Meet Alleged Stablecoin TerraUSD, Now in a Potential Death Spiral – Mish Talk

May 10, 2022

Stablecoin TerraUSD chart courtesy of CoinMarketCap

TerraUSD Not Exactly Stable

Stablecoins are pegged to something, typically $1 but it could be anything. TerraUSD was supposed to be pegged to the US dollar.

$1 = 1 TerraUSD.

That peg broke hard on Monday.

Many readers may be wondering what TerraUSD is backed by.

The answer is nothing. Officially, it’s backed an algorithm that clearly doesn’t work.

Faith Based Algorithm

The algorithm is based on faith and arbitrage. If the price of TerraUSD falls below $1, traders can “burn” the coin in exchange for $1 worth of new units of a cryptocurrency called Luna.

In theory, if either Luna or TerraUSD deviates too far traders will burn one in exchange for the other.

Also in theory TerraUSD’s monetary policy scales nearly without limits, thereby helping DeFi (decentralized finance) projects reach their full potential.

Finally, users can gain passive income using TerraUSD with the Anchor protocol’s stable interest rates. Anchor is a lending protocol that promises a 20% return on UST savings. Additional and steady income appears through rewards in PoS chains, which maintain their stability due to commissions and inflation. This nuance will make it possible to form a reliable interest rate.

20% interest. What can possibly go wrong with that?

Theory vs Practice

The chart above shows the difference between theory and practice.

The comments on CoinMarketCap are more than a bit amusing.

Relax. the algorithm will catch up with the market. your money is safe
Buy UST with any other stable and take a profit from the difference tomorrow everything will be 1:1
$LUNA wow! never expected $UST to do this, Terra luna going down HARD! still when the bear market is over everything will work itself out & I really think this will be the project that will come out on top and be in the top 5.
$UST arbitrage opportunity of a life time. imagine buying the dollar at a 20 percent discount

Here’s one comment that actually made sense: “Which idiot thought that stablecoins backed by anything other than USD was a good idea?“

Emergency Loan

Please note Terra Stablecoin Peg Slips Below $0.70—Despite Loan From Bitcoin Reserves

Terra’s UST, the third-largest stablecoin by market cap, dropped to $0.69 in Monday trading, an all-time low according to CoinMarketCap data, even after the Terra-supporting Luna Foundation Guard rushed a $1.5 billion loan to shore up the currency. On Coinbase, the listed price got as low as $0.65.

Luna Foundation Guard (LFG), co-founded by Terra co-creator Do Kwon, wasn’t so certain that [the algorithm] would work, given the larger crypto market meltdown that’s been taking place over the last five days, which has seen the crypto market cap swing from $1.8 trillion to $1.4 trillion.

So, over the weekend it decided to make use of a backstop strategy it’s been pursuing over the past few months. As of May 3, LFG had stockpiled nearly $4 billion worth of Bitcoin, Avalanche, UST, and LUNA for its reserves that it could fall back on in case the algorithm stopped working.

As the stablecoin’s price peg slipped to $0.985 this weekend, it voted to lend out $750 million in Bitcoin and $750 million in UST to “proactively defend the stability of the $UST peg & broader Terra economy, especially under volatility and the uncertainty of macro conditions in legacy markets.”

The whole point of maintaining a reserve of Bitcoin and other cryptocurrencies was for precisely this moment.

Reserve? What Reserve?

This has me shaking my head.

How is a loan supposed to shore up an algorithm?

Doesn’t the loan have to be paid back?

Steady Lads

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Terra co-creator Do Kwon says “Steady lads, deploying more capital.”

Explaining 20% Interest Payments

Abracadabra

Frog Nation DeFi

Big MF Problem

Nut Size