$UST (Terra Luna) Debacle, Looming Regulations & Enduring Bear Market
Will The Fed’s Hawkish Position Cause Furthering Hemorrhaging?
As most of us know, a week in our market is about 3 weeks IRL. So much has transpired since our last interaction, which was only last week. We will keep this as a weekly update for anyone who cares to follow. If you happened to miss the last update, you can click here on this heart ❤ to catch up. I personally feel that it is important to understand our market cycles before interacting or engaging in this space.
Look around; outsiders are condemning influencers for supporting our market. (Matt Damon, Reese Witherspoon, Gary Vaynerchuk, etc.) Many publications are highlighting how retail investors are down in their portfolios — in a BEAR MARKET. The downswing inevitably happens every cycle. The pendulum swing naturally happens & is the most important thing to keep in mind when reading any content about this space.
Above, we can take a look at Terra’s native token $LUNA & below we will be looking at Terra Luna’s stable coin $UST — which is supposed to be pegged at $1.00 but as you can see, it has taken quite a spill.
Now I’m going to assume if you’re here, you’re generally aware of what is happening within our space. If you’ve been living under a rock, allow me to give a very quick overview. (if you’ve read or heard about this for the thousandth time, allow this to be one thousand and one my friend) What happened to Do Kwan’s Terra Luna will forever be etched within our history and has questioned the validity of a big part of DeFi (algorithmic stable coins).
I have heard this story retold many times over the past week, but I truly have to give all the props to this man here — @OnChainWizard
He was on top of the blockchain transactions a day or two after the debacle transpired. You can check out his thread if you click on the heart — ❤
If we take a look at the transactions on Ether-scan, we can see it was more than one wallet, & seemed to be a coordinated attack on LUNA’s peg. (click on the heart above to look at each individual transaction)
Arbitrage Mechanism Explained
Each time $UST is minted, $LUNA is burned. Vice versa, each time $LUNA is minted — $UST is burned. You’d want to do this because if $UST is over a dollar, you need to peg it back to $1 flat. The burning of $LUNA puts more $UST in circulation- this lowers its value because of the extra supply. On the other hand, if the value of $UST was to get too low, the protocol would incentivize holders of $UST to burn $UST for $LUNA — decreasing the supply of $UST to increase its price back to $1. This is how the arbitrage worked.
This was all to keep the price of $UST stabilized at a $1 peg (peg-a predetermined level at which something (such as a price) is fixed).
LFG (LUNA FOUNDATION GUARD) was formed as a secondary implementation to help “guard” this $1 peg & this is a very important part of this entire saga.
LFG announces a partnership with Frax Finance & they unitedly open up a new pool called 4pool. Click on the underlined word “partnership” for the tweet thread.
Another vital part of our story…
Transferring capital from 3pool to 4pool — The attackers were able to drain this pool with only 350 million vs if the pool had appropriate liquidity, it would need 3billion to drain. (The simple point stands. One pool pulled liquidity from another for the creation of a new pool & this left LFG compromised — in terms of protecting the peg).
From here, the attack began on the peg.
Attackers drained 3pool & started dumping $UST on Binance.
Once liquidity was drained, LFG (LUNA FOUNDATION GUARD) started dumping their reserves of $BTC to fend off the attack — Fueling the fire that had already begun, because then Bitcoin starts bleeding from all this selling pressure. This makes $LUNA bleed, which pushes investors to dump and/or burn their $LUNA; which then puts more $UST in circulation & this, believe it or not, puts pressure on the peg.
This is where the death spiral began.
The pressure was too much, and the peg began to further deviate. Exchanges all over halted withdraws to help, but the damage had already been far too extensive.
A massive supply of $LUNA was dumped on the market from the de-pegging & once the LFG ran out of Bitcoin to sell, nothing stood in the way of more deviation. $UST is now trading well below fifty cents.
This flooded our market with millions of $LUNA & now the price will never be what it once was because of the huge supply we now have of $LUNA.
Investors lost half of their STABLE INVESTMENT. There have been reports of suicides, homes have been foreclosed, and some financial lives will forever be affected by this disaster.
Regulators On The Way?
Critics of our industry and market have been crying out to regulators over this past week. Most notably, Citadel’s Ken Griffin was on Bloomberg Markets and Finance calling for strict regulations on stable coins in general. Many take the stance that regulations will impede our innovation and cause huge roadblocks to participate in our market. Others would argue, that trillions of dollars are sitting on the sidelines, waiting for regulation. There is something to be said for both camps, but I am on the latter of the two. Once “big” money can have strict guidelines for what it can and cannot do. I truly believe capital will flood into the digital assets & our market capitalization will rival Gold’s market capitalization. For contextual reference, we currently sit @ $1.27 Trillion and Gold sits roughly around $11.7 Trillion.
What are your thoughts on this? I’d love to capture any feedback in the comments. This isn’t black and white; regulations will surely dampen the nature of where cryptocurrency sprouted from — decentralized INDEPENDENT protocols.
Bear Market Continued…
Looking at our monthly macro chart, we can see it has been a rough time since the start of our bear market. Again, if you happened to miss the last update here, please click on the link below to fully get caught up.
As stated, I truly believe one needs to understand the way our cycles play out, to really engage with the space. If not, black swans like the $UST debacle will force you out of this market. Imagine not taking risk-off and being all in with $LUNA because you aren’t aware of cycles and hoping for Bitcoin to moon, subsequently taking Terra with it…
This is why we push fundamental knowledge about this space, on this page.
By looking at our cycles, we can see the bear market should end around November of this year. Yet, that doesn’t provide us with the most important information about this downturn.
“How low can we go?”
Candidly, I am hoping for a bottom around $19k — $15k, but calling bottoms is near impossible, so let me give some more technical guesses.
For max pain, I could imagine looking at $13k and if this is short-lived due to the Fed pivoting sooner than later, I could see nothing lower than $20k.
Anyone questioning the validity of this space or calling for “crypto to be dead” clearly doesn’t understand the technology.
This will happen cycle after cycle, and many will continue to point out the flaws without understanding the intrinsic value this market is worth & how it will essentially change the way we interact with money.
Markets are bleeding and will continue to do so if the Fed keeps its hawkish position. Everyone has lost heaps of money. The bubble is being deflated & people were buying overvalued assets at all-time highs, in all MARKETS. Look at Peloton, Netflix, Upstart, etc. These stocks are down by insane percentages (for stocks) from the top of the year. For anyone who is trying to single out Crypto, it is unfair. What we really should be talking about is this looming recession or the continuation of inflation, debasing our money, and continuing to kick this can down the road.
Thank you for your time today, I know you value it, so hopefully, I was able to provide value within my update and analysis. If you’ve read this in its entirety, go ahead and leave a comment saying “cheers”. I would love to engage with the community. Thanks a million for your attention, and we will catch up next week. Until next time, cheers!
I will leave all appropriate channels below and again, thank you for your time.