TerraUSD Not Exactly Stable
Stablecoins are pegged to something, typically $1 but it could be anything. TerraUSD was supposed to be pegged to the US dollar.
$1 = 1 TerraUSD.
That peg broke hard on Monday.
Many readers may be wondering what TerraUSD is backed by.
The answer is nothing. Officially, it’s backed an algorithm that clearly doesn’t work.
Faith Based Algorithm
The algorithm is based on faith and arbitrage. If the price of TerraUSD falls below $1, traders can “burn” the coin in exchange for $1 worth of new units of a cryptocurrency called Luna.
In theory, if either Luna or TerraUSD deviates too far traders will burn one in exchange for the other.
Also in theory TerraUSD’s monetary policy scales nearly without limits, thereby helping DeFi (decentralized finance) projects reach their full potential.
Finally, users can gain passive income using TerraUSD with the Anchor protocol’s stable interest rates. Anchor is a lending protocol that promises a 20% return on UST savings. Additional and steady income appears through rewards in PoS chains, which maintain their stability due to commissions and inflation. This nuance will make it possible to form a reliable interest rate.
20% interest. What can possibly go wrong with that?
Theory vs Practice
The chart above shows the difference between theory and practice.
The comments on CoinMarketCap are more than a bit amusing.
- Relax. the algorithm will catch up with the market. your money is safe
- Buy UST with any other stable and take a profit from the difference tomorrow everything will be 1:1
- $LUNA wow! never expected $UST to do this, Terra luna going down HARD! still when the bear market is over everything will work itself out & I really think this will be the project that will come out on top and be in the top 5.
- $UST arbitrage opportunity of a life time. imagine buying the dollar at a 20 percent discount
Here’s one comment that actually made sense: “Which idiot thought that stablecoins backed by anything other than USD was a good idea?“
Emergency Loan
Please note Terra Stablecoin Peg Slips Below $0.70—Despite Loan From Bitcoin Reserves
Terra’s UST, the third-largest stablecoin by market cap, dropped to $0.69 in Monday trading, an all-time low according to CoinMarketCap data, even after the Terra-supporting Luna Foundation Guard rushed a $1.5 billion loan to shore up the currency. On Coinbase, the listed price got as low as $0.65.
Luna Foundation Guard (LFG), co-founded by Terra co-creator Do Kwon, wasn’t so certain that [the algorithm] would work, given the larger crypto market meltdown that’s been taking place over the last five days, which has seen the crypto market cap swing from $1.8 trillion to $1.4 trillion.
So, over the weekend it decided to make use of a backstop strategy it’s been pursuing over the past few months. As of May 3, LFG had stockpiled nearly $4 billion worth of Bitcoin, Avalanche, UST, and LUNA for its reserves that it could fall back on in case the algorithm stopped working.
As the stablecoin’s price peg slipped to $0.985 this weekend, it voted to lend out $750 million in Bitcoin and $750 million in UST to “proactively defend the stability of the $UST peg & broader Terra economy, especially under volatility and the uncertainty of macro conditions in legacy markets.”
The whole point of maintaining a reserve of Bitcoin and other cryptocurrencies was for precisely this moment.
Reserve? What Reserve?
This has me shaking my head.
How is a loan supposed to shore up an algorithm?
Doesn’t the loan have to be paid back?
Steady Lads
Deploying more capital – steady lads
— Do Kwon 🌕 (@stablekwon) May 9, 2022
Terra co-creator Do Kwon says “Steady lads, deploying more capital.”
— Ed n’ Stuff (@EdnStuff) May 9, 2022
Explaining 20% Interest Payments
We all know Stablecoins Require Utility™ to maintain demand and defend their peg.
So where does $UST get utility?
Simple, Anchor Protocol.
Anchor Protocol is (nominally) a money market, but the important tl;dr is it pays you 19.5% to stake $UST.
— jonwu.eth (@jonwu_) May 9, 2022
Abracadabra
Two obvious questions:
1) if something is paying you 20% risk-free, why not just borrow a ton of money and make it pay you like, 100%+?
Oh uhm, that’s exactly what Abracadabra / $MIM‘s degenbox did:https://t.co/2MUoAvjFiI
— jonwu.eth (@jonwu_) May 9, 2022
Frog Nation DeFi
2) How does one give out 20% in free money every year?
Well that’s also easy, the LFG (Luna Foundation Guard), overseers of Terra’s multi-billion dollar ecosystem fund.
We’ll come back to that.
— jonwu.eth (@jonwu_) May 9, 2022
Big MF Problem
But what’s even MORE important is the directionality and stability of $LUNA‘s price.
It’s a Big Motherfucking Problem if the average redemption price of $LUNA for $UST is high relative to $LUNA‘s current price.
— jonwu.eth (@jonwu_) May 9, 2022
Nut Size
So now back to the Luna Foundation Guard:$UST has the same dynamics as many other algo-stables, except in addition to the “algo” part they also have LFG.
In other words, UST is stabilized by:
1) Contracts.
2) The gigantic gravity well created by the size of Do Kwon’s nuts.— jonwu.eth (@jonwu_) May 9, 2022
Why Sell?
Better 0.85 than 0.00
— jonwu.eth (@jonwu_) May 9, 2022
Entire Thread
I posted the more interesting portions of what @jonwu_ had to say. Here’s the Entire Thread for interested parties.
Luna Price
Somehow I suspect Terra has a date with something close to $0.00.
Good Luck Cashing Out
As Bitcoin Breaks Support, Bulls and Bears Pretend to Know the Unknowable
Yesterday I commented As Bitcoin Breaks Support, Bulls and Bears Pretend to Know the Unknowable
Bitcoin bounced off support near $30,000 and is $31,373 as of 12:37 AM central. This will autopost at 8:30 AM so the price may be anything by then.
If the Nasdaq bounces, Bitcoin is likely to as well.
What About Tether?
Tether is another stablecoin that many, including me, think is fraud. For discussion, please see Interested in Crypto? Please Read the Best Crypto Interview in History
Grant Williams leads an interesting round table discussion with key questions about fraud allegations surrounding Bitcoin and cryptos in general.
This post originated at MishTalk.Com.
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Mish
In other words, if all crypto were to suddenly go to zero, what kinds of carnage would there be?
I’m in a gloomy mood and need some doom and gloom stuff. Zerohedge isn’t enough for me lately.
Crypto is no different, in my opinion. It has value only because someone says it does. It’s created out of nothing and anyone can create more of them out of nothing and demand the world value it at their price. What’s amazing to me is that people actually agree to value it.
I do not think there will ever be a stable crypto currency unless it’s tied to something with intrinsic (and therefore stable) value. A gold backed Crypto, a dollar backed crypto, etc. would be of more value than what’s currently floating in that space.
While my opinion is not popular, and I’ve missed opportunities to make millions, I’ve steered clear of the crypto space entirely because I neither understand all the nuances nor believe it to be more than a lasting flash in the pan, here today and gone tomorrow. Crypto has all the makings of a 2000 style crash coming…and that crash will force innovation in the crypto space that will be stable.
You just told me a story and made my point.