LUNA - Understanding the Lunatic Drop 👇🧵
Trying to find the explanation of what went SO wrong with Luna i found the best possible explanation here:
UST fell to a low of $0.66 while 
LUNA crashed to a low of $24.85 overnight.
Lessons learned fromLUNA UST disastrous collapse 👇🧵
But let's assess what actually happened.
-UST deposits on Anchor fell 43% in a day (currently 6.7bn)
-UST getting massively shorted + sell-off on Curve
- LFG emptied out all its reserves to save the peg
- Rumours that Citadel engineered the attack
/ Lesson 1: Death Spiral
Illustrated perfectly by
@ZeMariaMacedo
, the design ofLUNA UST is a giant positive feedback loop.
This was the "flywheel effect" that everyone's talking about but very few actually viewed it as a double edged sword.
A design that has a tendency to spiral out of control, even if it is to the upside, is a fundamental flaw. Most positive feedback loops are bad, be it in biology or engineering.
Don't get caught up in the buzzwords like "flywheel effect" esp when things seem rosy.
Lesson 2: Arbitrageurs can stop arb-ing
UST peg is maintained by:
- Arbitrage
-
@stablekwon
& LFG's deep pockets
IfUST falls below $1 (e.g. $0.95), arbitrageurs buy UST for $0.95, redeem the UST and mint $1 worth of LUNA.
Profit = $0.05,UST supply falls, UST --> $1
But ifLUNA is in a prolonged downturn, the risk of holding onto LUNA after minting is high.
The arb profit might get wiped after mintingLUNA as LUNA price keeps dropping, hence arbitrageurs might abstain and choose to chill instead --> stabilization mechanism fails
Lesson 3: Over-reliance on Do Kwon & LFG
Crypto is built on the ethos of being independent of trusted third parties.
IfUST relies on the aggressive, interventionist measures of centralized entities like Do Kwon & LFG, how is it scalable?
Imagine maintaining a peg by having the founder pump in capital each time shit goes south? Everything about Terra operates off the back of exogenous capital injection.
Even Anchor's 20% APY relies heavily on the yield reserve top ups instead of revenue earned from lending.
The idea that Terra is too big to fail is very dangerous and it's why many diehardLUNA maxis got burned today. It's a house of card built entirely on trust, in a supposedly trustless space.
Lesson 4: Cult Heroes
Cult heroes in crypto have the same ending. Daniele Sesta and Frog Nation. Andre Cronje and FFTM community.
Do Kwon is next... He is a great guy don't get me wrong, but never all-in your trust in a cult hero and invest on people
Lesson 5: Stablecoin Designs
Seems like pure-play algo stablecoins can't withstand the heat. Over-collateralized stablecoins are icky cuz they're like loans instead of currency and have a massive capital utilization problem.
A hybrid model might be it...
@fraxfinance
Lesson 6: LFG Reserves Transparency
LFG is transparent about the size of its reserves and you can track their wallets in real time.
Central banks usually avoid disclosing the size of their forex reserves e.g. Singapore or they release lagged data
Conclusion:
A lot of trust has been lost today. It really goes to show the importance of a sound, self-sustaining system beneath the veneer of marketing gimmicks.
CanUST and LUNA rise again? Definitely. But A LOT of work is needed to fix the fundamental design flaws.
UST fell to a low of $0.66 while LUNA crashed to a low of $24.85 overnight.Lessons learned from
LUNA UST disastrous collapse 👇🧵But let's assess what actually happened.
-
UST deposits on Anchor fell 43% in a day (currently 6.7bn)-
UST getting massively shorted + sell-off on Curve- LFG emptied out all its reserves to save the peg
- Rumours that Citadel engineered the attack
/ Lesson 1: Death Spiral
Illustrated perfectly by
@ZeMariaMacedo
, the design of
LUNA UST is a giant positive feedback loop.This was the "flywheel effect" that everyone's talking about but very few actually viewed it as a double edged sword.
A design that has a tendency to spiral out of control, even if it is to the upside, is a fundamental flaw. Most positive feedback loops are bad, be it in biology or engineering.
Don't get caught up in the buzzwords like "flywheel effect" esp when things seem rosy.
Lesson 2: Arbitrageurs can stop arb-ing
UST peg is maintained by:- Arbitrage
-
@stablekwon
& LFG's deep pockets
If
UST falls below $1 (e.g. $0.95), arbitrageurs buy UST for $0.95, redeem the UST and mint $1 worth of LUNA.Profit = $0.05,
UST supply falls, UST --> $1But if
LUNA is in a prolonged downturn, the risk of holding onto LUNA after minting is high.The arb profit might get wiped after minting
LUNA as LUNA price keeps dropping, hence arbitrageurs might abstain and choose to chill instead --> stabilization mechanism failsLesson 3: Over-reliance on Do Kwon & LFG
Crypto is built on the ethos of being independent of trusted third parties.
If
UST relies on the aggressive, interventionist measures of centralized entities like Do Kwon & LFG, how is it scalable?Imagine maintaining a peg by having the founder pump in capital each time shit goes south? Everything about Terra operates off the back of exogenous capital injection.
Even Anchor's 20% APY relies heavily on the yield reserve top ups instead of revenue earned from lending.
The idea that Terra is too big to fail is very dangerous and it's why many diehard
LUNA maxis got burned today. It's a house of card built entirely on trust, in a supposedly trustless space.Lesson 4: Cult Heroes
Cult heroes in crypto have the same ending. Daniele Sesta and Frog Nation. Andre Cronje and FFTM community.
Do Kwon is next... He is a great guy don't get me wrong, but never all-in your trust in a cult hero and invest on people
Lesson 5: Stablecoin Designs
Seems like pure-play algo stablecoins can't withstand the heat. Over-collateralized stablecoins are icky cuz they're like loans instead of currency and have a massive capital utilization problem.
A hybrid model might be it...
@fraxfinance
Lesson 6: LFG Reserves Transparency
LFG is transparent about the size of its reserves and you can track their wallets in real time.
Central banks usually avoid disclosing the size of their forex reserves e.g. Singapore or they release lagged data
Conclusion:
A lot of trust has been lost today. It really goes to show the importance of a sound, self-sustaining system beneath the veneer of marketing gimmicks.
Can
UST and LUNA rise again? Definitely. But A LOT of work is needed to fix the fundamental design flaws.
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