#UST depeg explained. What started it, why the safety mechanisms failed and where we are rn.
Nuff said, let's dive in. π1/n
Nuff said, let's dive in. π1/n
#UST is an algorithmic stablecoin. In other words, it is not meant to be backed by reserves. Instead, it uses an algorithm to maintain the peg.
We have talked about this mechanism in this thread.
Extra precautionary steps were also taken. 2/n
We have talked about this mechanism in this thread.
https://twitter.com/0x_armin/status/1521469566429192193
Extra precautionary steps were also taken. 2/n
In April 2022, @stablekwon bought ~1.5B #BTC and 200 million worth of #AVAX as reserves.
The idea?
bloomberg.com/news/newsletteβ¦
3/n
The idea?
bloomberg.com/news/newsletteβ¦
3/n
If 1 #UST falls below 1 USD, sell the #BTC and #AVAX to buy UST, thus restoring the peg.
If 1 UST rises above 1 USD, sell the UST to buy BTC and AVAX, thus increasing the reserves.
Sounds like a win-win doesn't it. So what went wrong? 4/n
If 1 UST rises above 1 USD, sell the UST to buy BTC and AVAX, thus increasing the reserves.
Sounds like a win-win doesn't it. So what went wrong? 4/n
A couple of things. First, the macro market environment is really shitty right now. But I don't think that's the biggest problem. 5/n
The biggest problem is that #BTC and #UST are both cryptocurrencies. In other words, it is pretty likely that their prices will be correlated.
We will talk more about the correlation problem later.
Then came the initial depeg of the weekend. 6/n
We will talk more about the correlation problem later.
Then came the initial depeg of the weekend. 6/n
Over 2 billion of #UST were withdrawn from @anchor_protocol and hundreds of millions were dumped in mere moments. Some suspected this was a coordinated attack.
Econs 101- if supply suddenly increases, price will fall.
Another strategic mistake was then made. 7/n
Econs 101- if supply suddenly increases, price will fall.
Another strategic mistake was then made. 7/n
.@LFG_org announced that they will be deploying up to 0.75B of BTC to restore the peg.
This was meant to restore confidence in the #Terra ecosystem. So what was bad about it? 8/n
This was meant to restore confidence in the #Terra ecosystem. So what was bad about it? 8/n
https://twitter.com/LFG_org/status/1523512196965167104
Like a tell in poker, this gave market makers a clear insight into #LFG's plans.
It's like playing chess but knowing your opponent's moves in advance.
But what's in it for market makers to attack #UST? 9/n
It's like playing chess but knowing your opponent's moves in advance.
But what's in it for market makers to attack #UST? 9/n
They can short futures of #UST to make a healthy profit.
How futures work- market makers agree with other buyers to sell UST at an agreed-upon price on a fixed date.
To make the numbers clear- 10/n
How futures work- market makers agree with other buyers to sell UST at an agreed-upon price on a fixed date.
To make the numbers clear- 10/n
If price of #UST falls over time, they profit by being able to buy #UST at $0.7 (hypothetical future price) and selling it at $0.9 (hypothetical agreed-upon price).
Again, it's not 100% confirmed that this is a coordinated attack. However, the depeg made its impact. 11/n
Again, it's not 100% confirmed that this is a coordinated attack. However, the depeg made its impact. 11/n
Retail investors, like you and me, fear that their #UST will fall in value. E.g. $10,000 may become $7000 or even less.
This sucks. And so the market panics by selling UST, thus putting even more downward pressure on the price.
What happened to the safety mechanisms though?12/n
This sucks. And so the market panics by selling UST, thus putting even more downward pressure on the price.
What happened to the safety mechanisms though?12/n
#Terra protocol promises that we can always swap 1 UST for 1 USD worth of #LUNA for arbitrage.
Turns out, there's a limit to this. 100 million UST can be burnt for LUNA each day. (We will link to a YT video by @TheCryptoCents explaining this.)
What if we exceed the limit? 13/n
Turns out, there's a limit to this. 100 million UST can be burnt for LUNA each day. (We will link to a YT video by @TheCryptoCents explaining this.)
What if we exceed the limit? 13/n
#Terra protocol promises that we can always swap 1 UST for 1 USD worth of #LUNA for arbitrage.
Turns out, there's a limit to this. 100 million UST can be burnt for LUNA each day. (We will link to a YT video by @TheCryptoCents explaining this.)
What if we exceed the limit? 13/n
Turns out, there's a limit to this. 100 million UST can be burnt for LUNA each day. (We will link to a YT video by @TheCryptoCents explaining this.)
What if we exceed the limit? 13/n
Because
1) #BTC and #LUNA/#UST are all cryptocurrencies (correlated) and
2) LFG explicitly mentioned they will sell BTC to prop up the price of UST
BTC's price fell as supply flooded the market. How did this hamper the purchase of UST? 15/n
1) #BTC and #LUNA/#UST are all cryptocurrencies (correlated) and
2) LFG explicitly mentioned they will sell BTC to prop up the price of UST
BTC's price fell as supply flooded the market. How did this hamper the purchase of UST? 15/n
Each additional BTC sold for a lower price, which meant that less UST could be bought.
Nasty cycle.
What now? 16/n
Nasty cycle.
What now? 16/n
As of the time of this tweet, #UST is at 0.71 USD, and #LUNA is at 9.44 USD.
Things look bad.
But on the upside, the #Terra team is working hard to raise funds to return UST to its peg. 17/n
Things look bad.
But on the upside, the #Terra team is working hard to raise funds to return UST to its peg. 17/n
https://twitter.com/lawmaster/status/1524098409594077185
Will their size be big enough?
Things are highly uncertain now. Leave a comment below, and tell me your plans. 18/end
Things are highly uncertain now. Leave a comment below, and tell me your plans. 18/end
(Missed out p14. Here it is.)
There will be increasing spread between #UST and LUNA.
Ideally, you will swap 1 UST for 1 USD worth of LUNA. But as more people do this swap, you will end up with 1 UST for 0.9, 0.8, 0.7... USD worth of LUNA.
This isn't a scam by the team. 14a/n
There will be increasing spread between #UST and LUNA.
Ideally, you will swap 1 UST for 1 USD worth of LUNA. But as more people do this swap, you will end up with 1 UST for 0.9, 0.8, 0.7... USD worth of LUNA.
This isn't a scam by the team. 14a/n
Instead, this was meant to dissuade investors from panic sales by offering a worse exchange rate. Unfortunately, this also meant the excess #UST supply was slower to be burnt.
Let's return to the correlation problem. 14b/n
Let's return to the correlation problem. 14b/n
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