Compile: TechFlow intern
Compile: TechFlow intern
As you may have noticed, things have been volatile in the market lately. This madness is driven by idiosyncratic factors, the bear market has been coming for several months, and this madness is largely caused by the risk of the Terra model.
As the circulating supply of UST grows, it creates an upward momentum for the price of LUNA. This works very well in a bullish market, as UST usage scenarios increase and demand increases, allowing users who hold LUNA to see their tokens directly create value. In safe-haven markets, however, the same mechanism can create problematic death loops.
background
background
1. People tend to prefer safe-haven assets. Macro conditions have clearly been deteriorating for some time, with maladaptive interest rates and deflation globally putting continued pressure on stocks and cryptocurrencies. This has led investors to move from under-collateralized stablecoins (UST) to fully cash/cash-equivalent-collateralized stablecoins (USDC, USDT).
what happened?
what happened?
1. LFG first issued a statement to transfer 150 million US dollars of UST liquidity from the 3CRV + UST pool in preparation for the launch of 4pool. At the same time, an anonymous address bridged and dumped $85 million in UST.
2. The sale caused the Curve pool to become unbalanced and put downward pressure on UST prices. To help correct this de-anchoring, LFG removed another $100 million of UST liquidity from Curve.
3. But this is still not enough to restore UST to anchor, and panic has slowly spread among the crowd.
4. Due to the design of the protocol, the price of LUNA is always linked to the circulation of UST. However, in the context of a large-scale bank run, the price of LUNA fell rapidly, which meant that UST was destroyed and exchanged for more and more LUNA, which caused a potential death spiral and brought the side effect of block chain blockage.
5. This congestion has caused people's panic to rise further.
6. The positions in Anchor are mainly guaranteed by LUNA. The price of LUNA dropped, causing UST to be liquidated, which in turn put further pressure on the price of UST.
7. TFL partners added $280M+ of non-UST liquidity to the 3CRV + UST pool in an attempt to stanch the bleeding. This liquidity is quickly consumed as outflows are significantly higher than "bailouts".
8. A large amount of Anchor deposits flowed out, and the UST market pressure increased sharply.
9. These anchored USTs have two destinations: they can still be exchanged into LUNA worth $1, and the selling pressure of LUNA is stronger; they are transferred out of the Terra chain for selling, which intensifies the decoupling of UST.
10. Less UST leads to more LUNA, and the price of LUNA drops at an accelerated rate
11. Subsequently, LFG decided to borrow 750 million BTC off-site to help UST restore the anchor, and after the market normalized, borrow 750 million UST to repurchase BTC.
12. The problem is that UST has become very cheap, so TFL's ability to repay market makers has declined. If BTC is liquidated and sold, it will further drag down the market and further intensify the death spiral.
By the afternoon, the anchor value recovered from a low of $0.66 to $0.90. Nonetheless, LUNA prices have steadily declined as USTs for LUNA continue to be sold on the market.
remaining questions
The key point of Terra's bear theory remains the lack of an alien yield protocol that interacts with UST. Stablecoins are designed to be highly liquid trading instruments, however, for UST, liquidity is leveraged and highly concentrated on one platform. A week ago Anchor had $14 billion in deposits, while UST had a market capitalization of $18 billion. Obviously, there are a limited number of practical use cases other than depositing money in Anchor.
This makes UST a riskier asset relative to other stable assets backed by cash or cash equivalents like USDC and USDT. The yield generated by UST is largely through the compression of Anchor's yield, and as investors shift from chasing yield to risk aversion, the unique appeal of UST becomes less important. even in"4POOL "Prior to the problem, funding had already started from"Anchor "Outflow.
So, what is Terra's solution?
1. First, the team must re-establish confidence in the algorithm and the model as a whole. Without it, the underlying "algorithms" won't work. Selling pressure on LUNA will only continue until there is enough money to support the peg. Speaking of which, there's been a lot of talk about fundraising for pegged defenses, which really helps to dispel this fear of unhooking.
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