The Sky is Falling: UST Craters, Crypto Insiders Respond to “Death Spiral”

TerraUSD (UST) has lost its status as a stablecoin as it is now trading at $0.40 $0.35 having dropped to as low as $0.30 in the last 24 hours. UST’s collapse is the hottest story in crypto land as it was, until recently, touted as the one algorithmic stablecoin to rule them all.

In recent hearings on Capitol Hill, UST was discussed with US Department of Treasury Secretary Janet Yellen as an example of why regulation is needed for stablecoins.

A good review of the series of events that caused the run on the bank is available here.

Do Kwon, co-founder of Terra, attempted to reassure the community, noting that the last 72 hours have been extremely tough – “know that I am resolved to work with every one of you to weather this crisis, and we will build our way out of this. Together.” Kwon countered the “death spiral” narrative by Tweeting:

Terra’s focus has always oriented itself around a long-term time horizon, and another setback this May, similar to last year, will not deter the #LUNAtics. Short-term stumbles do not define what you can accomplish. It’s how you respond that matters. Terra’s return to form will be a sight to behold. We’re here to stay. And we’re gonna keep making noise.”

CI received multiple comments on the collapse of UST sharing their opinion on the crypto saga.

Manuel Rensink, Strategy Director at Securrency, said the failure of UST to hold its peg may represent an opportunity for others.

“The Terra debacle shows that there is both a huge appetite for yield and a need for better alternatives with a more robust and sustainable design. We see strong opportunities for new entrants to the market of decentralized stable value. Programmable yield-bearing accounts that leverage the unstoppable trend towards proof-of-stake chains, institutional DeFi, and an emerging web3 fixed income market.”

Dusan Kovacic, Chief Investment Officer at Rockaway Blockchain Fund, shared:

“The depegging of UST first began on Sunday, with outflows of UST into BTC coming from the Luna Foundation Guard purchasing Bitcoin via 3 Arrows Capital and Genesis. Following this, the market began to arbitrage Curve UST 3pool, which caused a liquidity imbalance, in turn leading to further outflow. A number of issues exacerbated liquidity issues for the protocol. Given the design of the Terra ecosystem, if there is not enough liquidity, 1 UST can be exchanged for Luna worth $1 USD. Arbitrageurs were buying off-peg UST (below 1 UST) and selling it to the Terra protocol for $1 USD worth of Luna, immediately selling on the market for profit. “Given the direct relationship between Luna and UST peg, this caused immense pressure on Luna. While Luna dropped by 75% over the course of 4 days, on Monday in the day of highest pressure, Luna dropped by 50% in a single day. The immense pressure on Luna and UST also triggered the withdrawal of liquidity from wider markets.

“As the whole ecosystem panicked, it is likely to assume that the LFG managed to acquire the liquidity to stabilize the peg. At its extreme, the peg decreased to as low as 0.6$ USD per UST. Given the large base of supporters including Galaxy, Digital, Pantera, 3 Arrows Capital and Jump Crypto, it is likely to assume there was enough conviction to save the protocol by buying up UST.

“By the afternoon of May 10, the UST peg had recovered from 60 cents to 93 cents per UST. While there have been costs to this recovery: major crypto institutions are now holding billions of UST, and Luna investors have suffered significant losses (–70%), ultimately Luna protocol has been saved, demonstrating its resilience even in a period of significant market volatility.”

Kovacic may have spoken too soon as the $0.93 recovery was followed by another dump as holders rushed for the exit once again.

Brad Yasar, CEO of EQIFI,  the first DeFi project powered by a licensed and regulated digital bank, said that UST losing its peg was predicted by many industry insiders. The decoupling was due to “its unsustainable 20% yield and high dependency on BTC prices.”

“Essentially, UST and LUNA work as counterweights to balance the UST at a $1 peg, however, the Luna Foundation Guard made big bets on BTC by purchasing $4B of BTC for its ‘reserves’, to back UST. “When BTC started losing value this year, the faith in UST peg was also tested and broken. This resulted in LFG selling all of its BTC reserves to protect the peg,  leading to the price drop in BTC. Despite what some may believe, Terra is not the cause of the bear market for crypto. The bear market has been around for months now. However, the bear market and the FUD surrounding it was one of the main reasons the algorithmic stablecoin UST broke its peg to $1.”

Yasar said that he does not believe the broader stablecoin market will suffer due to UST  as asset-backed stablecoins are not prone to de-pegging as long as the reserves match the number of coins in circulation.

“Algorithmic stablecoins that are not asset-backed so far have been depegged by violent market movements. Examples include Bitshares in the past, or UST this week,” said Yasar. “In a bear market, the best advice is to be patient, because markets are cyclical. Unless there is a pressing reason, do not rush to move positions and realize losses. Also, take your profits next time we have a bull market, so the next bear cycle doesn’t affect you as much. “Bear markets are great opportunities for new entrants to get exposed to the assets they want at good prices, as well as for existing projects and founders to grow and prove themselves. Most investors and entrepreneurs that survive a bear market come out on the other side much stronger and experienced.”

Max Kordek, CEO and Co-founder of Lisk, said the UST crash is the culmination of multiple events:

“What happened here is that a single wallet dumped a very large amount of UST in the market, which also caused LUNA to drop. It’s unknown if the single wallet also dumped a very large amount of LUNA on the markets at the same time but it is likely, with rumors circulating that this was a coordinated attack. To build additional trust amongst token holders, Terra had acquired a large amount of Bitcoin (BTC) to support UST’s peg. With UST losing its peg due to the large dump and LUNA falling with it, Terra then sold their BTC to stabilize UST and LUNA. We are talking about billions of USD in BTC here, which has an enormous knock-on impact on the entire crypto industry. This then caused a death spiral because a falling BTC price usually also means that all other cryptocurrencies fall, including LUNA. The continued fall of LUNA then accelerated the fall of UST, which then again made LUNA drop lower, forcing Terra to sell more BTC to support their markets, starting the entire cycle again.”

Kordek believes that trust in algo based stablecoins are likely to have greatly diminished and difficult to restore:

“This will, unfortunately, be used by politicians as an example of why the world requires CBDCs. We don’t need CBDCs, what we do urgently need though, is reliable, decentralized stablecoins. The markets were already overbought for some time and were bound to go lower, especially due to current macroeconomic trends. The news of Terra now selling billions of USD in BTC on the market influenced many investors to sell their BTC as well. As a result of this crash, we have seen the largest daily BTC in-flow to exchanges in over four years.”

Kordek noted that we are definitely in a bear market but bulls start following a big capitulation:

“Bear markets are the time when those optimistic about the future of crypto will accumulate. The technology and its potential remain the same as before — nothing has changed here. Bear markets are great for building, so put your head down and support the industry by building new technologies and founding new startups.”

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