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#Terra / #Luna / #UST Ecosystem Risks - How real are they? #UST hodlers assemble! A thread ๐งต...
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@terra_money #LUNAUST #LUNAUSDT #LUNAUSD
Full post on Reddit: tinyurl.com/2w9tna5b
#Terra / #Luna / #UST Ecosystem Risks - How real are they? #UST hodlers assemble! A thread ๐งต...
๐๐๐
@terra_money #LUNAUST #LUNAUSDT #LUNAUSD
Full post on Reddit: tinyurl.com/2w9tna5b
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I've been looking into the Terra / Luna / UST ecosystem and I perceive some clear risks to the overall ecosystem in the current setup.
The following risks seem unlikely, but the chance of them happening is above 0, thus can't be ignored. ๐
I've been looking into the Terra / Luna / UST ecosystem and I perceive some clear risks to the overall ecosystem in the current setup.
The following risks seem unlikely, but the chance of them happening is above 0, thus can't be ignored. ๐
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This includes a possible total loss of funds for Luna / UST holders.
๐ด 1. UST market cap vs Luna market cap ratio as a risk metric for #UST holders
UST Market Cap today - $10.5 bil
Luna Market Cap today - $28 bil ๐
This includes a possible total loss of funds for Luna / UST holders.
๐ด 1. UST market cap vs Luna market cap ratio as a risk metric for #UST holders
UST Market Cap today - $10.5 bil
Luna Market Cap today - $28 bil ๐
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Today, if Luna crashes more than 65% or to around $29, then Luna's market cap will be under $10.5 bil UST in circulation. What happens then? The UST/USD peg is lost. This is exactly what happened on 23 May 2021.
Can this happen again? Yes. ๐
Today, if Luna crashes more than 65% or to around $29, then Luna's market cap will be under $10.5 bil UST in circulation. What happens then? The UST/USD peg is lost. This is exactly what happened on 23 May 2021.
Can this happen again? Yes. ๐
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The problem is that as the UST/Luna market cap increases, we can end up with a situation where if the ratio goes negative again, it won't be $400 mil that are backed by nothing, but billions.
At that point, panic will be quite high. ๐
The problem is that as the UST/Luna market cap increases, we can end up with a situation where if the ratio goes negative again, it won't be $400 mil that are backed by nothing, but billions.
At that point, panic will be quite high. ๐
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If you hold Luna or UST, watching this ratio is crucial!
๐ด 2. Anchor Protocol - deposit interest crashes from 20% due to lack of yield reserves
A lot of UST was created and is used to farm the 20% interest paid by Anchor for deposits. ๐
If you hold Luna or UST, watching this ratio is crucial!
๐ด 2. Anchor Protocol - deposit interest crashes from 20% due to lack of yield reserves
A lot of UST was created and is used to farm the 20% interest paid by Anchor for deposits. ๐
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Anchor represents 50% or $9 bil of the total value locked on the Terra chain today. Anchor is basically leading the adoption of UST.
Today, Anchor has $60 mil in its yield reserves to guarantee the 20% interest on deposits. This is falling quite quickly as shown below. ๐
Anchor represents 50% or $9 bil of the total value locked on the Terra chain today. Anchor is basically leading the adoption of UST.
Today, Anchor has $60 mil in its yield reserves to guarantee the 20% interest on deposits. This is falling quite quickly as shown below. ๐
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Why is the yield reserve crashing?
Because there are more deposits getting interest vs borrowers paying it. Worse yet, Abracadabra and other protocols farm this 20% yield and compound UST deposits to drain it faster! ๐
Why is the yield reserve crashing?
Because there are more deposits getting interest vs borrowers paying it. Worse yet, Abracadabra and other protocols farm this 20% yield and compound UST deposits to drain it faster! ๐
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So where is the risk?
As soon as the 20% interest cannot be paid anymore, the interest % will be reduced to whatever is sustainable. However, suddenly, the 5.5 bil UST on Anchor deposits may want to leave Terra ecosystem to find better opportunities. ๐
So where is the risk?
As soon as the 20% interest cannot be paid anymore, the interest % will be reduced to whatever is sustainable. However, suddenly, the 5.5 bil UST on Anchor deposits may want to leave Terra ecosystem to find better opportunities. ๐
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What happens when UST market cap is reduced?
More Luna is released into circulation. Luna price goes down, people that borrowed UST with Luna get liquidated. The whole process is reversed.
What goes up, now goes down. This is a systemic risk, see point 1. ๐
What happens when UST market cap is reduced?
More Luna is released into circulation. Luna price goes down, people that borrowed UST with Luna get liquidated. The whole process is reversed.
What goes up, now goes down. This is a systemic risk, see point 1. ๐
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What can save this?
Terraform Labs injects fresh capital into the Anchor yield reserve (sounds familiar?). They did it before in July 2021. ๐
What can save this?
Terraform Labs injects fresh capital into the Anchor yield reserve (sounds familiar?). They did it before in July 2021. ๐
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This will only make things worse long term because as the Terra ecosystem grows on "credit" the systemic risk also increases as we're now talking billions not millions.
So when the music stops, who will back the yield? No one and people rush to liquidate their UST/Luna. ๐
This will only make things worse long term because as the Terra ecosystem grows on "credit" the systemic risk also increases as we're now talking billions not millions.
So when the music stops, who will back the yield? No one and people rush to liquidate their UST/Luna. ๐
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Everything is done to POSTPONE the market from finding an equilibrium between deposits/borrowers and when the rug is pulled, it may get ugly, fast.
The peg can be lost again, people get liquidated, billions are lost. Who will buy Luna if they risk losing their money?
๐
Everything is done to POSTPONE the market from finding an equilibrium between deposits/borrowers and when the rug is pulled, it may get ugly, fast.
The peg can be lost again, people get liquidated, billions are lost. Who will buy Luna if they risk losing their money?
๐
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๐ด 3. Luna price goes to near 0.
This is highly unlikely, but would make UST worthless and the whole ecosystem crashes. Likely it would not recover.
While this risk is low, it can't be excluded can it? There is nothing else backing UST but Luna. What backs Luna? ๐
๐ด 3. Luna price goes to near 0.
This is highly unlikely, but would make UST worthless and the whole ecosystem crashes. Likely it would not recover.
While this risk is low, it can't be excluded can it? There is nothing else backing UST but Luna. What backs Luna? ๐
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The risk to me is the fact that at KEY points when UST lost its peg, Terraform Labs stepped in as a "lender/buyer of last resort".
For example when the peg was lost in May 2021, Terraform Labs bought Luna, increasing its price/market cap. ๐
The risk to me is the fact that at KEY points when UST lost its peg, Terraform Labs stepped in as a "lender/buyer of last resort".
For example when the peg was lost in May 2021, Terraform Labs bought Luna, increasing its price/market cap. ๐
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When Anchor was in trouble to pay the 20% interest Terraform Labs toped it off with $70 mil.
At one point they will not be able to "control" the market from finding an equilibrium. Particularly if the ecosystem grows beyond their means of controlling divergences. ๐
When Anchor was in trouble to pay the 20% interest Terraform Labs toped it off with $70 mil.
At one point they will not be able to "control" the market from finding an equilibrium. Particularly if the ecosystem grows beyond their means of controlling divergences. ๐
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That is when the crash takes place. Can they control it then?
Anyone trying to control prices or the market will eventually fail. This is demonstrated by 5,000 years of recorded history. The more you distort prices artificially, the larger the eventual "correction". ๐
That is when the crash takes place. Can they control it then?
Anyone trying to control prices or the market will eventually fail. This is demonstrated by 5,000 years of recorded history. The more you distort prices artificially, the larger the eventual "correction". ๐
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It would be best if Anchor finds a fair interest rate for its depositors rather than "crediting" it to keep it at 20%.
At one point the money will run out and it will be painful to find equilibrium then. ๐
It would be best if Anchor finds a fair interest rate for its depositors rather than "crediting" it to keep it at 20%.
At one point the money will run out and it will be painful to find equilibrium then. ๐
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๐ด 4. Yield vampires - a risk created by the artificially high 20% interest on Anchor
As indicated under point 2, the 20% interest paid by Anchor to depositors has led to other protocols (call them "vampires") dumping a lot of UST into Anchor to farm the yield... ๐
๐ด 4. Yield vampires - a risk created by the artificially high 20% interest on Anchor
As indicated under point 2, the 20% interest paid by Anchor to depositors has led to other protocols (call them "vampires") dumping a lot of UST into Anchor to farm the yield... ๐
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...and suck the money out of Anchor's yield reserve as fast as possible. This is done by creating more UST and compounding it several time with leverage.
Basically, market participants will milk this free cash dry until there is none left and move on to the next cow. ๐
...and suck the money out of Anchor's yield reserve as fast as possible. This is done by creating more UST and compounding it several time with leverage.
Basically, market participants will milk this free cash dry until there is none left and move on to the next cow. ๐
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The market will always seek equilibrium and this 20% interest is an artificial distortion, it will not last!
Why is it allowed to continue?
It boosts the UST supply and "adoption", Luna price goes up... But it comes at a price, obviously. ๐
The market will always seek equilibrium and this 20% interest is an artificial distortion, it will not last!
Why is it allowed to continue?
It boosts the UST supply and "adoption", Luna price goes up... But it comes at a price, obviously. ๐
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The hope is that Anchor can onboard more borrowers with attractive payouts (borrow and receive money!) to cover for the deposits, but this is misleading as the vampires will only increase, usually faster and liquidate the yield reserve. ๐
The hope is that Anchor can onboard more borrowers with attractive payouts (borrow and receive money!) to cover for the deposits, but this is misleading as the vampires will only increase, usually faster and liquidate the yield reserve. ๐
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The longer they distort the market the worse it gets. Perhaps demand to borrow an additional $10 bil in the current market is simply not there... Anchor is encouraging people to borrow by giving them handouts!
What happens when they are gone?
The longer they distort the market the worse it gets. Perhaps demand to borrow an additional $10 bil in the current market is simply not there... Anchor is encouraging people to borrow by giving them handouts!
What happens when they are gone?
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TLDR:
Current Terra growth is subsidized by incentives. As soon as they stop the growth will be reversed, creating systemic risks (peg lost/crash).
Hodling UST as a "stablecoin" is a high risk in this context.
Like/follow/retweet if you liked this analysis! ๐
TLDR:
Current Terra growth is subsidized by incentives. As soon as they stop the growth will be reversed, creating systemic risks (peg lost/crash).
Hodling UST as a "stablecoin" is a high risk in this context.
Like/follow/retweet if you liked this analysis! ๐
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