Beginning on May 8, the rumor of “UST decoupling” began to ferment in the market, and the seriousness of the situation can be seen from the exchange of UST stable currency pairs of centralized CEX:
The quotation of UST against USDT on Binance was once close to 0.98, and the UST in the borrowing market was swept away. With the spread of panic, UST and LUNA seem to have indeed ushered in an unprecedented new test.
According to Terra Analytics data, the circulating supply of LUNA increased by 957,201 in a single day on May 8, with a total of 91.357 million, setting a new single-day record for the circulating supply of LUNA since April 8.
Double peg mechanism between Luna and UST
The core design idea of Terra ecology is how to expand the usage scenarios and payment requirements of the stable currency UST, and the operation of UST adopts a dual Token design:
Luna, a token for governance, staking and verification; UST, a native dollar-pegged stablecoin.
The simple understanding is that every time a UST is minted, one dollar worth of LUNA must be burned, and LUNA helps maintain the pegging of UST to the dollar through an arbitrage mechanism:
Whenever the UST exhange is higher than the peg, the user can send LUNA worth 1 USD to the system and receive 1 UST; conversely when the UST exhange is lower than the peg, the user can send 1 USD worth of UST to the system to get 1 USD LUNA.
In both cases, users are incentivized to arbitrage, thereby helping to maintain the peg of UST to the US dollar. The stablecoin design of this dual-token arbitrage and the typical over-collateralization requirements are extremely prone to occur when the crypto market experiences severe volatility. A tragic mass liquidation event.
In the previous “5.19” crash in 2021, UST’s price “de-anchored” due to spiral liquidation, and even de-anchored by more than 10% at one point, almost entering a confidence collapse and a vicious circle.
Whether it is the stampede liquidation of ETH in “3.12” in 2020 or the “queuing and shooting” of ETH in “5.19” in 2021, it has verified the worst possible huge damage in this extreme situation.
This is also an almost unavoidable test for algorithmic stablecoins . Therefore, under extreme market conditions, the price stability relative to the overall market is an inevitable and important growth test for a stablecoin like UST. logo.
Risks on the data level: At least from the data level, UST has reached the most critical moment , even far beyond the previous “5.19” de-anchoring crisis in 2021.
Inversion risk of UST market capitalization and LUNA market capitalization
The main reason is the inversion risk between the market value of UST and the market value of LUNA: the market value of LUNA has been much higher than the market value of UST before, which leads to the fact that when LUNA falls, sufficient space for liquidation is generally reserved to avoid extreme situations of insolvency. , so as to prevent the death stampede after the confidence dam collapses.
However, in the past six months, the circulation of UST has soared rapidly. As of May 9, it has exceeded 18.7 billion US dollars, an increase of more than 11% in the past 30 days.
This is in a delicate embarrassing situation – Luna’s current market value is $22.4 billion, and UST’s circulating market value is $18.6 billion. If LUNA’s secondary market price continues to fall, UST’s circulating market value may exceed Luna.
Calculated according to the corresponding price, that is, if Luna falls below $55, the market value of UST will exceed that of Luna, and there is a high probability that it will bring extreme panic in the market and give birth to a “death spiral”.
UST’s flight sentiment intensified “stomping”.
Confidence is more critical than gold, especially for algorithmic stablecoins like UST that rely on ecology to grow.
However, the UST in Anchor had a net outflow of about US$2.3 billion in the past two days, of which 1.3 billion UST was outflowed on May 7, setting a new one-day high.
Compared with the peak value of 12.7 billion US dollars on May 5, the current UST savings in Anchor has dropped by nearly 20%, which has triggered a general panic among investors about the UST de-anchoring , and the redemption wave has further increased the risk of stampede.
Anchor reserves are insufficient.
Anchor Protocol currently has a total daily expenditure of about 7.05 million US dollars, a total income of about 2.15 million US dollars, and a net expenditure of about 4.9 million US dollars. At the same time, the Anchor capital reserve has 180 million US dollars, which is expected to cover 35 days of spending needs.
What is the toughness of UST
The development confidence of UST and Terra ecology is basically supported by the Luna-ust anchoring mechanism based on Anchor.
In the best case, it can maintain a scale of 1-2 billion, but the current problem is that the current circulation of UST has reached 19 billion.
- Support for Curve Pools
Therefore, LUNA also turned its attention to Curve, in order to control the “minting power” of the encrypted world. The most direct one is its 4pool solution – the new Curve liquidity pool composed of UST, FRAX, USDC, and USDT.
In this way, with the help of Curve, the coinage market, it provides a link guarantee for extreme situations:
veCrv guarantees the stability of liquidity. When large-scale asset exchange actually occurs, there will be no liquidity flight; veCrv can be used as a governance tool for re-linking after de-anchoring, and using millions of dollars can make billions of dollars Asset re-pegging, which is fundamentally impossible in uni.
However, this construction has just begun, and it has encountered this shock. UST has only about $500 million in liquidity on Curve, but has tens of billions of dollars in deposits on Anchor.
- Adjustment of Anchor Model
UST deposits on Anchor are a double-edged sword for Terra’s ecological life and death.
On March 24th, Anchor Protocol’s proposal to “adjust the yield to a semi-dynamic rate based on the volatility of the yield reserve” was approved.
Starting this week in May, its interest rate was cut from 19.5% to 18%. After that, the Anchor Earn interest rate will also be dynamically adjusted monthly by a maximum of 1.5% according to the appreciation or depreciation of the income reserve, the minimum APY is 15%, and the maximum APY is 20%.
At the same time, at the end of April, a protocol researcher from Terraform Labs issued a proposal suggesting that Anchor Protocol should introduce the veANC model. On May 7, the latest news was that Helm Protocol, an Anchor revenue and governance platform, will be launched soon. Users can deposit ANC into Helm to obtain veANC’s Derive Token HELM.
In addition, Anchor has also successively added AVAX, ATOM, and SOL as collateral for borrowing. According to the progress of Terra ecology, Anchor’s efficiency has been extinguished by itself.
- LFG’s Bitcoin Reserve
As of now, the Luna Foundation Guard holds a total of about $3.5 billion worth of Bitcoin reserves, which are designed for use in extreme situations – only for emergency rescues, and only when the LUNA stability mechanism fails, will the emergency reserves be used :
It means that in the extreme case of UST being sold off heavily and LUNA prices falling sharply, Bitcoin, as a foreign exchange reserve that is not strongly correlated with the Terra economy, adds a policy tool for Terra to intervene in the exchange rate (maintaining the peg with the US dollar).
Terra founder Do Kwon also said recently that LFG’s Bitcoin reserve against UST guarantee mechanism will be deployed in a few weeks, and the Astroport team is currently implementing Jump Trading’s design parameters on Agora.
As an anomaly of stablecoins that have been advancing rapidly in the past six months and whose market value is quickly approaching US$20 billion, UST’s “de-anchoring” test this time will far exceed “5.19” in terms of its own understanding and possible spillover influence. “.
Regardless of the final outcome, UST is destined to leave a strong mark in the battle for the holy grail of stablecoins.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/the-battle-of-ust-begins-can-terra-handle-a-new-crisis-of-confidence/
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