A thread on the @terra_money $UST peg break and fears of an algo bank experiencing a...bank run?! π
1/ As you probably noticed, over the past week shit hit the fan in crypto markets. China FUD, ESG/Elon etc etc.
Invariably, prices started collapsing across the board. On the monthly print, this was the worst month for $BTC/USD since at least 2013.
Invariably, prices started collapsing across the board. On the monthly print, this was the worst month for $BTC/USD since at least 2013.
2/ The last leg up on $UST prints was fuelled by leverage via @anchor_protocol. Multiple round trips of $bLUNA mints based on UST borrows, based off of the same source collateral.
This thread from @Josephliow does a good job at describing the mechanism.
This thread from @Josephliow does a good job at describing the mechanism.
3/ So market tanks, LUNA/USD tanks together with the market, over-levered loans backed by LUNA proceed to a liquidation cascade, LUNA collateral gets sold on margin calls, LUNA/USD tanks more.
Ok, so what?
Ok, so what?
4/ Well, remember, the UST is backed by π₯π₯π₯ LUNA! So at some point the value of the collateral that backs the UST, became less than the UST float.
5/ Naturally the UST/USD peg broke to the downside. BIGLY!
6/ Aaaaaand the market went into full blow panic modeβat least for a while.
"Is this the end? Is the Terra system insolvent?"
Sidenote: if you think, "ok but where else did the market NOT panic?" I won't hold it against you.
"Is this the end? Is the Terra system insolvent?"
Sidenote: if you think, "ok but where else did the market NOT panic?" I won't hold it against you.
7/ It turns out, however, that all this panic was unwarranted.
This thread from @terra_money does a good job at explaining why that is the case.
This thread from @terra_money does a good job at explaining why that is the case.
8/ Fwiw the $UST peg is already almost fully restored, and mind you, we have seen similar (or worse) peg breaks over the short history of algorithmic stablecoins $DAI, $FEI and even non-algorithmic stablecoins for that matter $USDT.
Nothing new here.
Nothing new here.
9/ @lukedelphi made a good point in that there are soft backstops to the system that would prevent a death spiral from happening. True enough!
10/ But besides the soft backstops, people forget that the Terra Foundation holds A METRIC TON of $LUNA compared to the rest of the market.
So if push comes to shove, the foundation *could* use reserves to recapitalize the UST (and other stables).
How's that for a backstop?
So if push comes to shove, the foundation *could* use reserves to recapitalize the UST (and other stables).
How's that for a backstop?
11/ A quick glance at @SmartStake's dash lets us peek into how the system is healing in near real time. UST overhang is being scooped up with LUNA.
UST supply down π€ LUNA supply up
UST supply down π€ LUNA supply up
12/ In all, last week was a true stress test for the system, and afaimc it passed with near flying colours. @mirror_protocol and @anchor_protocol have massively improved the viability of the ecosystem and it shows.
13/ Without those in place, you could argue that the peg break drama would have been avoided. I say "maybe"!
But maybe not. Don't forget that the Terra stables traded under the peg for nearly all of their history, until the launch of Mirror and Anchor.
But maybe not. Don't forget that the Terra stables traded under the peg for nearly all of their history, until the launch of Mirror and Anchor.
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