The ultra-high volatility of LUNA in the recent market is the direct cause of UST’s de-anchorship.
Original title: “Why does UST deviate under the impact of the market? 》
Written by: Yolo
Source: Cerebrobacter
The success of UST comes from the vigorous development of the ecological coupling protocol, and the challenge of UST comes from the market’s confidence in LUNA. What is urgent now is to develop a synthetic asset mirror protocol to meet the pain points of market hedging the exposure of encrypted assets, increase the ecological demand for upstream UST currency, and maintain system stability.
This article briefly reviews the mechanism design of LUNA and UST, and analyzes the recent challenges faced by UST. This article will answer the following questions:
What are the advantages of the UST stablecoin design?
At present, UST has some signs of de-anchorage, and the price is lower than USDC by about 5%. Why does it happen?
What do you think of the future Terra ecology?
In the past period of time, the market generally believed that UST was one of the few stable algorithmic stablecoins. During the peak period of the bull market, DAI is 4 billion, UST2.5 billion, and LUSD 1.5 billion. UST may be the only algorithmic stablecoin that can be at the same order of magnitude as pledged stablecoins. However, recently UST has de-anchored by about 5% due to huge market volatility. How did this happen?
Pros: mutual coupling of mechanisms
Terra is similar to an automated traditional bank, facilitating payments, transfers, investments, loans, and savings. It is implemented in the form of a public chain, owned and managed by the community, and can be accessed by anyone in the world with an Internet connection. Users enter the ecosystem through Terra stablecoins and access the aforementioned banking functions through a set of applications and protocols. Terra improves on the existing banking model with global access and no rent-seeking.
Among the Terra ecology, the most interesting thing is the coupling between its protocol and the protocol. Specifically:
Mirror is a protocol built on Terra that allows users to trade synthetic stocks (mAssets). mAssets is created through the minting process, and any user can realize minting by depositing a minimum of 150% of the collateral. Trading of mint assets on Mirror is done through the liquidity pool of AMMs or mint assets paired with UST. The price of mAssets is softly linked to real-world counterparts through arbitrageur and liquidation rewards. Traders who are long on certain stocks will buy and hold mAssets, while casting mAssets is actually shorting mAsset.
Anchor is the second major agreement launched on Terra, and possibly the most disruptive agreement. Anchor uses the borrower’s collateral as a pledge to provide the lender with a fixed annualized return of 20% on UST deposits. Through the pledge of major PoS networks, Anchor can maintain a stable and cash-flow-generating income for depositors.
Terra has many plans in the future, such as the release of the ETF protocol (Nebula) to further aggregate the yields of various composites and assets, to build a stronger UI experience (Kash) for users, and to collaborate with large companies and fiat currencies to crypto Currency onramps (Local Terra) integration. ETF will increase the demand for synthetic assets, making synthetic assets more stable; while Kash will guide more users into the Crypto world at the front end. With the development of the overall ecology, it is possible to cooperate with institutional clients in Onramp, and further Expand the boundaries of ecology.
The integration of these financial services has lowered the threshold for ordinary users to obtain services. In addition, for the inside of the agreement, it has also increased the currency demand of UST and improved LUNA’s value capture capabilities. These diverse users and participants have made the market deeper and the overall system more stable.
Cons: LUNA’s deflationary spiral
As of May 24, 2021, the exchange rate of UST-USDC is about 0.94, and the price of LUNA is about 4.74, a drop of nearly 70% in two days.
The core of the UST algorithm stabilization mechanism is to smooth short-term fluctuations through the medium and long-term benefits of the system. The stablecoin UST adopts a dual-token design, LUNA is the system token, after the stake can capture the entire network fee, while UST is a US dollar stablecoin. LUNA and UST can mutually mint and destroy each other, and the price used for minting and destruction is based on the price quoted by the oracle. This dual Token design can provide negative feedback to the system at ordinary times and keep the stable currency UST stable.
For example, when UST
The premise for the establishment of the above mechanism is that the market has an expectation of uniform growth for LUNA. If this expectation is stable, then when UST is unanchored, the depth of the second LUNA pool will be deeper, and arbitrageurs will be more willing to stake to capture revenue in the system instead of directly selling LUNA; and if the expectation disappears, LUNA buyers will be more likely to be in the market. The overall liquidity pool will be relatively shallow, so when the arbitrageur sells LUNA, the slippage will be very large, which will greatly restrict the arbitrageur’s motivation and affect the stability of the system.
summary
As we have just shown, the huge coupling capabilities displayed by the Terra ecology enable the development of upper-layer protocols to promote the needs of lower-layer protocols. The larger the upper-middle building blocks of DeFi Lego, the stronger the demand for LUNA and UST, and the better the stability. However, the problems exposed at the same time are the positive feedback spiral problem. The underlying protocol accelerates expansion and the system accelerates and stabilizes; the underlying protocol accelerates contraction, and the system accelerates fluctuations. This kind of overall strong consistency also caused the phenomenon of LUNA’s ultra-high volatility and UST de-anchorship.
So what is the current solution for LUNA? It is imminent to actively promote the development of mirror. When the market is depressed about encrypted assets, there is a huge demand for helping users switch their exposure on the chain. If I can buy synthetic US Treasury bonds, then I will not be vulnerable to the impact from the mainstream crypto market. Moreover, with the development of mirror, casting synthetic assets will drive more demand for UST and maintain the stability of UST’s value.
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