Thread by @FloodCapital

1/ Luna has the most interesting and potentially profitable value accrual out of all L1s.

When UST is created Luna is burned forcing prices up over time. UST is cryptos top algorithmic & decentralized stable coin. Algo stables have recently come under fire -🧵on Luna & UST.

2/ As a quick summary of the Luna/UST mechanics:

When demand for UST is increasing it causes a burning of Luna thus reducing the supply – bullish Luna.

When demand for UST is falling it causes the minting of Luna thus increasing supply – bearish Luna.

3/ If the mechanism between UST and Luna is working properly and demand is growing this can fuel burning of Luna and rapid price appreciation.

We saw this clearly when UST increased its market cap by $1.7bn from Feb-May and Luna ran from $1.94 and peaked at $22.

4/ This does come with a potentially significant trade off – the “death spiral”.

During the May crash, UST lost its peg briefly due to the low liquidity of Luna & cascading ANC liquidations.

Some important lessons came out of that crash for Luna & UST.

5/ The main factor that allows algo stables to maintain their peg boils down to utility.

Utility gives people a reason to hold UST and creates a natural bid in the market. If Terra Dapps can provide real value to users there will always be buyers & holders of UST.

6/ The single most important factor behind the stability of UST, is that it's use cases provide real value.

Chai – for cheaper and faster payments.
Mirror – to access US equities anywhere in the world.
Anchor – allowing savers to tap into the staking rate of crypto.

7/ Applications on Terra are exploding - further increasing the stability of UST and its true value.

Many algo stables have failed because they provided no sustainable value to the end user. As yield farms ended many entered the "death spiral" as there was no long-term demand.

8/ Who is more likely to dump their algorithmic stable coin.

1. Someone who can tap into a more attractive savings rate and purchase US equities from anywhere?

2. A yield farmer whose yield has crashed from 3 to 1 digit APY?

9/ These people hold stable coins for different reasons:

One is derived from real utility that is sustainable (buying equities and saving money - thus diamond handsing UST)
Vs
Pure value extraction on yields that can disappear over night (paper hands)

10/ This system is not perfect but given all the use cases for UST, users are not there to panic and dump UST on the market.

They would rather hold and use it and taking advantage of the long term value it facilitates (savings, equities, payments). This breaks the death spiral.

11/ There are a couple tangible things that can be done to further increase stability of the UST peg:

1. Creating more applications with real use case and utility thus stabilizing UST with uncorrelated and constant demand

2. More liquidity for UST & Luna (specifically on chain)

12/ Luna has always been relatively illiquid due to the massive amount of Luna staked.

This makes Luna volatile, which is fun on the way up but dangerous on the way down. The marginal Luna prices the whole system - informing minting/burning mechanics, ANC LTV ratios & liqs.

13/ If we can increase Luna’s liquidity this should help dampen volatility and give time for market makers, investors and the natural bid derived by UST to stabilize the peg.

Utility & liquidity will facilitate a strengthening of the peg to and grow UST's "Lindy".

14/ The attribute of decentralization amongst stable coins seems to still be underappreciated in DeFi right now.

People will begin to realize the importance of this in the future. You can see it beginning with the recent CeFi leverage crackdowns & more exchange regulations.

15/ If Terra can source sufficient demand + liquidity for UST and continue to develop these decentralized applications, then Luna will have the best value accrual out of any layer one.

The UST mechanism supercharges Terra’s development and network effect.

16/ Luna/UST relationship has created a positive feedback loop within the community as everything built on Terra creates demand for UST flowing value to Luna holders.

New development is always supported as each application works together synergistically to create demand for UST.

17/ Take a moment to think about what this could be. If Terra can successfully scale UST, the asymmetry on Luna at these levels is attractive.

Imagine if the ~$100bn of stable coins on ETH went towards buying and burning, ETH would be an order of magnitude higher in price.

18/ Now some price models for Luna.

Within 90 days, February-May of 2021 UST market cap grew by $1.7bn.

This growth was driven by Mirror & Anchor, we now have countless Dapps in the pipeline many of which that have launched or are launching soon. @pylon_protocol @orion_money

19/ A reasonable assumption is for UST to grow anywhere from 50-150% before the end of the year (176 days) putting UST at a 3-5bn mcap.

This table shows the days until we "run out" of liquid supply. In green is the price we "run out" given each UST mcap at end of the year.

20/ Luna is special b/c of its value capture and unique positive feedback loop.

Every stakeholder in Luna from users to developers benefits from an increase in use & demand of UST.

Not only from Luna's price but more use cases for UST = strong peg = value for entire ecosystem.

21/ And remember @d0h0k1:

22/ Thanks for reading more content on the Terra ecosystem soon!

(*Not Financial Advice, DYOR*)

(We are long $LUNA)