly 18 million KRW profit.

Capital utilized is around 90K SDR, and the player did almost 100 full round trips of swap trade.

Address : terra1qjyllg9cfv0d62axvyw4zswklkl0qa43fu8c6t

**Case Study**

We researched most recent swap trade round to understand the reason of the bumpy cross-exchange-rate of SDR/KRW

- A swap trade round explained

Above table explains that the trader found SDR expensive compared to KRW at height 209458, and immediately became cheaper at height 2090461~2090463.

Even thought the rate difference(profit rate of this round) was very small(about 0.1%) from “swap_rate_after_tax” value, actually it was much larger because the “swap_rate_after_tax” is calculated after the tobin tax 0.25%. Therefore we could guess that the swap rate for SDR/KRW was changed approximately 0.60%(0.1% + 2*0.25%) between 2090458 and 2090461

2. Votes during the trade round

Explanation of rate changes

- Note that usdr/ukrw = (usdr/uluna)/(ukrw/uluna)
- If we see the above table, the main factor of “changes” are from ukrw/uluna
- We see almost no change on “usdr/ukrw” rates
- But, we can observe that because median(usdr/uluna) changed 0.61% and median(ukrw/uluna) changed 0.14%, swap rate for usdr/ukrw changed -0.46%
- This is happening because Terra calculates median of each luna rates first, and then uses those calculated median to get each cross-rates

**Suggested Solution : Alternative cross-rate computation process**

- Alternative is to calculate each cross-rates from each vote, and then calculate median from calculated cross-rates
- From below example, if we apply alternative approach, the cross-rate doesn’t change at all, which is consistent result from the data because we can see that the cross-rates of each validator are not changed!
- So, in conclusion, when the state machine calculates each cross-rate, it should first calculate implied cross-rate of each validator, and then get median from those calculated implied cross-rate