Crypto: A bizarre place to be
After the Luna Ust fiasco there seems to be lowest investor confidence at this point. You got big players of this place(crypto) such as Galaxy Digital (Michael Novogratz) , Three Arrow Capital , Hashed , Coinbase Ventures and many more invested heavily in Terra Luna ecosystem.
List of Investors :
After having these big backers whole world was shocked to see Luna Ust go on extreme death spiral.
Working of Luna Ust model explained :
LUNA is the governance token of the Terra ecosystem.
UST is a stablecoin pegged to $1, and its “assets” are just LUNA tokens in circulation.
Here is how the peg works:
Expansion: if 1 UST = 1.01 USD, then UST is overvalued vs. its peg. In this situation, the protocol allows LUNA holders to swap 1 USD worth of LUNA for 1 UST. The LUNA is burned or taken out of circulation, UST is minted or brought into circulation. Given 1 UST = 1.01 USD, traders earn a 0.01 USD profit. This acts as a procyclical amplifier of the price of LUNA because its supply decreases.
Contraction (where we are right now): if 1 UST = 0.99 USD then UST is undervalued vs. its peg. In this situation, the protocol allows UST holders to swap 1 UST for 1 USD worth of LUNA. Given that you can buy 1 UST for 0.99 USD and exchange for 1 USD worth of LUNA, you profit 0.01 USD. UST is burned, and LUNA is minted. This acts as a procyclical amplifier of the downward price movement of LUNA because its supply increases on the way down. The big problem is that investors who now have newly minted LUNA will decide its better to sell it immediately rather than holding it in hopes the price pumps. That is why there is constant sell pressure on LUNA when UST trades at a substantial discount to its peg.
LUNA is perceived to be more valuable the more UST is used in commerce across the Web3 decentralized economy. This mint and burn mechanism is great on the way up, or when UST is growing in popularity, but if UST can’t hold its peg on the downside the death spiral can begin with LUNA being minted ad infinitum in an attempt to bring UST back to parity with its peg.
Just about every algorithmic stablecoin has failed spectacularly due to the death spiral phenomenon. If the price of the governance token declines, then the governance token asset backing the pegged token is not viewed as credible by the market. At that point, the participants begin dumping their pegged token AND the governance token. Once the spiral begins, it is very expensive and difficult to restore confidence to the market. And then it’s goblin town.
The death spiral is no joke. This is a complete confidence game. It’s a confidence game akin to the current debt-based fractional banking system; however, this game does not have governments who can coerce usage of the system with the threat of mortal violence.
Wanna read more about the Algorithmic Stablecoin can refer to the article written by Arthur Hayes.
How all of this got started :
Some say it was a death spiral catastrophe and some say it was pre-planned attack as Terra Labs had liquidity from the curve pool as they were getting ready for the deployment of 4pool next week , so the attacker found the right opportunity to drain the curve pool and so on unravels the death spiral aka unable to peg ust to 1$ .
Here is a deep dive thread by Onchain Wizard:
https://twitter.com/OnChainWizard/status/1524123935570382851?s=20&t=iQrLZSFeHBWK8lV9zFferA
Current Status of Luna Ust :
At the time of writing this article :
Luna’s price has been dropped from $119 being at it’s all time highs to $0.00014299 which almost 100% down from all time highs.
Ust price as discussed above , wasn’t able to restore it’s 1$ peg. In the beginning when Ust started depeg from 1$ on 9th and 10th of may, it started consolidating in b/w $0.75 and $0.90 giving it’s investors some hope of restoring it’s peg back to 1$ but at the end it wasn’t able to do so .
The series of events in order of which it happened :
- Ust depegs which further leads to Luna getting minted and dumped heavily.
- Bts(behind the scene ) LFG, Jump , and few other VCs trying to restore Ust’s peg failed miserably.
- Curve pool instability
- Luna’s price fells below 1$ and it’s supply keeps on increasing at a very unstable rate.
5. To stop further which leading to more catastrophe Terra decides to halt the blockchain for a while.
6. In between there were many proposals were passed before the chain got halted.
7. Binance delisted all of the Luna and Ust trading pairs from it’s exchange.
8. Later on after the chain got resumed, there were some talk held b/w Cz and Terra team about the plan of action .
9. Binance resumes trading Luna/Busd and Ust/Busd.
10. Cz and other people on twitter criticizes Terra and LFG asking about the unaccounted BTC reserves which was made to save Ust from depeging .
11. After a while LFG’s twitter account clarifies about the reserves how they were used in a failed attempt of restoring the peg.
https://twitter.com/LFG_org/status/1526126703046582272?s=20&t=CigeTUlWIB4pIPIYshVPkw
Conclusion :
No project here in crypto is too big to fail.
Luna and Ust both at their all time highs combined were having marketcap of 58billion$(approx).
Diversify your investments don’t consolidate it in just a single coin or token.