Thread by @ZeMariaMacedo

As $LUNA continues to outperform, its critics also become louder

Most criticism is focused around the possibility of a bank run and $UST de-peg event

A few people have asked me about this, so rather than repeating myself I thought I’d put together a thread with my take 👇

1/ Until the recent @LFG_org reserve $BTC raise, $UST was an “algorithmic stablecoin” meaning it was backed only by endogenous collateral (i.e. $LUNA itself)

This is in contrast to debt-based stablecoins such as @MakerDAO which are overcollateralised by external assets

2/ The tradeoff here is clear:

Debt-based, overcollateralised stables are more resilient since there is always >$1 of external collateral backing the stablecoin

However, they grow slower as growth is constrained by demand for credit rather than demand for the actual stablecoin

3/ Growth struggles are why debt-based stables have to onboard centralised, censorable assets like $USDC as collateral

After all, debt-based stablecoins compete with money markets and other credit protocols for demand for leverage and must provide a competitive product

4/ Algo stables don't require debt or external collateral. As a result, they're more capital efficient and can grow far quicker than their debt-based counterparts

However, this also means they have higher tail risk and are less resilient to black swan type events

5/ The risk is the so-called death spiral, depicted below

Endogenous collateral creates reflexivity which just means a self-reinforcing positive loop; $UST contraction leads to $LUNA being minted and declining in price, which leads to fear and more $UST redemptions

6/ It's important to recognise that, other than $UST which hasn't just survived but thrived, all other algorithmic stablecoin systems have fallen victim to the death spiral

As someone who still holds a decent amount of $ESD, I can tell you a death spiral is no fun at all

7/ It's easy to focus on this, extrapolate from the past, and assume that LUNA is doomed to the same fate as its predecessors. But as with all venture investing, the right question to ask is "What if it works?"

In other words, what's the bull case for $UST ?

8/ Decentralised stablecoins are a multi-trillion dollar opportunity. They’re also the ultimate network effect product (liquidity, integrations, 'lindy', etc), meaning they'll likely concentrate around a few huge winners

In a network effects biz, he who grows fastest wins

9/ $UST's design allows it to grow far faster than its debt-based counterparts

It’s already the #1 decentralised stablecoin by market cap and growing at about 2-3x the rate of #2 ($DAI is actually declining)

But everyone knows $UST grows fast so let's talk about resilience

10/ $UST already defied the odds by not just surviving but thriving as a pure algo stable: growing supply, keeping a tight peg and withstanding shocks such as May ‘21

What Terra achieved is truly unprecedented and #few understand it. How did it happen?

11/ By building real utility for $UST, both through its investment ecosystem on Terra and cross-chain, and its burgeoning spending ecosystem

This utility acts as a demand floor for $UST and negates some of the reflexivity of the death spiral

https://twitter.com/ZeMariaMacedo/status/1402274974266691592

12/ As it moves to exogenous collateral, it will become far more resilient while still enabling fast growth

How? Exogenous collateral mitigates the death spiral by allowing $UST redemptions to $BTC, relieving the pressure on $LUNA price (more details on mechanism coming soon)

13/ The @LFG_org raise shows that once demand/market share is there, it’s not hard to bootstrap collateral

The investors who participated in that raise understand that while you can build up reserves once you have demand, you cannot build up demand by starting with reserves

14/ While exogenous collateral puts $LUNA in a much better place, with $15b in UST supply and growing, it’s reasonable to ask whether $3b in BTC is enough to backstop the peg

The answer is no one knows. This is uncharted territory and we’re definitely not out of the woods

15/ UST's dependence on @anchor_protocol, regulatory pressure, or even a global recession, can all lead to contractions in UST supply

A sufficiently violent contraction could eat through BTC reserves and leave LUNA vulnerable to a death spiral

16/ As someone who holds the majority of their net worth in LUNA, UST and Terra alts, I'm obv bullish and think this is unlikely

However, anyone holding $LUNA or $UST needs to understand and be comfortable with this risk

DYOR and don't put in more than you can afford to lose

17/ I'm bullish not because I think there are no risks, but because I understand the tradeoffs and believe the upside more than justifies the risk

Decentralised stablecoins are a multi-trillion dollar, winner-takes-most market that $UST is best positioned to win

18/ At only 15B MC for $UST, we're just barely scratching the surface of this opportunity

While tail risks do keep me up at night, I believe as $UST supply grows, LFG will be able to continue to grow the reserve to something the market is comfortable with

19/ But this is just my opinion. I understand the risks and am ready to accept the consequences of being wrong

Until that day comes, I'll be helping build the Terra ecosystem and doing my part to make the 🌕 shine brighter

20/ I'll also continue investing and contributing to other ecosystems that excite me. Most importantly, you'll never catch me or any other @Delphi_Digital team member throwing shade at projects or rooting for them to fail

WAGMI is the crypto way