Is it feasible to leave Luna and protect UST?
Terra’s death spiral has finally arrived.
Since May 11, the price of LUNA has almost completely collapsed. It has fallen below 0.5 USDT and continues to drop, with a single-day drop of more than 95%; the de-anchoring of UST has also intensified, with the lowest drop to 0.225 USDT.
LUNA/USDT, data from Binance, as of 11:15 on May 12
What I want to talk about here is whether Terra’s current self-rescue plan (accelerating the LUNA issuance plan and raising external funds) is feasible.
In Terra’s economic model, the price stability of UST is regulated by the arbitrage system and protocol mechanism. Market participants can mint UST by destroying equivalent LUNA, and vice versa, they can also destroy UST and exchange it for equivalent LUNA.
Therefore, if demand for UST exceeds the current supply (assuming a price of $1.01), arbitrageurs have the opportunity to burn LUNA on-chain and mint UST, taking the difference as profit on the open market; conversely if demand for UST is greater than Supply (assuming a price of $0.98), arbitrageurs can buy 1 UST for less than $1, then burn and mint $1 LUNA for profit.
Since the price of UST has been underwater since May 8, the market balancing mechanism of “burning UST to mint LUNA” has been in continuous operation for the past few days (reflected in the circulating supply of LUNA changes), but under extreme panic, the mechanism has been slow to achieve its ideal regulatory effect.
On the afternoon of May 11, Terra founder Do Kwon tweeted the latest progress to the community, during which he mentioned that the only way to save himself is to absorb the excess UST supply in the market, and help UST gradually return to anchor by balancing market supply and demand. At the same time, Do Kwon also proposed some specific solutions in different directions.
Externally, Do Kwon said the team is continuing to explore options to bring in more external capital for the entire Terra system. In the morning, some people familiar with the matter had revealed that the Luna Foundation Guard (LFG) was seeking to raise $1-1.5 billion in outside funding to provide more support for UST, and several institutions, including Jump Trading, Celsius, and Jane Street, had agreed. Contribution, the condition is to get the LUNA spot at a 50% price discount and lock the position for one year. However, people familiar with the matter also emphasized that the financing has not been confirmed, and everything is subject to change. Given the collapse of LUNA prices, the progress of the financing is not expected to be too smooth.
Internally, Do Kwon hopes that the community will vote for the governance proposal Proposal 1164 , which aims to increase the scale of BasePool (UST-LUNA virtual liquidity pool) in the LUNA-UST minting and redemption module, and reduce PoolRecoveryBlock (BasePool automatically returns to The number of blocks required for the equilibrium state), thereby improving the execution efficiency of the balancing mechanism of “burning UST to cast LUNA” and speeding up the absorption of excess UST supply.
As of 11:00 on the 12th, Proposal 1164 has won more than 60% of the votes in favor, and the voting will end in 6 days, but in view of the urgency of the situation and the total number of votes (136 million) has approached 50% of the total votes (288 million), The community is seeking immediate adoption of the proposal.
In Proposal 1164, the proposer GS390 pointed out that the reason why parameter adjustments are needed at this point in time is because the current arbitrage balance mechanism returns much slower than market demand to excess UST supply. From the data point of view, on May 8th During the period from the 10th, about 8 billion US dollars of UST circulation was withdrawn from Anchor, but only about 1 billion US dollars of UST was recovered through the redemption mechanism during the same time period. Affected by panic, these have not been recovered. UST has become the main source of selling pressure as its price continues to de-anchor.
In this case, the price of UST cannot be regulated by the balance mechanism in the economic model. With the further fermentation of panic, FUD, selling and shorting have come one after another, and the prices of UST and LUNA are also falling rapidly. Because of this, Do Kwon and Proposal 1164 hope to improve the execution efficiency of the balancing mechanism, speed up the burning speed of UST, and recover the excess circulating supply as soon as possible.
Obviously, this solution will obviously put considerable pressure on the price of LUNA, because speeding up the burning of UST will in turn significantly speed up the additional issuance of LUNA. What is even more frightening is that, although in theory, the decline in currency prices and the increase in circulation will not have much impact on the overall market value, this is only an ideal assumption based on a peaceful market environment. In extreme markets, more LUNA holders will The choice to sell due to panic makes the price of the currency fall much faster than the increase in circulation, which in turn leads to a continuous decline in the total market value of LUNA. On the one hand, the supply of UST gradually decreases with recycling, and on the other hand, the total market value of LUNA, which is the indirect value support of UST, is also decreasing. The balance between the two will come later than the static estimate.
According to SmartStake data, as of 10:20 on the 12th, the circulating supply of LUNA has increased by 1.35 billion in two days, and the total circulating supply has reached 1.739 billion.
Do Kwon is well aware of this, and in his tweet, Do Kwon also mentioned that this will come with a “high price” . GS390 also wrote clearly in the proposal: “Yes, billions of UST will be burned and LUNA will be greatly diluted… Allowing for more efficient UST burning and LUNA minting will put pressure on LUNA prices in the short term, But will be an efficient way to get UST back to the peg, which will eventually stabilize LUNA prices as well.”
It is not difficult to see from Do Kwon’s statement and the Proposal 1164 that the Terra community strongly promotes that the current remedial concept chosen by Terra is to give priority to solving the problems of UST’s de-anchoring and supply-demand imbalance, and to sacrifice LUNA prices in the short term. It’s like Terra had to take a powerful medicine in a desperate situation. If you take it, you have to face a series of pressures brought by the decline of LUNA, but if you don’t take it, UST and LUNA may both die in a spiral.
Some readers may ask, doesn’t LFG reserve billions of dollars worth of BTC as a potential value support? Is the money still there? Regarding this point, GS390 pointed out in the proposal that LFG did have a BTC reserve worth $3.5 billion (nothing less than that in the fall), but Terra has now become a fish in the eyes of various funds, rashly using this part of the reserve Funds will only be surrounded and suppressed by various funds, and may eventually be eaten up.
Regarding this point, I am willing to recognize the statement of GS390, not to believe who and what, but to objectively see that the current hole in Terra is too big (as of 10:25, the total amount of UST in circulation is 13.1 billion, and the total market value of LUNA is Only $1.9 billion), the reserve fund is simply not enough, so the main task now is to squeeze the bubble (reduce the UST supply), wait for the hole to shrink a little, and then use the reserve fund and possibly external funds that come back to implement other remedial measures.
Although Terra’s self-rescue measure is not necessarily successful (in fact, it is more likely to fail), but thinking about it from Terra’s standpoint, it seems that this is the only feasible measure without adjusting the core economic model. Well, this economic model once gave them unparalleled light, but now it seems to be a knife that will continue to cut off the “value” of LUNA. Of course, Terra might have opted to decouple UST from LUNA, as some readers suggested, but doing so would be like asking Terra to admit that her past was a complete failure.
Looking further afield, the current problem is only the first hurdle for Do Kwon and the entire Terra team, even if the solution succeeds in saving UST and stabilizing the price of LUNA in the future, there will be one after another. Ghost gates, such as the community reputation crisis after the black swan incident, such as the economic loss of the LUNA price drop to the community and partners (such as local traditional business resources), and the regulatory sword that is already hanging over the head…
A number of institutions and platforms have chosen to “cut the seat” or “avoid” when the Terra Building is about to collapse, in order to protect their own stability and prevent the risk from spreading.
On May 11, the South Korean crypto exchange Upbit listed LUNA as a prudent investment project, and a detailed review will be carried out to determine whether to extend, lift or terminate trading support; Solana’s ecological algorithm stablecoin project Nirvana will completely replace UST in the platform AMM For USDC; CEOs, co-founders and investors of companies like Dragonfly Capital, Multicoin Capital, Framework Ventures, 6th Man Ventures, OnJuno, ByWassies, FingerprintsDAO also took to Twitter to assure the market that they do not hold UST and LUNA Or make related investments; even Binance temporarily adjusted the LUNA U-margined contract leverage margin ladder and minimum price accuracy, and the 24-hour trading volume of LUNA exceeding BTC ($5.901 billion) also provides some hints for Binance to urgently maintain the C2C function direction.
On the other hand, the collapse of the UST breakout zone has also attracted regulatory attention. At the Capitol Hill meeting on May 10, U.S. Treasury Secretary Janet Yellen mentioned the UST’s decline and argued that legislation to regulate U.S. dollar stablecoins is imminent. On the 12th, two former SEC lawyers revealed that the SEC has every reason and may have been investigating what happened in the past week at UST. The corresponding regulator declined to comment on UST for now.
The heavy pressure from the outside may make Terra involuntarily choose strategies. This road to self-rescue is more difficult than everyone imagines.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/terra-breaks-his-arm-to-survive-on-the-verge-of-death/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.