Original title: "Research｜Will UST collapse? "
Original author: CryptoYC Tech
We talk about Terra's collapse every day because we are skeptical of his "left foot on the right foot" economic model. However, if we focus on the relationship between its two cores, that is, the relationship between LUNA and UST and the breadth of utility, how likely is this collapse? Or even if there is a crash, will there be a mechanism to fix it? Therefore, today we will look at whether Terra will perish from this perspective.
The Foundation of the Terra Empire - Anchor
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Image source: Terra dashboard: https://terradashboard.com/
And if you remember the Terra chain itself, you should remember that the official issuance amount of ust is 10b. If calculated according to the price of USD, the total supply should be 10b. The reason for the over-issue is unknown, but we can temporarily think that the current demand for UST has exceeded the previous setting. We also talked about the PVC mechanism between UST and Luna before, which also means that the super issued UST will drive the price of Luna to increase, and then enter a benign upward spiral. Everything seems to be very good, but let's take a look at the real utility of the current UST?
At this time, we need to look at the application of Terra's foundation——Anchor. Why watch it? Because, the current UST total amount is 10.54B, and the TVL on Anchor is priced in UST as follows:
Image source: Anchor dashboard: https://app.anchorprotocol.com/
Among them, the UST pledged for lending is 5,572,388,550. In other words, 50%+ UST spot is directly stored in Anchor. If the assets of the entire platform are covered by UST, then more than 98% of UST is in Anchor. Well, here we remember the current ratio. Continue to look at other applications. At this time, we should turn our attention to the recent Abracadabra fire.
The magician of Terra---Abracadabra
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Image source: https://app.powerbi.com
Of course, if you have a little bit of understanding of this project before, you know that UST is in full swing on Abracadabra and is related to the recent Degenbox (released on November 3, 2021). I originally planned to just tell you about Degenbox, but if you only talk about this, you may not understand it. So, let's quickly go over the project itself.
The Magician's Magic Wand --- Leveraged Earnings
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Image source: https://docs.abracadabra.money/
The official process is as follows:
To explain this more clearly, let's take an example of a user who wants to leverage his yvUSDT position:
Steps 1 and 2: The user chooses the desired leverage, gets yvUSDT, and deposits it as collateral.
Step 3: According to the selected leverage, the protocol will borrow the corresponding amount of MIM.
Step 4: These MIMs will be exchanged for USDT (current price peg and slippage play an important role here).
Step 5: These USDT will be deposited into the Yearn Vault to obtain yvUSDT.
Step 6: These yvUSDT tokens will be deposited back to Abracadababra to be used as collateral for the user's position.
In fact, it seems that there are many steps, but it can be summed up in one sentence: if you give him the collateral he wants, he will not give you MIM directly, but will give you the leverage (up to 10 times) set by yourself in the form of flash loan. Farming income, such as the yearn income corresponding to the multiple.
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Image source: https://docs.abracadabra.money/
There are only a few steps here. In summary, users can pledge UST to obtain MIM. But abracadabra's profit is obtained from Anchor. To be a little more specific, the protocol will cross-chain 85% of the user's pledge to Terra to pledge to Anchor (via EthAnchor), and then cross-chain the pledge certificate aUST back to degenbox for pledge, increasing the value of the user's mortgage assets.
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Image source: https://abracadabra.money/
So in general, if the slippage setting is 1%, choose 90% TVL, 10 times leverage can allow you to get 6.7 times the original cost.
That is to say, this function supports that I can make a profit in nesting dolls in yearn. Stake 100 ETH to get 100yvWETH, and then pledge yvWETH to abracadabra to open 90% TVL and 10 times leverage to get 6.7 times yearn ETH income. Let's calculate the benefits of doing so based on the latest yearn ETH interest rate (1.18%) and Abracadabra's yvWETH borrowing rate (0):
Total interest rate = Ryearn ETH x 0.9 x 1.18% x 6.7 - 0 = 7.1154, while the unleveraged return is: 1.062, which is much worse.
However, high returns come with high risks. Since the leveraged income position does not directly give you MIM, once liquidation occurs, you will not own any tokens.
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Image source: https://llama.airforce/#/curve/pools/mim-ust
Currently stable at 1b. Assuming that the average data is used to see that the total amount of collateral + loans on Anchor accounts for 90% of the entire UST supply, then the remaining 10% are basically in the abracadabra pool. This also means that these two protocols are critical to the stability of Terra. Especially Anchor, where the vast majority of UST is included. If an accident happens to the 20% fixed annual interest rate that it promises, causing the decoupling of UST and USD, will a storm come? This will be the part I will focus on today.
Warning of an approaching storm
If considering the extreme situation, Anchor has a problem (after all, it is a P2P, the APY of the stable currency can still be so high, and a crash is not impossible), to what extent will it affect UST and LUNA? This needs to start from the TVL structure of Anchor.
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Image source: Anchor dashboard: https://app.anchorprotocol.com/
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Image source: Anchor dashboard: https://app.anchorprotocol.com/
It can be seen that the latest loan interest rate is only 2.3% (the real loan interest rate is Distribution APR- Borrow APR. D APR is the ANC reward interest rate of the loan). Even if the Borrow APR of 15.76 is really used, it still cannot cover the 20% annualized interest rate that needs to be paid. So, there must be other options to improve solvency. At this time, you can turn your attention to the collateral of loan users, LUNA and ETH.
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Image credit: https://lido.fi/#networks
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Image source: Anchor dashboard: https://app.anchorprotocol.com/
It can be seen that the amount lent to the agreement far exceeds the loan amount, even if calculated at 15% of the borrow rate, it is far from enough to pay the deposit interest. Let's do the math directly.
Based on the latest interest rate of UST pledged at 19.34%, the amount that Anchor needs to pay each year is:
5572m x 19.34% 1077.62m
At current interest rates, the annual profit output is:
Luna: 4865.11m x 7.02% 341.53m
ETH：478.92m x 4.7% 22.51 m
Borrow: 1938.87m x 15.76% 305.56 m
The total income is: LUNA+ETH+BORROW = 669.6m
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Image source: http://www.mirrortracker.info/anchor
However, if I look closely at the above deposit, I will find that the borrower is much larger than the lender just recently. What happened will not be shown for the time being. Now let's think about a question: Anchor is not stupid, what should it do when this happens?
The simplest idea is: reduce this 20% fixed APY.
However, this raises another question: more than half of the spot UST in the entire network is in Anchor, and the 20% APY of the stable currency is what they are looking for. Once this APY is reduced, will it have a great impact on the stability of UST? ? In addition, UST-MIM is also a very large plate now, will it further affect the stability of MIM or even Curve's other stable coin pools? To summarize further, it is an upgrade to our opening question: Assuming that the interest rate of Anchor is greatly reduced, what will happen to UST?
Is the building about to collapse, or is it safe?
Once the Anchor interest rate is significantly reduced, then we can make some assumptions. According to the usual thinking, assumptions should be divided into optimistic assumptions, common assumptions, and pessimistic assumptions. Let's look at them one by one.
Let’s look at the optimistic assumption first: Assuming this happens, but the market still thinks that UST is a very low-risk asset, even if the interest rate is lowered, people are willing to believe in the stability of UST. So this situation will not have any substantial impact on UST.
Look at the usual situation: the market is relatively stable, but market participants are all profit-seeking. This means that everyone has a threshold in their hearts. Once the Anchor interest rate falls below this threshold, the market will be stimulated to take certain actions. Let's assume this threshold is 10%. Once the deposit APY is lower than 10%, people will withdraw their pledged UST, resulting in a decrease in the number of pledged UST in the pool, further leading to a rapid increase in borrow interest, which in turn will stimulate the rise of deposit APY, which in turn will attract people to pledge UST, repeated reincarnation. This is a phenomenon we often see. It is also the one that is most likely to occur under normal market conditions.
Finally, let’s take a look at a situation that we want to know the most today, that is, the pessimistic situation: the premise of this situation is that the market believes that UST is a high-risk asset: once the interest rate of Anchor falls below their psychological threshold, it will cause Panic, a large amount of pledged UST was withdrawn in an instant, and this part of UST withdrawn was the most unstable factor.
Where will these unstable USTs go? Well, liquidation arbitrage bots are going crazy. Let's look at a few situations:
·Hold UST: **********Do you believe it? I just think UST is risky, so maybe Hold it.
Sold UST for other stablecoins: This will unquestionably depeg UST (regardless of time):
i. Affects Curve and Abracadabra's degenbox. But how big the impact will be will be discussed in detail later.
ii. There will be selling pressure on Luna. There are too many USTs on the market, and the agreement needs to use Luna to buy back USTs, which will have an impact on the price of LUNA.
·I manually use ust to redeem luna for arbitrage: People who understand Terra's mechanism are likely to take this measure. Use ust to redeem LUNA, and then sell LUNA to the open market. There are two cases here:
i. The depth of Luna in the public market is very good, and the centralized exchange can absorb this fluctuation (it will not cause the execution of the agreement mechanism).
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Image source: https://twitter.com/0xHamz/status/1479261217298468865?s=20
Now, let's look at the effect on Curve and MIM.
Where will the domino effect stop?
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Image source: https://cryptorisks.substack.com/p/on-abracadabra-degenbox-strategies
However, here we need to take a closer look at the specific situation:
Once a large number of USTs flood into the market, it means that ust will become cheaper, and a large number of USTs will be turned into mim or 3CRV. At the same time, Degenbox will start liquidation, turning a large amount of ust into MIM, which will lead to Luna selling pressure... What will happen in the end? Apply the analysis of another boss Naga King:
"The current pool of MIM-UST has a volume of 1b, of which 950m of MIM is guaranteed by UST. If this 95% of UST is withdrawn and traded into MIM in this pool, it will cause more than 90m of this pool composition % of UST, forecast at 93%.
Of course, Degenbox has also considered this point, so it proposes a fault tolerance method: in the event of a large-scale withdrawal of UST from Degenbox, once the total withdrawal amount exceeds 10% of the total amount in the Degenbox pool, the withdrawal will be restricted. Until UST is extracted from Anchor back to the main network. This may take several hours. And more often than not, market arbitrageurs play a role in bringing prices back to normal levels in the process. Of course, this is all without a complete loss of consensus, otherwise arbitrageurs would not arbitrage things that have no value at all.
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