Why my $UST go doop
Recently Crypto crashed a lot. It was largely due to the collapse of UST a large algorithmic stablecoin ( Token which is pegged to the USD using magical maths instead of being backed by anything)
So, you got rekt by an algostable.
One step closer to the coveted title of web3 veteran. Lose some more money and you’ll be a legend.
But where did all your digital magic buckaroos go?
Will you get them back?
Sandcastle build on a house of cards
1 UST = 1 USD of LUNA
so 1 UST = 1 USD mostly?
$UST was the native stablecoin of the smartchain Terra Luna. It used an arbitrage flow mechanism to maintain peg. What this looked like was:
As demand for UST increases and it’s price is > $1 it becomes profitable to burn $1 of luna for 1 UST and sell it.
As demand for UST decreases and it’s price is < $1 it becomes profitable to burn that 1 UST for $1 of luna.
This seems pretty smart it means UST always floats around $1!
The crux of the issue is that this depends on a market for LUNA. LUNA creates this demand through needing it to pay transaction costs on the network.
This system falls apart when there is too large a supply of UST relative to the network activity and buy demand for LUNA.
What is anchor protocol?
Anchor is a lending platform built on Terra Luna. It lets users deposit their UST to be lent out to other users. Lenders earn interest and borrowers get access to leverage.
To incentivise holding UST there is also a reserve of extra UST which is distributed to people with deposits. This means even if there are periods of low borrow demand one can confidently use anchor like a savings account.
But what if there is never any borrow demand? We can just keep printing money?… right?
Awfully similar, This is because Anchor accounted for over 75% of Terra’s total TVL. Rather than anyone transacting and burning LUNA it was all sitting in Anchor.
Makes sense as Anchor paid a consistent 19.5% put your money anywhere else and you need to beat it.
So if there is a massive amount of dollars sitting in bank accounts disproportionate to the opportunities to spend them what are they really worth?
What happens when people sell them for something they can spend?
Price falls below $1.
People Burn it for $1 worth of LUNA. Sell LUNA. LUNA its price goes down. $1 of LUNA becomes more LUNA than before. Money printer goes BRRRRRRR
That blue vertical wall on the right is the increase in LUNA supply might explain the drop in price.
Now Terra Luna should have had billions of dollars of reserve assets to defend this peg which they claimed to deploy. I think it is more likely they used their reserves to bail themselves and maybe their early institutional investors out. It was likely not enough capital to defend the peg either way.
Marketcap of LUNA =/= Dollars in reserve
As lots of UST was also in circulation bridged to other chains all across DEFI this depegging cut deep. It was one of the largest stable coins. Which might be next to fall?
“ if you don’t see where the yield is coming from it’s coming from you”
- Some guy on twitter
This whole situation along with many others has lead to criticisms of any token emissions or rewards. This is something I fundamentally disagree with, whether you like it or not tech companies give out free money to get users. Traditionally this is through vouchers, advertising yada yada.
Why not cut out the middleman and just give your customers free money?
Similar to the new trend away from advertising and towards content marketing. Why slap your brand on something that kinda annoys them when you can just provide what customers want.
Where to now?
- There will be more algostables in the future which will fail so be careful
- Not all stablecoins are created equal (make note of their reserves)
- Defi survived Woo!
- Be careful who you trust to Peg your assets in future
I have more content on my twitter
Also Check out
Please shoot me a DM if you have questions or suggestions for content.