Thread by @MyLifeInDefi

1/ There's plenty FUD floating around (especially on Twitter) wrt LUNA and UST. I'm trying to keep abreast of this and stay objective. There'll always be FUD and we need to just try to make informed decisions around investments.

A thread 🧵..

$LUNA $UST #anchorprotocol

2/ $UST deposits on Anchor are benefiting from 19.5% APY. This'll drop to 18% on 1 May.
The main FUD is around the sustainability of the LUNA - UST relationship. Let me start with a quick refresher on some context and stuff we need to know.

3/ $UST is minted by burning $LUNA. Burning UST mints LUNA. The price to determine the amount of LUNA and UST minted/burned is from an Oracle. There is a tax ('swap spread fee') applied when minting and burning. This tax can vary and increases the more minting/burning happens.

4/ The daily limit in the mint/burn operation on Terra is approx. $293m before the tax goes greater than 0.5% (see agora.terra.money/t/liquidity-pa… for when the latest adjustment took place) Oh, and $293m was at the end of Jan, so that would have fluctuated with $LUNA price movement

5/ This means the ability to provide arbitrage opportunities to bring back to peg is limited. So a significant de-peg could last for some time, as arbitrageurs utilize the daily 'allowance' to bring it back. Without deep diving the reason, but it is mainly to reduce manipulation.

6/ The result of this increasing tax is a damped correction to the peg which is OK if you are happy to hold through the period.

7/ What's being added now is $BTC and $AVAX as reserves for $UST. LFG is currently purchasing $3bn worth of BTC and will allow for users to choose receive BTC rather than minting LUNA when burning UST. The same will happen for AVAX, although only around $100m initially (AFAIK)

8/ Starting to dive into how things could go wrong...

Because the $LUNA price is fairly directly affected by $UST demand, the adding of other currencies (far less correlated with UST demand) as reserves seems like a good thing... and I think it is.

9/ I think this is a good step in the right direction for the longer term stability of $UST and $LUNA.

My concern is that it might not be enough alternative currency reserves and we need further mitigating steps for longevity.

10/ I.e. If there is a significant exodus of UST in the coming months, then these reserves may not be enough to mitigate serious Terra ecosystem damage.

11/ Here's why/how this might happen:

Some event occurs that causes a X billion UST to leave Anchor Protocol quickly. One such event could simply be that the reserves run out leading to a significant drop in APY. Potentially around a 7-12% APY seems to be the number thrown about

12/ There could be other events that causes a UST exodus, but let's not itemize them. Here, lets just assume an event that causes an Exodus for our FMEA process.

13/ This UST gets liquidated on exchange causing a de-peg of UST. Not enough daily allowance to bring it back and also CEX liquidity isn't enough to absorb anything close to this amount.

14/ Because of all this Exodus and FUD (relevant/warranted or not), some panic forms which further escalates the exodus of UST. Result is further de-pegging and possibly... more panic (a spiral?).

15/ The above will exhaust the BTC and AVAX reserves fairly quickly (if even in place by then). LUNA will be minted and market sold creating sell pressure.
This could reasonable result in a significant UST de-peg state.

16/ LUNA prices on CEX's driving down, and the previous FUD makers springing back up on social media saying "I told you so", it seems (I think) reasonable that LUNA holders could start to fear the worst and join the selling. Almost like a self fulfilling prophecy.

17/ LUNA exchange buy liquidity is unlikely to handle this potential volume of selling. A potential scenario where the LUNA price gets hammered.

18/ Once the LUNA price is significantly low, it's possible that the UST market cap now exceeds the LUNA market cap (possibly by a serious margin) and raising concerns about how the UST de-peg can be arbitraged back using LUNA.

19/ Let me expand on this: The lower the price of LUNA, the more LUNA needs to be minted when UST is burnt. I.e. LUNA supply will increase maybe exponentially relative to before. Supply increase -> reduction a price... especially when demand is lower and supply is ramping up.

20/ This includes a bunch of assumptions, but it is (IMO) still a potential scenario.
The above sounds like a death spiral. I'm unable to put a probability to it though.

21/ I've always been aware of a possibility of this, but this exists with any currency. Here, I actually think that all the FUD is increasing the probability of it, because it may fuel panic even if/when the system is doing it's job.

$LUNA $UST $DEPEG

I have a serious amount in Anchor Protocol, and constantly trying to be objective. I have started diversifying though. I welcome any arguments against this happening. Let's make this a conversation we can all benefit from.

$UST $LUNA #anchorprotocol