Dark Moon: The Inevitable Collapse of Luna
swanbitcoin.com
swanbitcoin.com
It's one thing to try an experiment and fail. It's quite another to mislead investors and not fulfill commitments. I imagine this paragraph will come back big time during the inevitable criminal and civil trials:
> It was here that LFG stepped in by allegedly selling their Luna and Bitcoin reserves to buy up UST in an attempt to stop the bleeding. However, as the price of Luna and UST fell, so did the price of Bitcoin as the LFG allegedly sold tens of thousands of their bitcoin. (Note: It is still unknown if they actually sold the bitcoin).
Think about all the crypto ads shown during the last Super Bowl. Think of all the people who watched those ads and decided to try out crypto speculation. Some percentage of those people were bag holders here.
Where were the regulators? Every investment advertisement in the real (non-crypto) world includes a "Past performance is no guarantee of future returns. Investing involves risk, including possible loss of principal." disclaimer, but apparently rules don't apply to crypto. It's hard to feel sorry for all of the "hodling to the moon in my Lambo" people but at the same time the government is asleep at the switch here.
But, in a more pointed answer to your question: yes. https://en.m.wikipedia.org/wiki/Reserve_army_of_labour
Obviously I’m just completely out of the loop. I’ve never seen ads for crypto so that’s probably why it seems so surprising to me.
https://en.wikipedia.org/wiki/List_of_most_watched_televisio...
They got all of these celebrities to shill for them using VC funding and the gains from their early adopters to fuel what must be massive marketing budgets. "Crypto" is a known concept now, even if an understanding of crypto isn't.
The Terra/Luna token was created by a South Korean company. These quotes are from reporting by the Financial Times:
“As the losses mounted, South Korean press reports linked the crash with a local surge in online searches for Seoul’s Mapo Bridge, a reputed suicide spot. Local police announced increased patrols around the bridge in response.”
‘“Do Kwon was like a successful cult leader,” said Donghwan Kim of Blitz Labs, a Seoul-based crypto advisory firm. “But now he’s the most hated man in Korea.”’
Venture capital lended an aura of legitimacy to the cult-like operation:
“Individual investors had been attracted by a scheme in which clients could lend out their terra for a 20 per cent yield. But hundreds of millions of dollars of investment in Terraform Labs came from venture capital firms including Galaxy Digital, whose chief executive Mike Novogratz would later acquire a luna tattoo on his left shoulder.”
‘“Commitments from some of the most respected funds is a testament to the shared vision of bringing decentralised finance to the masses,” Kwon declared in July last year.’
‘“About Won14tn-Won15tn was deposited in just one year after they began to offer the 20 per cent yield,” Kwon’s former colleague said. “Retail investors were lured by the high yield, while venture capital was attracted by the coins’ fast growth. The speed of growth was unsustainable.”’
15 trillion won is 12 billion USD. The scale of the scam was massive, and it’s possibly only the first crypto domino to fall.
Waiting for the moment where he reveals it was an adhesive tattoo.
Do Kwon is apparently in the process of launching Luna 2.0, he's been retweeting the listing of that crypto on several exchanges. I don't know if I should laugh or cry.
From the article it seems that people got persuaded by the seeming respectability combined with the promise of great returns. One of the people they spoke to invested via Stablegains.
They also mention how people had taken online investment courses which led to them getting into crypto trading.
That’s the most interesting part, almost sounds like a disguised sales funnel for crypto, because if they’d learned anything about investing from it they might realize much of it seems to good to be true.
Certainly you can make good money off crypto if you’re smart enough, many people do. But most people don’t it seems.
Luck almost certainly has a lot more to do with it than smarts. I can make lots of money playing the lottery too.
My thought too. People made money trading baseball cards and beanie babies, too. Doesn't mean they were necessarily smart, or that this was a sustainable way to get income.
> 1400% yearly return
Pick one. For real, 1400% return must be some ponzi-level s*t. How the hell can it generate such returns if not by selling to a greater fool?
My advice in life to anyone about nearly anything is to "just take a win". A lot of people can't just take a win. They have to keep going.
While waiting for a re-entry into bitcoin he found out about staking stable coins. He didn't understand how the UST peg was kept but like a lot of complex things in life he didn't question it. He knew the yield was abnormally high but chalked that up to the investors pouring money into the project trying to gain traction. He expected the yield to be lowered over time to normal market levels as investor money ran out and adoption occured.
He staked 250K and was earning approx $950 a week in yield. I spoke to him after the peg broke (0.33c) and he was confident that the peg was going to stabilise. I told him I didn't think that was going to occur and to exit on the bounce at a loss he was comfortable with. Suffice to say he ended up exiting UST at 0.10c.
To answer your question people get involved because they see opportunity, have a high risk tolerance and/or just don't understand the risks.
There are a lot of suckers to exploit.
What other options are there for people? House prices are insane, inflation is eating your savings, salaries are stagnant.
People are gonna scramble to whatever they thing is their way out even if it’s obvious scams at times.
> Many of the large firms that invested in and marketed this coin were able to exit before the crash occurred, escaping with massive profits. Strangely, some of these whales felt the need to share this in their comments following the crash. Pantera Capital CIO Joey Krug admitted that they had sold 80% of their Luna position before the crash. Furthermore, Pantera Capital partner, Paul Veradittakit, seemingly bragged that they had turned their $1.7 million dollar Luna investment into around $170 million dollars.
So the bag holders/true believers directly funded the market makers and manipulators.
Wondering when the crypto “Big Short” book will inevitably arrive.
Borrow the coin you want to short, then sell it, and you now have a short position on that coin.
If anything, the modern round of coins with smart contracts are probably uniquely suited to shorting, or enabling the shorting of other coins.
Decentralized platforms like DyDx offer leveraged longs/shorts on a lot of popular pairs as well
Another way to theoretically short a coin is to borrow a lot of it against a stable asset on any asset lending platform like AAVE
Great way to lose a lot of money fast if you don't know what you're doing.
[1] https://www.ledgerinsights.com/hedge-fund-makes-short-wager-...
On a more retail scale you’re sort of gambling on the liquidity of an exchange, but if you want to hedge that buy puts on CoinBase or whatever.
The most liquid instrument in which you can go directionally short at retail size is a “perpetual swap”, which is kind of like a future but with important differences that are better explained elsewhere.
You can definity short XYZ coin if you want, and you can definitely hedge against the liquidity of the counter party at least roughly.
Any pointers?
I’m not aware of any law that stops you asking a friend to put a trade in on your behalf as long as you pay appropriate taxes.
Check with someone who knows before doing it though because I could be totally wrong!
If the derivative (“perp”) is trading above the underlying then longs pay shorts a fee on some cadence, making long positions progressively less attractive holdings and creating sell pressure. Vice versa.
This tends to push the derivative close to the underlying.
This has two big advantages and a shitload of problems. The two advantages are:
- short sentiment can be expressed without an up-front load, kinda like a put
- entering a position is much like a CME future, you don’t have to put up the whole price, just wherever geometric Brownian motion is likely to set you back (“implied leverage”)
Used responsibly this isn’t insane, but the ways it can be abused? Think housing never goes down in 2007.
An intentional massive short of Luna and UST at the same time could have had disastrous effects (since UST needed Luna for collateralization).
https://coinmarketcap.com/currencies/terra-luna/ https://coinmarketcap.com/currencies/terrausd/
So if you can flood UST and LUNA with enough volume to drop the price, you could send LUNA into a massive selloff. UST would then start to flood LUNA with shares which would accelerate the sell off.
These stable coins are not long-term stable, the incentives around them are horrible. Every stablecoin custodian has huge incentives to spend the fiat until their coin is only partially backed, and then sooner or later there will be a run. They're all going to collapse.
Much like traditional banks in fact - there is no uncertainty that eventually they will go bankrupt. It is easy to predict what the mechanism will be. But maybe they'll last long enough to be useful.
And what do you mean by "much like traditional banks in fact - there is no uncertainty that eventually they will go bankrupt"? Are you saying that all banks eventually go bankrupt? When should we expect Barclays to go bankrupt, now after having existed for 300 years? When should we expect Bank of New York to go bankrupt, now after having survived for 250 years?
Money in your account a debt the bank owes you. It's not money you can spend until after you withdraw it and the bank has liquidity to honor the withdrawal.
Also a company surviving for a long time is not an especially solid predictor of future lifespan. The list of financial institutions founded at the same time that didn't survive is so large nobody bothers to keep track and the management today is (in the style of the ship of Theseus) completely different from the historical decision makers.
Some bright spark will notice that they don't need all these untouched reserves and will do something with them, increasing the risk and, eventually, getting hit with a bank run.
There should be by then other mechanisms to get liquidity and that can represent the economic output of the world. It could be a basket of CBDCs from multiple countries, or tokenized (and legally standing) representations of bonds, titles and property. But the current system is far from the final design.
Basically every sizable payment processor for instance meets that bar and it’s incredibly rare to have a scandal with those institutions.
Fractional reserve banking isn't a scandal, it is routine business.
Convenience, security? The backing doesn't matter, your bank account is insured. Why do people keep cash in bank accounts instead of under their mattress.
Holding USDC yourself is risky, you expose yourself to hacks. Most people don't know how to manage their crypto keys securely.
https://twitter.com/GiganticRebirth/status/15251100328950251...
https://www.coindesk.com/markets/2022/02/17/how-the-big-shor...
Insider trading securities is illegal in US, but probably not in Bahamas, where FTX is located.
Sure, he also made a lot trading, but that's not how he became a billionaire.
Also, US has a long arm, this is why foreign exchanges forbid US citizens.
Insider trading has a very narrow scope, typically equities. To my surprise I learned that there is no such thing as insider trading in forex (from a legal point). But there are other laws that might apply to the client trading data you mentioned.
This event has enormous ripple effects across the whole ecosystem, and they will continue for quite some time.
I do not think it would be in his interest to make 2 top 10 coins collapse spectacularly. He would have shot himself in the foot.
I'm a Bitcoin only person for a reason: the devs prioritize system security over adding new features.
You can't really "Big Short" a manipulated market where there are no rules whatsoever and you don't have transparency.
So the idea was that the Luna token would stabilize the peg for the UST stablecoin. In turn the UST stablecoin would drive demand for Luna blockspace giving the Luna token its underlying value.
To Terra’s credit they did make fairly serious efforts to spread a UST payments system. This got a fair bit of traction particularly in South Korea. The idea being that every time you paid for a cup of coffee from your UST wallet, the transaction fee would bid up Luna blockspace and help stabilize the peg.
As the market cap of Luna skyrocketed it allowed for the minting of massive quantities of UST, and then as the price of Luna declined the value of the tokens backing UST was less than what was in circulation and contributed to the death spiral.
No amount of demand for Luna block space was ever going to keep this thing pegged. The only thing defending it was open market moves from extremely well capitalized trading desks which is uh decidedly not "algorithmic" nor "decentralized".
There's other stable coins with similar mechanisms like Synthetix / SUSD which are also risky, but AT LEAST in their case they require 400% overcollateralization in SNX to mint SUSD.
What's shocking is how many people, who ostensibly should be in the top 1% in terms of finance IQ, (e.g., Mike Novogratz, Raoul Pal, etc.) were seemingly unaware of these risks and never examined how it worked while shilling it to retail investors.
Apples and oranges, really. There is no redemption mechanism in sUSD that results in uncontrolled printing (i.e. devaluing) of SNX (the underlying collateral), unlike UST/LUNA.
sUSD is more akin to DAI (i.e., over-collateralized debt-based stablecoins) than to UST.
Not shocking at all, it’s answered in TFA:
> Many of the large firms that invested in and marketed this coin were able to exit before the crash occurred, escaping with massive profits. Strangely, some of these whales felt the need to share this in their comments following the crash. Pantera Capital CIO Joey Krug admitted that they had sold 80% of their Luna position before the crash. Furthermore, Pantera Capital partner, Paul Veradittakit, seemingly bragged that they had turned their $1.7 million dollar Luna investment into around $170 million dollars. Galaxy Digital CEO, Mike Novogratz, wrote in a letter that Galaxy had “booked profits along the way” before the Luna collapse happened.
In theory, people would want Luna to get the 20% returns through Anchor.
Of course, that assumes the 20% returns would continue forever (which a bunch of crypto people foolishly believed) ...
The people don’t believe we can all be trillionaires, they just believe everyone who believed and HODLled their savings into XYZ is going to be one.
TerraUSD yielded 20% returns on anchor
Luna gave staking yield. It received a portion of transaction fees off the Terra network, that was what created demand for Luna - if you thought transactions on Terra were going to increase and therefore give increase yield in the future
Of course there simply wasn't enough demand to offset the terrible peg mechanism
That TerraUSD all came from people buying Luna and converting it to TerraUSD.
The root of demand for the Luna ecosystem was the 20% returns.
The entire value proposition of the crypto-currency industry is like "I will create this virtual token out of thin air and people will pay real money for it because.... reasons".
Currently at $0.999 USD. Is that really your definition of struggling?
The combination of these two suggests they’re seeing lots of selling and keeping peg up only by spending reserves. Except….they haven’t got it back to $1
They could easily do this if there wasn’t sell pressure.
You can also check the Curve 3 pool. It’s missing about $2 billion in capital, the stablecoins ought to be near equal
A different but similar thing can happen. There's no death spiral mechanism in Tether. Either you can redeem it for $1 (for a limited definition of "you", their redemption requirements are nuts), or you can't
Tether breaking the peg would look different, with the peg slowly dropping over weeks or months as people got less and less confident in Tether's reserves
Market sentiment, though, tends to change quite quickly: I would not expect a collapse, if and when it happens, to take weeks. It's not that different.
There's also little reason to have confidence in Tether's reserves: Tether have refused to have traditional accounts produced, and they are known to have lied about the nature of the reserves, having initially claimed to be 100% backed by cash, but due to a leak we know the reserves include debts. Debts generally are illiquid, and you need highly liquid assets to defend a peg.
It’s that there’s nothing new here.
Maybe I’m just old, but I remember the late 90s and the 2001 wipeout. Companies were doing big IPOs with what we would now call a token white paper, selling garbage to retail investors that promptly went to zero. Under the shining flashlight of any and every Ayn Rand asshole who backed Greenspan in stomping on Brooksley Born over it.
But once the garbage collector ran and all the Luna, err, Pets.com garbage had been flushed out, there were a few real things. Google survived that, and in fact picked up all the leftover fiber and engineers and other infrastructure on the cheap.
It’ll be the same this time. Most of its garbage, but there will be one or two real things that will make it.
Cyber-money is also kind of cool in that conventional electronic securities markets (which are every bit as crooked btw) don’t really innovate much because there’s no Jobs/Wozniak version of being an electronic financial market participant. When that stuff gets more efficient, everyone’s 401k compounds a little faster. So as a farm league for ARCA there’s some value there.
But the main use case that speaks to me is going from “unbanked” to “quite reasonably banked” in remittance scenarios. I live in California and sadly we put most of our crap jobs on semi-legal folks from Central and South America. Speaks a bit to their superior moral fiber that they often work hard to send every spare dollar home. Difficult to do via SWIFT, easy to do via USDC.
So, no fanboy here, but it’s not all bullshit.
I don’t mind people having the last word in general, but a vague and inaccurate swipe at one of several substantial points that I raised isn’t really HN style.
In the spirit of giving you the last word I’d like to invite you to reply substantially.
There is a tremendous variance in both domestic and international wire transfer complexity. If you’re an upstanding white guy with KYC in place on two banks that know each other it can take place quite quickly, unless it’s more than $10,000 in which case you’re most likely going through some additional security audit. A text if you’re lucky, a phone call asking which 2 of 5 addresses you’ve held in the last 10 years, or just an unpredictable delay.
None of this is simple or consistent or Gaussian distributed, and to the extent that I oversimplified for brevity I apologize.
I don’t think you know nothing.
But you said I did, and if that’s your true opinion? Then you can fuck right off can’t you?
If you want an unregulated workaround then sure, but most people don't.
I don’t own cryptocurrency, I don’t stand to profit from anyone buying it. I find it interesting and not a 1-bit topic.
But it does tend to draw 1-bit people like hogs to a trough, and after the relentless gang-tackle by literally dozens of 1-bit minds for suggesting that there’s some substantially interesting subject matter here: I’m kind of in a place of: if you think my curiosity is not only misplaced but offensive, then fuck off and go do something more useful with your day.
What are the technological reasons? I can transfer EUR between different euro countries in a matter of minutes. I thought that transfers were only ever slow because of regulations, AML etc.
Uh... What? Every time I transfer money from my US bank account to my European bank account it's the same story. I put in the transfer at Chase, they go "Oh, sorry, the bank is closed now because it's after 3pm in New York, because that's apparently still a thing, but we'll transfer it first thing tomorrow morning."
At 6am New York time or whatever, their shitty batch job runs, and seconds later the money is available to me in my EU bank account.
A couple of hours later I then get an email from Chase telling me that the money has been sent and I should anticipate it in about three business days.
You don't know what you don't know, and most Americans simply have no idea how much US banks suck in an international comparison. SWIFT transfers are instant when your bank doesn't suck.
Now try a new employee, or not being white, or a million other things. The conventional international money transfer scenarios start to get some serious grit in the gears.
If you hit even one of those potholes the USDC there in 15 minutes thing has already won.
By your own admission it’s already won if it’s after 5pm (not 3) Eastern.
24/7/365: 15 minutes, 5 bucks or 50 million.
That’s better than SWIFT for you at dinner time, and for a lot of people ever.
LOL. Money can be sent internationally in a lot of places instantly. Hell, I've transferred six figures between the UK and Australia recently as well, and never waited more than a handful of hours for the mone to arrive.
This is such an enormous non-use-case for cryptocurrency it's hilarious.
“Banking the unbanked” is a core part of the crypto narrative, but there doesn’t seem to be a lot of traction in the real world. El Salvador ought to be a showcase, since it’s a dollar economy (no local currency) and the government gave crypto wallets to everyone with a $30 free money incentive. Yet crypto remittances is only a few percent of the total, IIRC, and the wallets mostly go unused.
More regulation around crypto on the remittance sender side (USA / Europe) is inevitable, and that makes the case even weaker. A non-crypto startup is probably a better, nimbler disruptor for this market than one carrying the ideological and technological baggage of crypto.
They also drive massive interest in renewables and soak up a fuck ton of otherwise wasted renewable electricity. When the aluminum market tanked with COVID the ETH boom caused a net increase in Icelandic geothermal exploitation.
Dirty mid-level PRC officials in NK-adjacent, coal rich provinces are a problem, but a different problem than BTC mining.
There’s arguable nothing on earth keeping so much renewable energy in-demand, fully-loaded, at all possible times than blockchain.
So what’s your beef?
I don’t remember where I read the thing about Iceland, but I was trying to buy a bunch of NVIDIA cards at the time and every supplier I spoke to was like: “Iceland bro, sorry”.
If you’re just against this thing by all means be against it. I’m certainly against parts of it. But whether some sketchy-ass coal from China gets used to mine BitCoin or gets shipped to NK to run whatever godawful shit they’re up to? I hope NK is just mining BTC, because I can think of about a zillion worse things they could be doing with off-the-books coal.
Ultimately HN isn’t a speculation society, and if you really think I’m in outer space on this tell me so and I’ll carve an hour or three out of a busy work week to pull all the footnotes and resoundingly corner you with facts and figures.
But if you just don’t like BitCoin? Well I don’t exactly love it either, and we can leave it at that.
Based on the numbers I’ve seen, I’m inclined to believe that crypto mining on renewables mostly just isn’t anywhere near profitable. The big operators all seem to be taking advantage of cheap fossil fuels. Of course if we could ban that and force mining to surplus renewables only, then fine — but it seems a long way off.
And as to mining on geo or PV or wind or whatever not being profitable? Wind blows at night, sun shines in Arizona, and geothermal is always on. I don’t think that it’s tough to get NVIDIA gear at retail because people are running a lot of Christmas lights. I think Ethermine is making a fucking mint, but like all such “no investors welcome” type ventures, I’m only speculating.
You really need to look at solutions like M-Pesa. This feels like a solved problem.
That is a major "value" for some people and the reason why they buy Bitcoin.
If they’re buying drugs for personal use? I’ve got no beef with that, the various legislatures are constantly changing their minds about that, who am I to judge?
If they’re trying to buy a hit on someone? I’m sure the authorities are on top of that with or without BitCoin.
As you can read on my sibling reply I think it’s more nuanced even than that, but to play Devil’s Advocate: even if BitCoin’s use case was only to seem a little more like cash and therefore feel a little less crowded by the equation group putting full-take on every traffic light they drive past, is that evil or bad or a scam?
Fuck I’d pay a lot more than gas fees for a truly private phone call.
People have a real chip on their shoulder about not being rich from owning BTC. I can identify more than most, I personally know a lot of people who have poo that doesn’t stink from owning BTC.
But it’s a deeper issue: people on here are wired up as hell over anyone who made serious cash. Which is super weird given that everyone’s all Ayn Rand.
I’ve said it before, and I’ll (unfortunately) have to say it again: the only kind of getting rich on here that’s not some kind of sour grapes is via a YC company. Because no one wants a comment history that’s going to fuck up their YC app.
And it’s so ironic because if you breathe a bad word about Ayn Rand you get downvoted to grey.
No, really, you don't have to.
Anything to do with crypto on HN’s front page is going to be tripping over itself about whether it can be more flagrantly wrong about finance or distributed systems research.
I’m not like a recognized expert in either thing, but, I’m north of intermediate in both, and this shit drives me up the wall.
It's funny, because cryptocurrency 'investors' often seem to occupy the intersection between those naive on economics and those naive about technology (particularly distributed systems and databases).
But aggressive ignorance does get my dander up, so I waste time on these kinds of pointless threads fighting a losing battle against people who are just mad at BitCoin or whatever.
Your assertions like "there will be one or two real things that will make it."
There might be, or it might all turn out to have been a giant waste of time and resources.
International remittances are not problematic because we don't have the tech and we're all crying out for a blockchain and a volatile intermediate asset, but (where they even are still problematic at all) because of bureaucracy.
Your point about energy might be the worst - for a start Bitcoin is actually becoming dirtier, as large portions of mining moved from China to Kazakhstan last year, and are relying on the local coal infrastructure. And the second point, that it somehow drives adoption of renewables - the world as a whole is trying to switch to cleaner energy. We already have massive pressure and demand in the entire energy market as countries try to switch away from fossil fuels.
Meanwhile, fossil fuel power plants are either getting life extensions or just plain being brought back online to service the mining market - https://www.wsj.com/articles/bitcoin-miners-are-giving-new-l...
So, you wanna talk about aggressive ignorance, maybe address the log in your own eye?
My reflex to her as an example is only reinforced by her close association with Alan Greenspan who so successfully dismantled all the business-cycle shock absorbers that it’s been a real rollercoaster ever since, and who had the gall to play word games with Congress on television when questioned in that infamous testimony about the complete and utter empirical disproof of basically every policy decision he and Summers ever cornered in a dark all off K street over.
Really quite an unpleasant scene.
I'm on here a bunch and I don't see what you mean with the ad hominems. Why guess at peoples motives anyways? Even if they are indeed just jealous, I'm not sure skepticism becomes invalidated when a bad motive is established. "You almost had me convinced I was wrong but then I realized you were simply jealous." Surely we live in a world where lots of good and true things can be attributed to shit motives. That also applies to skepticism.
There’s been a shift in tone on here over a period of time I couldn’t precisely identify, years at least.
The technical debates always got, uh, quite spirited at times, but there was a sort of “hey, so-and-so did well, good for them. With a little luck it’ll be my turn before long.”
A kind of recognition that while a little envy is only human, it’s still in the best interest of everyone to build rungs on the ladder rather than kick them out.
And that’s not completely gone, but there is this creeping zero-sum kind of sentiment that just seems to be growing over time. This kind of narrowing of all bad feelings onto lucrative/prosperous people and ventures. There are some godawful industries in the world: finance, pharma, health insurance, big agribusiness, lobbyism, the friggin Sackler family, whatever Blackwater/Xe is calling themselves now.
But that stuff is discussed quite rationally. OTOH recommender systems, internet ads, crypto-money: people get really, really heated up about that stuff.
I’m open to alternative theories than the one I’ve presented, but the way I see it mass murder via OxyContin is a way bigger deal than cryptocurrency and FB ads put together.
That is a pretty bad read of the situation. As far as I can tell, most criticism here is from the perspective of "thank goodness I didn't _lose_ money on something so risky.
I don't doubt that there are people like that on here, but you definitely seem like you're projecting.
Good day to you.
Source: I was living in USSR/Russia since my birth.
What I still don’t understand is how the uncollatorized algorithmic doodads were meant to work, and also how they weren’t collatorized? It sounded like there was a lot of asset purchasing to support prices?
Algorithmic “stable”coins like this generally work by issuing two coins: one pegged asset that’s meant to be worth $1 (UST) and one floating asset that’s free to have a price set by the market (LUNA).
Your job as a “stable”coin algorithm is to keep the price at the peg (1 UST == $1) even when an imbalance of supply and demand pushes it above, or more likely, below that price, just by issuing and doing things with those 2 coins. On the plus side you can issue as many as you like.
Assuming a liquid market (an AMM like Uniswap will do), you can always reduce the price of the pegged coin (UST) if it goes above the target by making and selling enough of them [1]. (This part is easy.)
When the price goes below the peg, though, you need to create enough buying demand for the pegged asset (UST) at $1 (or whatever) to take all the sellers offering a discount out of the market.
If you did a good job creating value (or at least a non-zero market price) for your floating asset (LUNA), perhaps by building a payments network on its underlying blockchain or pitching really well to a bunch of VCs (maybe both!), then a way to do this is to issue more LUNA and use them to buy UST.
The problem is that just issuing more coins obviously does not create any additional value. It sometimes looks like it does, because markets aren’t perfectly rational or instant, or because of an expectation that the money raised issuing the tokens (/money/equity/bonds, whatever) will be spent wisely to create value. But if all else remains the same, doubling the number of the floating asset (LUNA) will halve the price.
Put simply: issuing more tokens like this is not creating value, it is transferring it from existing holders to whoever holds the new tokens (often called “dilution”).
The first observation here is that in the limit, if I print an infinite number of my floating coins and do nothing else, the most value I can get is the total value of all of them (their “market cap” [2]) before I started printing.
The second observation is that if I’m able, on average, to increase the (perceived by the market) total value of the floating coins (LUNA) faster than I dilute their holders by issuing more (even if it’s just a rising tide lifting all boats), the price should go up and everything might just look like it works.
But if the issuance needed to keep the peg is consistently above that growth rate (LUNA is diluted faster than it creates value), the price will go down. If this happens for long enough and nobody expects it to stop, people will start to sell, pushing the price down more. The lower the price, the more issuance is needed to do the same amount of stabilisation, and the more that will impact the price, etc. (This is the death spiral.)
So I’d argue that UST was (is?) in fact collateralised by whatever fraction of the total network value (market cap) of LUNA can be successfully taken from its holders without initiating a death spiral. This was (clearly) not nearly enough. In fact, given the more volatile nature of a floating asset that’s at risk of dilution and is valued more like a startup than a treasury bill, one might wonder why anyone ever thought they could keep an algorithmic stablecoin stable indefinitely…
Note: when things were looking better the LFG also bought a bunch of assets (bitcoin) as a kind of emergency fund. When everything started to go wrong they also used this in addition to newly minted LUNA to try to support the UST price (by buying it) but this was still just using value from the Terra ecosystem to support the price of UST. They did try to build reserves in good times to support in a crisis, which is sensible, but if doing that still doesn’t prevent you diluting faster than you create value you’re still going to be in trouble.
[1] Generally it makes sense (as far as any of this makes sense) to sell them for the non-pegged asset (LUNA) to push its price up, and to burn (destroy/remove from circulation) them if possible, which might push the price up a bit more (but probably shouldn’t, if you can issue infinite of them anyway).
[2] This is in reality more complex than just market cap, but it’s close enough to be illustrative of the fact that the market values the whole pie (network/protocol/company) at some amount, and that amount doesn’t change no matter how you re-slice it.
I'd give more than one uproot if I could :)
Then the peg would break
Basically DAI might break peg if the backing assets became illiquid (no buyers).
Theoretically a big enough crash could cause the collateral to drop faster than liquidations happened, and that could cause a run on DAI to cash out the collateral that's left before it runs out
Would DAI be able to defend peg or also fall and accelerate fall of ETH?
People wanting to withdraw their ETH from collateral would need to get DAI on the market to pay back the collateralize DAI loan to get their ETH before it's liquidated. This should initially drive DAI over 1$ peg.
Would liquidating loans drive down ETH further? What exactly happens to ETH form liquidate loans? Is it sold? Is it burned? Does it happen automatically or is decided by owners of Maker token?
Though I'm a perpetual pessimist (and saw the UST/Luna failure mode in five minutes of reading the whitepaper), I don't think DAI can death spiral as it right now.
DAI is currently backed by 47% USDC, 17% ETH, 7% WBTC, 7% USDP (very like USDC), and 10% USDC/DAI Uniswap LP positions and 4% "other". DAI is backed with 150% assets per DAI.
Since only 28% of DAI's backing is non 1:1 USD backed assets, even if ETH, WBTC, and whatever is in "other" where to zero, there would still be > 100% backing for the remaining.
FRAX though, FRAX could death spiral any time now.
The bait might change but the fish bite the same."
- Fish Karma
You can add crypto to that list right after Beanie Babies.
> Since late March, I have publicly warned our clients and the broader Bitcoin community about the impending collapse of the cryptocurrency Luna and its native stablecoin, TerraUSD (UST).
The only position I'd take is the free stuff that Brave hands out, if I ever switch from Edge to Brave, which is pending how this MV3 debacle turns out... and I would buy a small bit of BTC for a fun investment on a hard crash.
I agree with the author, the only one worth owning (if any) is BTC. From my former positions, I watched altcoins collapse with BTC, but did not always pick back up with the same fervor with BTC. Just crashed alongside it. For that reason, if I take a small position again, it'll be BTC.