Will LUNA really fall into a death spiral, as predicted by on-chain analysis on May 19th last year and May 10th this year?
On May 7, 2022, LUNA/USD fell 20% between May 7 and May 8, reaching $61, the lowest level in three months, after whales dumped $285 million worth of UST. As a result of this sell-off, UST briefly lost its peg to the U.S. dollar, falling to a low of $0.98.
The UST stablecoin decoupled sharply from the US dollar again on May 10, 2022, falling to $0.68, a record low. LFG (Luna Foundation Guard) has announced that it will “loan” its $1.5 billion Bitcoin reserves to professional market makers to keep the peg. UST and LUNA have both been drained of LFG’s public Bitcoin and Ethereum wallets after revealing that LFG will lend $1.5 billion in BTC and UST. With a large amount of capital investment, the UST price has gradually recovered and has returned to above $0.9.
However, this isn't the first time UDT has "unanchored." The market fell on May 19, 2021 (519). Due to spiral liquidation, the price of UST "de-anchored." It almost entered a vicious circle of confidence collapse when it de-anchored by more than 10%.The occurrence of multiple "unanchored" situations shows that in the "bear market", under the dual threats of market conditions and deliberate attackers, Luna is at great risk of falling into a death spiral.
Terra ecological stablecoin UST and abracadabra ecological stablecoin MIM are solid ponzis, according to MakerDAO co-founder Rune in January 2022. A possible UST decoupling and a worst-case scenario for the LUNA death spiral were posted by Twitter user 0xHamz.
In March 2022, in response, LFG announced a reserve of $10 billion in BTC to deal with a possible UST decoupling.
This time, UST "un-anchored" again, and LFG's public Bitcoin and Ethereum wallets were depletedon May 7th and May 10th, 2022.
SharkTeam will show you how the LUNA death spiral is generated from the perspective of on-chain analysis, how big the risk is, and when it will appear.
1. Why and under what circumstances does a death spiral occur?
(1) Business Model: Algorithmic Stablecoin (UST/Luna) and High Interest Rate (Anchor).
This begins with Terra's business model. Terra ecology's core design is to expand the stable currency UST's usage scenarios and payment requirements. Luna: Token for governance, pledge, and verification, and UST: stable currency pegged to the native dollar, are used in the operation of UST. The simple understanding is that every time a UST is minted, one dollar worth of Luna must be burned, and Luna aids in the pegging of UST to the dollar through an arbitrage mechanism: if the price of $UST is > $1, there is a chance to destroy $Luna, mint $UST, and profit from the difference with the peg; if the price of $UST is 1$, you can burn $UST for $Luna to restore the peg,
Anchor Protocol (hereinafter referred to as Anchor) is a DeFi platform officially launched by Terra in March 2021. It is essentially Lending, similar to Compund. But Ancho's speciality lies in its extremely high APY (Annual Percentage Yield), which is always maintained at around 20%. Stimulated by high annualization, users' demand for UST has skyrocketed, which is also the core of UST's business. In the Terra ecosystem, Anchor acts as a "state-owned bank", promising an ultra-high current yield of 20% to absorb public deposits (in the form of UST).
(2) Revenue and Expenditure Model: Unable to make ends meet, hidden dangers are buried
Anchor's main income comes from borrowing interest + PoS reward income for borrowing collateral (currently bLUNA and bETH) + liquidation penalty; Anchor's main expenditure is about 20% annualized deposit interest, Anchor itself also provides borrowers with relatively High ANC token subsidy, in order to maintain the ANC token price, Anchor also faces additional ANC token price maintenance costs, which is to solve the problem of ANC token selling pressure.
This is the revenue and expenditure model of UST and Luna. According to the current size of UST and Luna, they need to bear an additional operating cost of about one billion US dollars each year. It is obvious that Anchor alone cannot afford this expense. So, in February 2022, with Anchor’s reserve pool running out, LFG announced an allocation of 450 million UST for Anchor to replenish its reserve pool. This confirms one point: Anchor, unlike other lending agreements, is essentially an integral part of Terra’s planned economy. Its current business operations are not for the pursuit of profit, but a subsidy for the expansion of UST with funds officially funded by Terra. scene-based products.
(3) The formation of the death spiral
Terra's complete logic can be seen in the above analysis: create a scene through Anchor to shape the demand for stablecoins; demand promotes the scale of UST minting, attracting users to enter the market; users continue to enter the market, creating ecological data performance (TVL, address Number of projects, number of projects, etc.) and gradually push up the price of Luna; the project party or foundation cashes out funds through Luna, and subsidizes it to maintain high annualized income, in this cycle.
If the above cycle is stable, UST is the engine of Luna, and Luna is the stabilizer of UST. More Web3 projects and users flood in, and the two interact, and when the trend is good, a positive spiral is formed.
However, when the market value of Luna relative to the stablecoin decreases and the transaction depth decreases, the collateral will be insufficient, the risk of de-anchoring of the stablecoin will increase, the cost of maintaining consensus will be higher, and it will fall into a death spiral. For example, when the market as a whole plummets and Luna is not immune, or when someone can stop the price of Luna, a death spiral will appear.
(4) What is the risk of a death spiral emerging and how high is the threshold?
Naturally, the project party understands the need of maintaining circulation and subsidy sources, and is taking steps to increase production reserves. Anchor is adding new collateral assets, such as bLuna, bETH, wasAVAX, and bATOM, to help increase profits. Anchor dynamic rate is introduced, according to the proposal, the anchor yield will decrease at a rate of 1.5% per month, the minimum APY is set at 15%, which will be reached in 3 months, but if the APY of Anchor is lower than people hope, people will be more interested in UST And Luna demand will fall, UST demand will become smaller, more Luna will be minted, and the price of Luna will fall.
Therefore, the emergence of the death spiral may come from the overall decline of the market, the decline of Anchor APY, and the targeted blocking of Luna prices. At present, the emergence of Terra's death spiral is almost certain, and the risk is very high. Of course, with the establishment of LFG and the incorporation of BTC into UST's reserves and redemptions, Terra Ecology is also striving to maintain a positive business cycle, but in extreme market conditions, can we effectively deal with more unexpected complex situations and To prevent the death spiral, all this still takes time to verify.
2. The cause of UST's de-anchoring from the perspective of on-chain analysis
From May 7th to 10th, whale user
terra1yl8l5dzz4jhnzzh6jxq6pdezd2z4qgmgrdt82k sold 196 million UST within 3 days; whale user terra195wtjmpjxhp336mclqfsyk2plvs8mw3lhsc5nc sold 176 million UST within 3 days.
Among them, terra1yl8l5dzz4jhnzzh6jxq6pdezd2z4qgmgrdt82k had 45.25 million UST flowing to Binance Exchange:
In addition to the unanchored UST price, from the evening of May 9, the price of Luna also experienced an unconventional sharp drop. Under the double blow, the market panic about UST's de-anchoring gradually formed, dragging UST into a death spiral.
It can be seen that the price drops of UST and Luna are all due to sudden and unconventional price collapses. The possibility of selling off the whale account is very high, and it is very likely that the Terra ecology will be precisely blocked. Specifically:
(1) Massive $285M UST sell-off on Curve and Binance by a single player.
(2) Massive shorts on Luna.
(3) Hundreds of Twitter posts continuously smear Terra and the UST ecology.
But it has to be said that in addition to the loss of the project side, a large number of ordinary investors have suffered huge losses.
3.What is the project party's strength based on the chain analysis, and will there be similar risks in the future?
As of May 9, LFG holds a total of about 3.5 billion USD worth of Bitcoin reserves, which are specially used in extreme cases and are only used for rescue in emergency situations. Only when the LUNA stability mechanism fails, will the emergency reserves be used. . This means that in the extreme case of UST being sold off a lot and LUNA prices falling sharply, Bitcoin, as a foreign exchange reserve that is not strongly correlated with the Terra economy, adds a policy to Terra's intervention in the exchange rate (maintaining the peg to the dollar) tools, such as this time.
LFG Bitcoin wallet location:
bc1q9d4ywgfnd8h43da5tpcxcn6ajv590cg6d3tg6axemvljvt2k76zs50tv4q On May 10, two large transfers were generated, 28205BTC and 42530BTC respectively, of which 28205BTC was directly sent to the wallet address suspected of Binance.
According to Do Kwon, founder of the Terra project, the sale of BTC can provide financial support for the purchase of UST, thereby stabilizing the price of UST. The flow of funds to the LFG Bitcoin address fits what Do Kwon describes is the strategy. Regarding the source of BTC, according to cointelegraph, on May 5, LFG purchased 37,863 BTC through Genesis OTC and Three Arrows Capital to serve the currency price stability of UST.
The ChainAegis platform also records the history of the fund balance of the LFG address:
It can be seen that since March 2022, LFG has been increasing its reserves of BTC, up to 42,350 BTC. On May 10, the LFG address used up all the accumulated BTC reserves and transferred in and consumed an additional 28,205 BTC on the same day. As of press time, the address has output a total of 70,736 BTC to stabilize the UST price crash on May 10. The current UST price has returned to above $0.9, and the low point ($0.6879) has rebounded sharply, but there is still a gap from the anchor price of $1. De-anchoring is still not fully resolved.
In general, from the perspective of LFG's ability to save the market and the development background of Luna, the capabilities of the project party and the foundation are very strong. However, under the shadow of the death spiral in the business model, this is not an equal war. The attackers use capital of less than 1 billion US dollars to build momentum with public opinion. The Terra project party has to pay several times the capital investment and experience to turn the situation around. Therefore, the possibility of similar risk events occurring in the future is still very high, and I hope everyone can invest cautiously.
SharkTeam will also continue to track and identify the biggest beneficiaries, and strive to fully restore the whole incident. Like 519 in 2021, 510 in 2022 is also a milestone that deserves our in-depth analysis and understanding.
About us: Our vision is to improve security globally. We believe that by building this security barrier, we can significantly improve lives around the world.SharkTeam composes of members with many years of cyber security experiences and blockchain, team members are based in Suzhou, Beijing, Nanjing and Silicon Valley, proficient in the underlying theories of blockchain and smart contracts, and we provide comprehensive services including threat modeling, smart contract auditing, emergency response, etc. SharkTeam has established strategic and long-term cooperations with key players in many areas of the blockchain ecosystem, such as Huobi Global, OKX, polygon, Polkadot, imToken, ChainIDE, etc.
Telegram：https://t.me/sharkteamorg
Twitter：https://twitter.com/sharkteamorg
