Thread by @coryklippsten

"Let’s first understand the underlying reason for why Terra’s pegging mechanism is inherently fragile"

A passage from Hjalmark Peters' new post, "Why I am Betting against TerraUSD" 👇👇👇

1/🧵

For every 1 UST that wants to convert back to 1 USD there must be 1 USD (or any other non-Terra asset worth 1 USD) willing to either buy UST at a price of $1.00 or, due to Terra’s arbitrage mechanism, buy LUNA at whatever price.
2/

Otherwise, if there are more UST eager to leave Terra than there are USD willing to enter Terra in the way just described, UST can obviously no longer trade at parity.
3/

At the time of writing there are 18.5B UST while the market cap of LUNA is 28B USD. Naively, one might conclude from that that there should be more than enough USD available for any amount of UST that might want to leave.
4/

However, this conclusion would be incorrect. Market cap is defined as market price times circulating supply. So, one would have to sell the complete circulating supply of a token at the prevailing market price to generate proceeds to the tune of the token’s market cap.
5/

When selling a large amount of tokens, though, none but the first few of them will obtain the prevailing market price, because the price will quickly crash. For that reason, only a USD amount worth a fraction of a token’s market cap can be pulled out of the markets.
6/

Now, this line of reasoning implicitly assumes that one cannot sell more than the circulating supply, and for LUNA one can, given LUNA’s variable supply.
7/

Nevertheless, while the exact number of USD that can be extracted from LUNA markets is unknown, it is limited and the above reasoning might provide some clue about it.
8/

If net more UST than this unknown number of extractable USD want to convert to USD, then UST’s peg must break. (“Net” means that the number of USD that want to convert to UST is subtracted.)
9/

This is the reason for why UST supply contractions pose a permanent threat to the peg (assuming they are caused by UST leaving Terra and not by UST merely swapping to LUNA).
10/

"Terra counters this threat by incentivizing UST supply expansion. However, its approach is not sustainable, as pointed out in the next section: Terra’s ponzinomics"
11/11 END

Peters continues with a clear, logical post that lays bare Terra’s ponzinomics, what will start the inevitable UST/LUNA death spiral, and why the Bitcoin reserve can't change the outcome.

hjalmarpeters.medium.com/why-i-am-betti…

"Terra will remain fragile in the long run no matter what. The longer it takes for Terra to bust, the bigger Terra will be when it happens, and the bigger the repercussions will be."

For Bitcoin's sake, let's hope crypto traderz and fundz kill Luna / UST in its cradle.
#DontKwon

https://twitter.com/coryklippsten/status/1522812425505964032