Thread by @ZeMariaMacedo

Why I'm bullish $LUNA 🌒

Centralised stables will be increasingly regulated and restricted. Decentralised stables are the endgame and will grow to become one of the largest verticals in DeFi

I believe $UST is the only truly decentralised stablecoin operating at scale

Thread 👇

1/ Stablecoins have become the backbone of DeFi, with nearly $100b in cumulative market cap

Unfortunately, over 70% of this is in centralised alternatives like USDT and USDC

2/ Centralised stablecoins are IOUs for dollars held in a bank account attached to a legal entity

Not only do users face counterparty risk with issuers, they also face potential censorship by nation states as legal entities can be coerced and bank accs frozen

3/ This is not just academic. Circle has already blacklisted multiple USDC wallets

Any protocol which relies on USDC as part of LPs or as collateral inherits its vulnerabilities. The consequences of blacklisting would be potential protocol insolvency

theblockcrypto.com/linked/102761/…

4/ The march of regulation is one-way

It’s clear to me that centralised stablecoins will increasingly become more regulated and restricted. As they do, they will push the crypto industry towards decentralised stablecoins

This is one of the largest TAMs in crypto

5/ Unfortunately, existing decentralised stables are either not stable or they’re collateralised by centralised, censorable collateral and thus inherit its vulnerabilities

@makerDAO’s $DAI is currently backed ~40% by USDC and are looking to increase this further

6/ While $FRAX is a clever mechanism, it's also backed 86% by USDC

On the other hand, the only ones not backed by centralised collateral (AMPL, ESD, DSD, BSD) have completely failed to maintain their peg

All except $UST

7/ $UST is the only decentralised stablecoin which has managed to maintain its peg while not being backed by centralised collateral

It has done this by building actual demand for its stablecoin, initially via Chai and recently via TeFi

8/ To understand how Terra achieved this we have to understand how algo stables work

An algo stable is inherently capital efficient since no external collateral is required. The tradeoff is higher blow-up risk via reflexivity on the downside: the so-called “death spiral”

9/ Most algo stables try and address the death spiral via mechanism design, creating incentives for long-term believers to come in and stabilize the system by buying coupons/bonds

These attempts have thus far all failed

10/ Mechanisms can help the death loop (LUNA increases tax rate on txs + cashflows to stakers when UST < $1), but the key is creating real demand for the stable

At this point, a bear market is just a bull market in stablecoins (ht @samkazemian); counter-cylicality is achieved

11/ Terra built demand for $UST first via Chai and recently via TeFi which, while under the radar on CT, now boasts >$2B TVL

This includes key primitives for decentralised stables,
savings account (@anchor_protocol), UST-backed synths (@mirror_protocol) and DEX (Terraswap)

12/ The weekend of May 15th was a tough test for all LUNAtics with $UST breaking down to $0.94 before regaining the peg

However, there were also some extremely bullish takeaways for me👇

13/ On the demand side:

UST TVL on Anchor kept increasing throughout the sell-off, showing many already see Anchor’s $aUST savings account as their “safe haven” asset

This is massive for an algo stable which relies

14/ On the mechanism side, we learned that:

🌒We need more on-chain liquidity for $LUNA
🌒Anchor liquidations need to improve
🌒Dependence on bLUNA in Anchor must be mitigated (e.g. adding other assets like bETH and bSOL)

...and much more

15/ No mechanism will be perfect from the get-go. The key is to back a smart, proactive community that can come together to analyze what happened and adapt

From my POV, the incredible LUNA community response has proven they can do this

https://twitter.com/Josephliow/status/1397695559818006532

16/ Most importantly, the fact that $UST survived one of the worst weeks in crypto history and is back at peg shows resiliency and adds "Lindy value" to the system

How many other uncollateralised algo stables can say the same? None

17/ At a $2B FDV, $LUNA combines a bet on the leading decentralised stablecoin + the 3rd largest Layer 1 blockchain by TVL

It is also by far the cheapest L1 by $ of TVL

Hard to find more asymmetric R/R in this market

Disclaimers:

Algo stablecoins are still an experiment. Invest at your own peril

Delphi Ventures holds $LUNA and $ANC. I personally hold $LUNA

None of this is investment advice