Keep in mind that DeFi /crypto as a whole is risky, this article is not financial advice, it’s just for learning and summarizing.
The “death spiral” of UST unanchored
In recent days, the entire Terra ecosystem has been hit hard, with the historic collapse of UST and the $1 peg, and the LUNA token falling to a year-to-date low. But if you’re news sensitive, the decoupling actually started off-chain over the weekend, when there was a massive UST selloff in the Curve pool, creating a huge pool imbalance that was then reflected in the market price of UST, plus, The handful of whale wallets withdrawing from Anchor at the same time undoubtedly spooked the Terra market and caused users to withdraw around $4-5 billion worth of tokens from Anchor overnight.
In the so-called “death spiral”, people collectively lost faith in UST, UST sell-off pressure surged, pushing the peg even lower, and finally hundreds of millions of dollars worth of LUNA as the price of LUNA plummeted It was liquidated, adding to the sell-off and loss of confidence, which further dragged the entire market down.
DoKwon and LFG have bought a whole bunch of BTC in recent months to increase their reserves to help support the UST, but considering Anchor’s TVL has dropped from over 20 billion to 8.5 billion (at the time of writing), billions of BTC reserves cannot be It should come as no surprise that prevented UST from sliding sharply to $0.60.
My purpose in writing this article is not to discuss the mechanics of the collapse, I strongly recommend that you get news from official sources, I will talk about how much FUD (Fear, Uncertainty, Doubt) social media Twitter can stir up later.
After I stayed up late and tracked a lot of news, I came up with the following feelings:
1) Overall, the cryptocurrency market is very inefficient – although they have improved, the UST/LUNA exchange rate still varies significantly across multiple platforms. The peg is around $0.80 if I use Uniswap now, $0.91 if I use OkCoin, or around $0.93 if I use the on-chain White Whale. Twelve hours ago, these differences were even bigger, with on-chain prices still pegged at around $1 to 1 UST, while off-chain prices fluctuated from around $0.60 all the way up to around $0.95.
I know that usually arbitrage has its functional purpose to open up the market to help balance prices (in most cases, I totally agree with that), but last night, I was skeptical.
Due to network congestion, frozen liquidity pools, and brutal shutdowns of services – many latecomers retail investors were completely refused to deleverage their positions to prevent liquidation, or at least be able to convert their holdings from Terra to something like USDC less volatile assets. So in the absence of enough traders to be able to move funds, the price difference will only increase the FUD people are showing on Twitter.
2) Speaking of Twitter, I really don’t think a “come-at-me-bro-” (similar to “come-at-me-bro-“) arrogance is really good for a project in the long run.
Here, I want to talk about Do Kwon, the star “spokesperson” of the Terra ecosystem. Don’t get me wrong, from what I’ve read, I think he’s a brilliant visionary who’s created an incredible ecosystem. But in my opinion, talking openly about other projects or crypto efforts is not only bad for those projects themselves, but also bad for the crypto-economy as a whole, such as the following tweet:
Now to be completely fair, I believe Do Kwon is a huge proponent and proponent of the crypto economy, and I know it’s not fair that I randomly pick a few tweets and then show them. However, as the only public figure representing one of the largest TVL blockchains, he is a public figure whether he likes it or not, and people will (sometimes misinterpret) what he says, whether he meant it as a joke or not. I believe that’s probably why we’re seeing this crash this week, we saw a similar (but not as big) crash in Daniele Sesta and Frog Nation, which resulted in a lot of losses for many Frog Army and other non-hypothetical retail investors funds. Dani, like DoKwon, known for his “come-at-me-bro-” attitude, had similar troubles:
Also, I am very impressed with the #LUNAtics community. Some are opening private messages to offer support to other losing friends. I read countless tweets and messages from community members who really care about each other, many expressing sympathy and support for each other during times of stress.
3) Speaking of Dani, while this is similar to the bank run that happened with MIM, I think the UST-induced bank run is 10 times larger.
MIM, or Magic Internet Money, is a stablecoin that prevents it from being pegged to over-collateralization via Abracadabra.money, which was tested during the Sifu scandal earlier this year. Unlike the MIM, however, the UST unanchored broke out of the 0.98 cent range and lower, making things even more catastrophic. A MIM bank run like the UST bank run shows how blockchain and protocol are so symbiotically intertwined. MIM is associated with the scandal that happened on Time Wonderland, and LFG’s sell-off of BTC caused huge FUD in the entire crypto space.
4) If the rumors about Citadel are true, the war on TradFi may have started (if it hasn’t already) . As a follow-up to the “come-at-me-bro-” attitude, when DoKwon publicly released when and how much BTC he bought, it created a game plan for potential players with enough capital to manipulate the market and go short, which Looks like that’s what happened here. Basically, the rumor is that someone at Citadel planned an attack involving shorting BTC purchased by DoKwon:
If it wasn’t premeditated, I don’t know what was, but TradFi definitely has the motivation and capital to do it.
5) The White Whale protocol is a “beast” . Essentially White Whale has an arbitrage pool that tries to automatically exploit different arbitrage opportunities when UST price deviations occur across different protocols. First off, I may be completely wrong, but I personally believe that UST will eventually regain its peg, so I do have some UST in White Whale’s arbitrage vault. In this period of extreme exchange rate volatility, I’ve seen White Whale spit out arbitrage opportunities every few minutes since last weekend. Is it true to its “stay anchored, be a whale” motto? Obviously not.
But nonetheless, I’m very impressed with its capabilities, and as long as the arbitrage vault continues to take advantage of price differences, I’ll likely continue to hold my positions there.
6) Speaking of arbitrage, not only UST has arbitrage opportunities, LUNA and bLUNA also have some crazy arbitrage opportunities :
I myself arbitrage at about a 9% premium, but if I had more patience (and sacrificed any sleep) I could have gotten close to a 30% premium. Now considering the price action of LUNA, is this totally stupid? Perhaps. But then again, I’m still banking on the fact that the ecosystem will still recover, and I’ll keep watching.
7) There are many more gamblers. Yes, there has been a massive loss of liquidity from the Anchor protocol, with a large number of people losing hundreds of millions of dollars through liquidations, but despite this, there is over $8.5 billion in TVL in Anchor at the time of writing, including over $2 billion in collateral. That’s a far cry from last week’s 20 billion TVL, but I think there’s still a lot of life left in the system. The bottom line is that in addition to people just trying to arbitrage, there has been (and will continue to be) a lot of action for people trying to be short and long almost together.
Also, interesting to see how many content creators (whether on Twitter, Youtube, or any other platform) talk about this, almost every content creator I followed (including myself) prior to this UST de-anchoring crisis ) all mention all the benefits of the Anchor protocol and how to make money from the Terra ecosystem, but there are a lot of people who are either silent or feel personally responsible for what fans are getting into and potentially losing their life savings.
Myself, try to point out (if I can) the potential risks of any project mentioned in my blog, but let’s be honest here – when you look at crazy high yields and get-rich-quick possibilities, it will also carry all risks.
There have been many lessons learned these days, and I hope they all help open our eyes to deploying our next investments. Will Terra recover? I certainly hope so, but it’s still hard to say for sure, as UST’s price volatility is ±5% during the time I’m writing this. So again, please do your own research and be critical of everything that happens to you. I believe the occasional risk is certainly acceptable, but try to fully understand what those risks are and accept the possible consequences if you embrace them.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/some-observations-on-the-death-spiral-of-ust-de-anchoring/
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