Last week, Terra experienced a death spiral. LUNA fell from $80 to almost zero, a drop of more than 99%, and the algorithmic stablecoin UST fell below $0.2.
Its approximate path is:The decline of the Nasdaq led to a decline in the crypto market → LUNA fell, and the market value was close to UST → giant whales dumped UST, causing panic, causing breakaway → LFG failed to use BTC to stabilize UST → the death spiral was triggered, and the arbitrage mechanism caused hyperinflation of LUNA, and the price was close to zero.
secondary title
1. Review of investment opportunities
Assuming that you successfully participate in the following opportunities with a principal of 500U, you can finally get about 2793U without considering leverage, and the rate of return exceeds 450%.
1) Short LUNA until its defi leverage liquidation occurs, triggering a dive
On May 9, short LUNA when the market value of LUNA and UST were inverted, and the price of LUNA was about 60 US dollars at this time
Judgment logic: There is a panic when the market value is inverted, and Do Kwon’s Twitter said that LFG’s rescue behavior is mainly to use BTC and UST for market making, and to undertake the selling pressure of UST, which means that the market value of LUNA will gradually be lower than that of UST under the panic
Risk: moderate, if LFG raises funds to boost LUNA at the same time, there is a risk of loss
Source of income: The continuous decline of LUNA will trigger the liquidation of DeFi leveraged agreements, and the critical price is about 42 US dollars
Earnings calculation: short position opening price - about 45 US dollars, closing price - short-term stabilization after liquidation leads to diving, about 30 US dollars; without considering leverage, the rate of return is about 33%.
2) Short Altcoins
On May 10th, I found that UST stabilized at $0.9 for a short time, so I chose to short Altcoin
Judgment logic: It means that LFG is using BTC to undertake the selling pressure of UST, that is, BTC may be under pressure and fall, and when BTC falls, Altcoin will fall even more, especially like WAVES, which has a similar algorithm stable currency USDN
Risk: With the Nasdaq falling and the overall market falling, the risk of shorting Altcoins is small
Source of income: the potential decline of Altcoin, which can be slightly increased leverage
Profit calculation: Taking WAVES as an example, the opening price of short positions is about 11 US dollars, and the closing price is about 7 US dollars. The rate of return without considering leverage is about 40%
3) LUNAUST circular arbitrage
On May 11, Do Kwon released Twitter to give up. After essentially giving up LUNA, users are encouraged to participate in arbitrage. When UST prices are restored, small funds can participate in LUNA UST circular arbitrage, that is, buy UST at a discount, withdraw cash, or use the Ethereum cross-chain bridge to the Terra chain Forge LUNA on the Internet, withdraw cash back to the exchange to sell LUNA for cash, and cycle operation
Judgment logic: burning 1 UST can mint 1 USD LUNA on the Terra chain, assuming that 0.5 USD purchased UST can obtain 0.5 USD arbitrage space
Risk: The risk is relatively high, mainly due to the chain freeze, the exchange deposit and withdrawal restrictions, and the long operation time, which lead to the loss of arbitrage space during the rise of UST/fall of LUNA
Source of income: discounted portion of UST
Profit calculation: Assuming that UST is purchased at USD 0.5 and one cycle is successfully completed, considering the rapid decline in handling fees and LUNA, the rate of return is about 50%
4) LUNA stock game
On May 13, Terra resumed block production but closed on-chain transactions. Binance resumed the LUNA/BUSD spot trading pair. You can try to buy LUNA to participate in the pure capital game
Judgment logic: LUNA has become MEME Coin on the centralized exchange. In the case of pure long positions, it can be expected that a wave of bottoming out will rebound, and a large number of investors will buy the bottom and raise the price.
Risk: The risk is relatively high, mainly due to the difficulty of pure capital games
Source of earnings: LUNAs rally
Profit Calculation: Assuming that Binance resumes the LUNA/BUSD spot trading pair on the evening of May 13, and buys LUNA at a price of $0.001, the yield is about 100%
5) Long ATOM
On May 15th, some public chains extended olive branches to Terra developers and projects and issued incentive funds to encourage projects to migrate their own ecology, such as Fantom, Juno, etc. Even if Terra falls apart, there are still many smart contract projects and developers deployed on it. great value
Judgment logic: As a blockchain that uses the Tendermint consensus module and is connected to IBC built by the Cosmos SDK, the most likely migration destination is the Cosmos ecosystem, especially since it supports the CosmWasm smart contract framework
Risk: high in the short term and moderate in the long term, mainly because Altcoins have a greater decline in the case of market declines
Source of income: the development of Cosmos ecology
secondary title
2. Timeline review
May 6
The Nasdaq plummeted 5%, BTC then plummeted from $40,000 to about $36,000, and the entire crypto world immediately started a downward trend; LFG announced that it had purchased $1.5 billion in BTC reserves through OTC transactions.
May 8
The attack on Curve started, and Terra withdrew 150 million liquidity from UST-3pool in preparation for 4-pool; a giant whale (this address was enabled on the same day) dumped UST 84 million UST in 3pool pool, and LFG, in order to maintain the balance of the pool, once again Withdraw US$100 million UST.
Subsequently, the two giant whale addresses withdrew 360 million UST deposits from Anchor, and at the same time began to sell UST on the centralized exchange, causing a short-term decoupling and panic among users.
May 9
LFG announced to use BTC to support UST, but due to the market environment and the sell-off of BTC, the price of LUNA continued to fall around $60, but the price of UST was relatively stable; the market value of LUNA and the market value of UST were inverted, panic spread, and the death spiral began.
Even after absorbing more than 580 million UST, LFGs efforts to anchor UST on Curve still failed. UST continued to be decoupled from DEX, and the focus of rescue turned to centralized exchanges.
Even after absorbing more than 580 million UST, LFGs efforts to anchor UST on Curve still failed. UST continued to be decoupled from DEX, and the focus of rescue turned to centralized exchanges.
There are rumors in the market that Terra is seeking to raise US$2 billion. At the same time, LFG used BTC to save the market, prompting UST to return to US$0.9, but its BTC reserve address shows zero.
There are rumors in the market that Terra is seeking to raise US$2 billion. At the same time, LFG used BTC to save the market, prompting UST to return to US$0.9, but its BTC reserve address shows zero.
May 11
There are rumors in the market that Terra’s financing failed, and UST dropped sharply, falling as low as $0.3.
At this stage, LUNA began to mint a large amount of coins, and the arbitrage mechanism led to the purchase demand for UST, which once caused the price to rebound to around US$0.75.
At this stage, LUNA began to mint a large amount of coins, and the arbitrage mechanism led to the purchase demand for UST, which once caused the price to rebound to around US$0.75.
May 12
The UST deposit on Anchor was reduced to 2 billion, and the arbitrage mechanism of burning UST to mint LUNA and sell it reduced the total amount of UST to about 11.2 billion, but the price of LUNA fell below $1, which caused the marginal coinage of arbitrage to be too high, and the supply of LUNA The amount has increased to 150+ billion pieces, and the death spiral is irreversible.
The Terra blockchain stopped producing blocks for a short time, and after recovery, new delegations were suspended to prevent governance attacks; a few hours later, it stopped briefly again, and transactions on the Terra blockchain were suspended after this recovery, but coins can be withdrawn to the centralized exchange.
The Terra blockchain stopped producing blocks for a short time, and after recovery, new delegations were suspended to prevent governance attacks; a few hours later, it stopped briefly again, and transactions on the Terra blockchain were suspended after this recovery, but coins can be withdrawn to the centralized exchange.
secondary title
Possible methods of operation are:
The vulnerability of the algorithmic stablecoin itself is the root cause of this incident, but the weakening of the market and the precise timing of UST bears also accelerated the death of LUNA. In just 3 days, the Terra project with a total market value of about 40 billion U.S. dollars almost returned zero.
This incident does not rule out the possibility of careful planning by an organization. There are rumors in the market that there are top hedge funds behind the scenes. After LFG announced the purchase of BTC as foreign exchange reserves, it is targeting Terra and the opportunity to short BTC.
Possible methods of operation are:
Borrow BTC and sell (the counterparty may even include LFG)
Grasp the early stage of 4pool pool deployment, smash the UST-3pool pool to an imbalance, and spread panic and public opinion at the same time
UST dumped on centralized exchanges, triggering panic
After UST unanchored, chips were absorbed at low prices and sold again during the LFG bailout
The death spiral was triggered, and LFGs BTC selling pressure further led to an overall decline in the crypto market
In addition, on May 12, in the 3pool pool on Curve, the liquidity of USDT was also drained, accounting for more than 87% at one time. The lowest price of BTC dropped to about 26,000 US dollars, and the method was exactly the same as that of attacking UST.
It is worth noting that Citadel Securities (founded by Ken Griffin and Citadel LLC) received a total investment of US$1.15 billion from Sequoia Capital and Paradigm in January this year, with a post-money valuation of US$22 billion. Paradigm, an encryption venture capital firm, is one of MakerDAOs investors.
In addition, on May 12, in the 3pool pool on Curve, the liquidity of USDT was also drained, accounting for more than 87% at one time. The lowest price of BTC dropped to about 26,000 US dollars, and the method was exactly the same as that of attacking UST.
secondary title
4. The missed rescue opportunity of the Terra team
In addition to the mechanism of LUNAUST itself, the following mistakes also caused Terra officials to miss the opportunity to save:
After the imbalance of the UST-3pool pool on Curve, Terra chose to withdraw UST instead of replenishing assets, which made the liquidity of the UST-3pool pool more vulnerable, causing users to question and panic on Twitter, and collapsed in the subsequent attacks
After UST unanchored, it made a high-profile announcement on Twitter to rescue the market (directly abandoning its own algorithm stabilization mechanism), but users doubted the stability and risks of the system, causing a panic run
Premature use of BTC to save the market and run out of bullets (especially when everyone knows that the reserves are insufficient), abandon the original arbitrage mechanism when the price of LUNA is high, so that it fails to destroy enough UST
After the reserve was exhausted (the whereabouts of BTC is temporarily doubtful), financing was announced, and at this time LUNA had fallen sharply, and it was not feasible to raise funds
After the financing failed, Do Kwon tweeted to announce that the arbitrage mechanism between LUNA and UST played a role, prompting UST to return to the anchor, but it was too late
secondary title
3) Abandon UST and LUNA, restart the Terra ecology, and release new LUNA
The future development of Terra may:
1) Burn the super-issued LUNA
At present, the arbitrage mechanism of LUNA and UST has been closed, and the main trading volume is concentrated in Binance LUNA/BUSD spot trading. There may be the possibility that the exchange will continue to absorb funds during the market-making process. If the exchange can absorb enough There may be a possibility of cooperating with the Terra team to restart the project in the future. The difficulty lies in the fact that the supply of LUNA has reached 6.5 trillion pieces, and it is distributed in many exchanges, so there is a great risk of failure to absorb huge amounts of chips.
2) Repurchase at a discount and destroy UST
Find a funder, repurchase at a discount and destroy the overissued UST, reduce the anchor of UST (such as 0.5 US dollars), restore the arbitrage mechanism with LUNA, but increase the handling fee, mortgage assets and capital control, and limit the upper limit of UST and LUNAs additional issuance , slowly recovering the use cases and consensus of UST. The difficulty is that UST still has 11.2 billion in circulation, and the required amount of funds is huge. In addition, in the case of Anchor Ponzi collapse, the usage scenarios of UST are also limited.
3) Abandon UST and LUNA, restart the Terra ecology, and release new LUNA
On May 14, Do Kwon released a rebuilding plan on the Terra Forum, proposing to issue 1 billion new LUNA tokens, which will be distributed to holders of LUNA and UST before breaking the anchor. But Changpeng Zhao said that the fork of Terra will not generate any value, and at the same time questioned the flow of LFGs BTC reserves. No matter what method Do Kwon uses to rebuild the project, most users have lost confidence in UST.
Under the background of strengthened regulation, USDC-type fiat currency stable currency controlled by supervision will become the mainstream, and the market share of USDT and decentralized stable currency may gradually decrease, and even more unanchor events will occur; the cryptocurrency market becomes a volatility An enlarged version of the Nasdaq index, under the condition of perfect supervision, more professional financial institutions will also enter the market. The development of the encrypted world and the decentralized vision may lead to the birth of more decentralized algorithm stable coins, challenging the dollar hegemony in the encrypted world.
The incident has attracted the attention of regulators. U.S. Treasury Secretary Yellen said that UST is a real example of stablecoin risk. The Treasury Department is stepping up the development of a stablecoin risk report. Although the risk has not yet reached the scale of a systemic threat, she said that a comprehensive framework for stablecoins needs to be developed by the end of the year. She also said that the emergence of stablecoins is a demonstration of the central banks digital currency (CBDC). The central banks digital currency may weaken the diffusion of stablecoins, but it is more likely that the central banks digital currency will rely on financial companies. The SEC also said that stablecoins may be regulated in light of the collapse of UST.
Summarize:
Under the background of strengthened regulation, USDC-type fiat currency stable currency controlled by supervision will become the mainstream, and the market share of USDT and decentralized stable currency may gradually decrease, and even more unanchor events will occur; the cryptocurrency market becomes a volatility An enlarged version of the Nasdaq index, under the condition of perfect supervision, more professional financial institutions will also enter the market. The development of the encrypted world and the decentralized vision may lead to the birth of more decentralized algorithm stable coins, challenging the dollar hegemony in the encrypted world.
Note: JZL Capital currently has a Cosmos ecological theme fund. The opinions in this article may have a high degree of interest correlation with the company. This report should not be used as investment advice.
about Us
JZL Capital is a professional organization registered overseas, focusing on blockchain ecological research and investment. The founder has rich experience in the industry. He has served as the CEO and executive director of many overseas listed companies, and has led and participated in eToros global investment.
The team members are from top universities such as University of Chicago, Columbia University, University of Washington, Carnegie Mellon University, University of Illinois at Urbana-Champaign and Nanyang Technological University, and have served Morgan Stanley, Barclays Bank, Ernst Young, KPMG, HNA Group , Bank of America and other well-known international companies.
contact us
We are always looking for creative ideas, business and cooperation opportunities, and we also look forward to your reading feedback, welcome to contact hello@jzlcapital.xyz.
If there are obvious facts, understandings or data errors in the above content, welcome to give us feedback, and we will correct the report.
Note: JZL Capital currently has a Cosmos ecological theme fund. The opinions in this article may have a high degree of interest correlation with the company. This report should not be used as investment advice.
