Thread by @CryptoRschTW

Just finished @banklesshq video of @zemariamacedo (Founding Partner of Delphi)and @gametheorizing (CIO of Selini), debating the bull and bear case of @terra_money

(thanks to @thedefiedge's news letter)

See below a 🧵 for summary $luna $ust

1/

TL;DR

Bull by Jose:
- Stablecoin is a multi-trillion dollar market and is a network effect business

- Centralized stablecoins will become irrelevant ultimately, and $UST is the largest and fastest growing decentralized stable - you want to bet on the winner

2/

- None of the algorithmic stablecoins have ever achieved the track record of stability and sustainability like UST

- Main thing that's backing an algo stablecoin is demand rather than the mechanism - and Terra has built an ecosystem around use cases for $UST

3/

- Terra team has been doing well in focusing on growing quickly first, and progressive decentralization later

- 4pool is a huge move - which will be the most liquid stablecoin pool in DeFi, that's the largest moat

4/

- Buying $BTC is not admission of current system doesn't work - it's just upgrading to the next stage (you won't put ETH migrating to ETH 2.0 in the same analogy)

5/

Bear by Jordy:
- $UST demand could go down when Anchor cuts rate and other L1s replicating Anchor model and offer higher yield

- Anchor's 20% yield is like a huge marketing expense to invite people to join the ecosystem and also buying more time for Terra...

6/

to expand $UST to other chains and add as much utilities to UST as possible. It's a big gamble

- Terra is somewhat centralized and the growth is inorganic, basically pumped by the devs and big supporters like Jump, how can it become truly decentralized?

7/

- When something goes wrong, the whales will exit ahead of the retails and cause panic, leaving the retails holding bunch of coins without value, which has happened many times in the history

- Adding $BTC reserve is smart, but the execution risk of bridging is huge

8/

- Also risks of depegging, market risks etc., too many assumptions being made

- Very far away from achieving a truly decentralized stablecoin - still ton of stuffs to figure out

The above is a quick summary of the Bull and Bear's key arguments, let's see full story below

9/

Topic #1 - how does $LUNA capture value and whether it's sustainable

Bull:
- Increasing demand for $UST means more $LUNA burned

- Fees generated on the Terra pays the $LUNA staking reward instead of pure inflation

10/

Bear:
- You don’t see a problem until there’s a huge problem - hard to slowly notice and fix it

- If there’s a rush for exit (on $LUNA or $UST), few sophisticated players that own most of the coins will get out first

- Historically most of the algo stablecoins didn’t work

11/

Bull response:
- None of the algorithmic stablecoins in the past have ever achieved the track record of stability and sustainability of UST (which lasted for over a year), so they are incomparable

12/

Topic #2 - why bullish / bearish on $LUNA $UST

Bull:
- Disclaimer: very bullish, most of the net worth on $LUNA and LUNA alts, but there's risk and not maxi

- Stablecoins will be multi-trillion dollar opportunity, and centralized $USDT $USDC will be irrelevant ultimately

13/

- $UST is the largest and fastest growing decentralized stablecoin

Bear:
- Disclaimer: no long / short position on LUNA

- Anchor is just a huge marketing expense for Terra

- Doubt that peg will hold through bear market and reduction in demand of $UST once yield...

14/

...on Anchor decreases

- Even if there's no depeg, other L1s could issue similar products like Anchor - add some tweaks and offer higher yields, that will reduce demand for $UST and hit $LUNA price

15/

Topic #3 - why is $UST a successful stablecoin?

Bull:
- Most ppl treat algo stablecoin as a mechanism problem, while actually it's a utility and demand problem

- The main thing backing a stablecoin is the demand - and #Terra built an ecosystem around use cases for $UST

16/

- Money also has to be spent - there are banks (such as @alice_finance) working with regulators on payment solution for $UST

- The end game is closed loop - you have a well developed DeFi system on Terra, and you also have a developed spending system

17/

Topic #4 - is algo stablecoin unstable? Seems like algo stablcoin itself is vulnerable and only has value with utilities

Bull:
- Algo stablecoins are not inherently unstable, it's just that most of them focused on ponzi incentives vs growing demand in the past

18/

- When market turns, everyone wants to get out at the same time cuz there's no use cases

Bear:
- If we are talking about $UST's use cases, we need to talk about @anchor_protocol

- The yield on Anchor is not sustainable and basically topped up by @LFG_org

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- The 20% yield is like a marketing expense to invite people to join the ecosystem and it's not working well

- And the yield is taken advantages by people such as degenbox strategy - which is not healthy

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Topic #5 - do you think $UST will fail ultimately?

Bear:
- Sort of 50/50 - you have strong devs and players like @stablekwon and @jump_, but there are risks

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- $LUNA price goes down when the entire market is down, which worries ppl that there's no enough collateral in $LUNA to absorb all $UST

- If Anchor rate drops too low that causes ppl to cash out, the burned $UST will be causing multiplier effect on $LUNA's price drop

Topic #6 - Anchor's utility

Bull:
- 20% on Anchor is unsustainable and the real rate shld be 7-12%

- The qn is then how much excess yield should Anchor pay for people to perceive the peg risk? Guessing 10% the lowest

- Disagree that the marketing expense was...

23/

unsuccessful, thinks it was massively successful

- $UST circulating supply has grown to 16B and liquidity has increased. And the longer it exists, ppl are likely to trust it (Lindy effect)

24/

Topic #7 - is LFG buying $BTC an admission that the current model isn't sustainable?

Bull:
- Don't get that argument - would ppl say $ETH moving to ETH 2.0 means that it's not working? No, it's just that 2.0 works better

- Current $LUNA model works, but as it gets to...

25/

the next stage, $BTC reserve is an important piece in bootstrapping trust into the system for it to scale further

Bear:
- Agree that adding $BTC backing is a smart move, adding diversification and stability

- But executing $BTC bridge to Terra causes huge execution risk

26/

Moderator: could purchasing $BTC mean Terra saying "we need external help for security and need to tap into the power of BTC in order to make things long-term sustainable"?

And isn't it a risk for a L1 protocol to tap into something that you can't control over ($BTC)?

27/

Bull:
- $DAI is also backed by $BTC in a very weak way - wBTC, which is basically a BitGo multi-sig. It's also backed by $USDC, which is a centralized stablecoins and can be intervened

- Still doesn't agree with the argument, think Terra is just migrating to a better model

28/

Topic #8 - is Terra becoming a bank when it's bringing $BTC into custody?

Bull:
- Agree that there's no perfect solution to bridge $BTC onto #Terra at the moment so it's kept under LFG's custody, which is not ideal

- But it doesn't make Terra a bank, cuz it already...

29/

has $LUNA as its native asset. The only thing to add is the trust assumption for bringing $BTC onto Terra.

- It's not a centralized company controlling everything

30/

Topic #9 - depeg

Bear:
- Risks came from reduction of $UST demand if Anchor rate cut or other L1s come up with same model and offer higher yield

- Terra is using Anchor to buy more time to expand to other chains and add as much utilities to $UST as possible. Big gamble

31/

Bull:
- There are risks in $UST, but so do other stablecoins - USDT/C are centralized, many $DAI backed by USDC, also smart contract risk

- DAI prioritizes safety over growth, while UST prioritizes growth over downside risk

- Concerns in $LUNA and UST are real...

32/

when $LUNA price crashes, ppl could worry that there's no enough backing for $UST, causing UST demand drop and $LUNA being minted - death spiral

- LUNA is backed by 3 things: demand for UST, demand for LUNA itself as it absorbs shifts in demand of UST, and $BTC reserve

33/

- Is $3B $BTC reserve enough? No one knows - but the system has survived until now without BTC reserve

- LFG raise also proved that investors understand the upside of $UST and the fact that stablecoin is a network effect business - only one or a few big winners will stay

34/

Topic #10 - is $LUNA / $UST truly tested?

Bull:
- Absolutely - LUNA's equivalent of Maker black Thursday was May 2021 when all the bad things happened tgt. LUNA dropped from $20 to $3, and the system survived

- Another promising thing during that tough time was...

35/

the deposit on Anchor was increasing, showing that ppl were selling $LUNA into $UST and seeing UST as the safe heaven

Bear:
- Moving from LUNA to UST isn't necessarily a "smart move", it's just ppl within the system shifting from the variable one to the stable one

36/

- Any L1 community would do the same to support the L1 when the market is down

Bull:
- Buying a L1 token at its dip is different from buying the native stablecoins, cuz that shows you trust the system - you're using the system as it's meant to be designed

37/

Bear's question: do you think the upcoming rate cut on Anchor is going to be a big test for the system?

Bull: yes it will be a big test that's never been faced before, but I'm positive on that

38/

Topic #11 - Do Kwon's key man risk and the centralization of Terra

Bear:
- Obviously there's key man risk, but don't think ppl shld be focusing on this

- The larger concern is around the centralization of Terra - the growth is inorganic...

39/

basically pumped by the devs and big supporters like Jump and Delphi, how can it become truly decentralized?

Bull:
- Believes in progressive decentralization - projects need to decentralize over time in the right way

- Thinks that Maker has gone decentralized too fast...

40/

it's a massive bureaucratic mess now. Proof that decentralizing too early is a problem

- Terra has been doing the right way - onboarding big companies that act as separate participants in the eco

- Decentralizing now would be too early, $UST is only $16B mkt cap...

41/

and we're talking abt multi-trillion market for stablecoins. The right thing to do is grow fast first and decentralize progressively later

- The community also needs the inspiration from founders and their energy to push things forward. Many projects...

42/

went decentralized cuz the founders have made it and are semi-retired while the project is not ready

- Not that there should be a centralized control, the system works without Do, but the community needs that energy of contribution and inspirational leadership

43/

Moderator to Bull: where would you put Terra on the spectrum, where $BTC / $ETH on the left, and TradFi on the right?

Bull:
- Hard to put things on a linear spectrum - ETH is decentralized but the stablecoins are extremely centralized

- For Terra, the system itself as a...

44/

Tendermint chain is fairly decentralized from a technical perspective, but yes there are centralized large companies being part of the success

Bear:
- Agree with the centralized growing theory, but has mixed feeling about it - it could create certain dynamic problems...

45/

Knows a team that worked hard on a protocol but realized that there's another one backed by the Terra founding team and Do, how are they going to compete against that?

- But probably what really matters is how $UST is going to other chains and spreading it to everyone

46/

Topic #12 - 4pool

Bull:
- 4pool is a huge move. 3pool is now the largest pool on #Curve and ends up being the bridge pool for many stablecoin swaps

- $UST has teamed up with $Frax and will send all incentives to the 4pool which shall make it the most liquid stablecoin...

47/

pool in DeFi and become the bridge pool. $Frax and $UST become the reference decentralized stablecoins across chains

Bear:
- Don't have view now as it's all experimental

- Agree that decentralized stablecoins are needed, but doesn't mean USDC will stopped being utilized

48/

Bull:
- One thing for sure is that centralized stablecoins won't work in the long run - government can freeze certain accounts for tax / AML / KYC reasons

- Don't think that other L1s can build their own version of $UST as it's not just a mechanism problem, they need...

49/

all their applications to integrate such stablecoin

Moderator: why won't the centralization fate fall on $UST? There are many centralized factors - LFG's intervention, Jump being a highly regulated institution, and BTC bridge execution etc.

50/

Bull:
- In Terra, no one can seize assets or freeze balances, and no one you can subpoena

- There are centralized factors that can make things difficult say it is forbidden to integrate $UST, but you can't destroy it in the same way like you can with USDC or USDT

51/

Moderator to Bull: can you measure the significance of the adoption of 4pool?

Bull:
- Don't have stats on hands but it will be massive win as #Curve is currently the liquidity hub for stablecoins in DeFi

- 4pool will become the most liquid pool and bring the biggest moat

52/

Topic #13 - nightmare scenarios when $UST is "too big to fail" and the collapse destroys the whole industry

Bear:
- It could be a nightmare and shake the foundation of crypto when $UST collapses at the time that most ppl already trust it

53/

- In the recent #Wonderland case, Alameda pulled $500M of liquidity from Curve pool and it's too late for the retails to realize and panic. If something similar happens to UST, the whales are likely to exit the 4pool first at the best price

54/

- What's worse, the current system of LUNA<>UST exchange has a cap of $100M per day. Unlikely that the retails can get any of that $100M

Bull: Don't agree with the idea that retails would get screwed cuz it'll be much easier for them to get out with lower slippage

55/

Bear: Yes it'll be easier for them given the sizing but they'll only know when to get out when the whales are already exited

Bull: Yes the whales will know first but they'll also suffer more slippage

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Closing arguments

Bear:
- Even with $UST keeping the peg, reduction of UST demand due to other L1s replicating Anchor would hurt LUNA price

- A lot of risks - UST risk, BTC bridge risk, market risk, centralization risk (big funds are pulling strings and have insider info)

57/

- Very far away from achieving a truly decentralized stablecoin - ton of stuffs to figure out

Bull:
- One of things that make me bullish on $LUNA is how misunderstood it still is. The peg fud and the Anchor sustainability fud are weak

- Ppl are over focusing on the...

58/

peg risk, without focusing on the upside and what will happen if it works. $UST is now the fast horse in the decentralized stablecoin race, and we're talking about a multi-trillion dollar market

- If stablecoin is a network effect business and you want to bet on the...

59/

winner, then $UST (while it's vulnerable in some ways) is growing much faster, and becoming more resilient

- Combining that with more devs building great projects of NFTs / games / new protocols on the ecosystem, there's no better bet than #Terra

60/

Phew, that's it!

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