Luna Has Fallen (as expected)

— By Ibrahim Quabboua

Hello frens, long time since I wrote on this blog. And this time the sad conditions made me reassess some stuff and let you know that “in theory” it was expected

Not going to be the traditional blog, just a few questions that can describe the whole situation for anyone.

Let’s dive in.

So first, what is Luna?

Luna is a South Korean-based traditional cryptocurrency whose value is tied with a stablecoin called Terra USD, or as we all know it, UST.

Terra, in turn, is supposed to be tied to the United States dollar. A mechanism was supposed to work so that people could trade one for the other if one of the two went under that price.

If UST traded for less than $1, people could exchange it for $1 worth of Luna. If UST traded for more than $1, people could buy $1 of Luna and then exchange it for more than a dollar of UST.

Traditional algo stable right? As the 2020 bullrun OGs remember, not even 1 single algorithmic stablecoin survived, not a single one. Because the value to stabilize the 1$ was extracted from another value, most of those other tokens have no real use case, which in case of black swan events or even hard dump, ngmi.

But as we all see, UST reached 19 B$, so how was that even possible?

The smart thing about Luna is:

  1. Use case of Luna token
    It is the native token of it is own chain, terra Luna network needed to be validated by staking Luna tokens, fees on the chain are paid with Luna, and governance of the network is paid with Luna.
    As some DeFi geeks can remember, we all love how clean the network was. Mirroring stocks and commodities, liquidity providing using these mirrored assets, delta neutral strategies to assure a win-win situation. From personal experience, I felt that I was a self broker on wall street.
  2. Anchor and its majesty “19.5” APY
    Anchor is a saving protocol that lets you borrow against your native token assets, such as avax, atom, Luna, sol, and Eth, and borrow UST with an undercollateralized position, same as aave.
    It benefits from both the liquidation fees and the rewards from staking the mentioned assets.
    So we saw in the past 6 months the unbelievable flow of cash to hunt this sweet APY, we saw Luna passing the 100$ mark and UST touching the 19B$ market cap. Life is beautiful, no?

We can say that anchor was the reason behind the boom of Luna as a whole. But, one question, where was the money coming from?

If we want to do a fast balance sheet:

Anchor has to pay 19.5% APY on the $12b deposited
Expenses: $2.34b per year ($12b x 0.195)
Staking rewards for $LUNA is 6.9% and 4% for $ETH, and it differs according to the situation of other native tokens.
The borrowing APR is 12.6%.

Staking rewards from Luna were = $334M
And from eth = $66.8M
and around 20 million from the rest.

Borrowing of money: $3.2b borrowed $UST x 0.1264 = $404M

Now let’s look at Anchor’s balance sheet.

Staking rewards: $400.8M
Borrowing: $404M
=Total: $804.8M

Anchor deposit: $2.34b

Balance: $2.34b -$804.8M = -$1,53b

The protocol is paying out $1.53b more than they can cover at the moment.

Aha, Anchor is paying way more than it should’ve paid.

How can they do so? By re-filling the treasury from the Luna foundation guard in order to keep attracting money to UST, and by that, augmenting the price of Luna.

Aka, Ponzi.

We saw that Anchor introduced a dynamic rate for lending UST, and it started lowering the APY because let’s be real, Do Kwon can’t pay forever.

At this point, we started seeing some fears and doubts regarding UST, the bomb was settled and just needed to be triggered.

How did the attack accrue?

-Attacker borrowed 100 000 BTC from Gemini.
- Made an OTC deal to buy 1B$ UST.
- 350M went to curve to empty the UST-3crv pool by that hurt the peg.
- 650M went to centralized exchanges to convert them into other stables by that hurting the peg.
- Withdrawals from anchor reached 10M per minute.
- Twitter CTs are panicking.
- Luna foundation started selling their BTC to restore the peg
- Nasdaq opened bearish, which made traders short BTC, which lead to more panic.
- Traders shorted Luna, which made it bleed more.
- Peg reached 23c, and LFG has emptied their BTC, eth, and avax reserve.
- Now they can only print Luna to restore the peg.
- Luna is trading at 0.006$ knowing that from 1 week it was around 100$.

What can we learn from this:

  • No one is too big to fail, no one
  • Know where the incentives are coming for, and then act accordingly
  • If you decided to lock your tokens and make a plan for such events, you can short and by that hedge against your position
  • Algo stables have proved to be inapplicable (till now)

Hope you enjoyed this fast resume, some of us won from this situation, and some of us lost hard, the most important thing is to keep going no matter what.




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