Intern Notes #6/ Bankless - UST; New Paradigm or Ticking Time Bomb; Terra Bear vs Bull
Speaker(s): David Hoffman, Ryan Sean Adams, José Maria Macedo, Jordi Alexander
Held on: 06-04-2022
Written On: 06-04-2022
URL:
I would encourage viewing the Zettelkastan webpage here. My notes were originally written for the Zettelkasten, and then copied over here, so there might be formatting issues below.
José Maria Macedo is a $Luna bull
Jordi Alexander is a $Luna bear
Fundamental Properties
José Maria Macedo
draws an analogy to $DAI except that Terra is a Layer 1 blockchain
$DAI is a debt based stablecoin
Gives $Luna unlimited value captures from its growth of $UST
About to be the most liquid with 4pool on Curve
$UST and $Luna are protocol native tokens of Terra
Arbitrage opportunities helps $UST to retain its peg Jordi Alexander
$UST is collaterized by the value of the underlying chain while $DAI is over collaterized
Can lead to a death spiral when everyone wants to exit at the same time
Comparison with other algostables
José Maria Macedo
Unfair comparison to compare $UST with other failed algostables as they never maintained stability
Monetary schedule
Ryan Sean Adams
There is no fixed monetary schedule for $Luna
$Luna can be minted/burned in response to the value of $UST
Why are you bullish/bearish?
José Maria Macedo (bullish)
Disclaimer: most of his networth in luna, but don't think its riskless, and doesn't think he's a maxi
Stablecoins are crypto killer apps.
Centralized stablecoins will eventually be regulated away
$UST is growing the fastest, is already the largest Algostable by marketcap while $DAI is actually declining Jordi Alexander (bearish)
$Luna: Doesn't hope $Luna to fail, no positions on $Luna, but has money in anchor
Thinks Anchor Protocol is currently an unsustainable marketing spend
$DAI is overcollaterized - leads to extreme capital ineffiency
$UST is uncollaterized - can lead to too fast a growth
Even if $UST doesnt depeg, other protocols can mimic $Luna protocols which can lead to the price of $Luna dropping
What makes UST successful?
José Maria Macedo
Algostable are more of a demand problem compared to a mechanism design problem
Money is used for spending, or deferred spending. Ecosystem around $UST: Mirror - Synthetic Assets, Mars Protocol - Credit protocol, and so on
Important for Algostables to have utility, as seen from Fei Protocol and Rari Capital merger Jordi Alexander
Anchor Protocol 20% APY is sort of a ponzi incentive to get people onto Terra
Chai, a way to spend $UST in real life, was a good experiment but didnt work out well
Lots of big players backing Terra
Do Kwon with great execution spirit
Jump Trading
Not sure if $UST will depeg, but there are definitely risks that can lead to a death spiral
Are we building a utility layer on an unstable foundation?
David Hoffman: Are we obfuscating the instability of Algostables with a utility layer?
José Maria Macedo answer:
Not that Algostables are inherently unstable, but most Algostables are too focused on ponzinomics
Anchor Protocol
José Maria Macedo
What is the premium that people will take to accept the risk in $UST?
20% is unsustainable, agrees with Jordi Alexander that its marketing spend, doesn't think it about attracting retail
7-12% real yield without yield reserve
Best place to borrow and lend Layer 1 assets
Also depends on $ANC token incentives and price Jordi Alexander
Anchor Protocol 20% APY is sort of a ponzi incentive to get people onto Terra
20% APY is being propped up by Luna Foundation Guard from $Luna in the treasury and propping up the interest rates to keep it at 20%.
Marketing spend to bring retail onto Terra is a good idea, but did not play out as intended because of applications like Degenbox which takes advantage of the 20% yield.
Bitcoin purchases by LFG
Ryan Sean Adams: Are the Bitcoin purchases by Luna Foundation Guard an admission that the model does not work?
José Maria Macedo
Hard to deny that the model does not work
To move to the next stage of trust and adoption, Bitcoin is required to scale further
Growth of the model, rather than an admission Jordi Alexander
Pretty universally agreed that having Bitcoin as collateral is a good move
Who custodies this Bitcoin
José Maria Macedo
Disclosure: he is one of the 7 directors of Luna Foundation Guard
Currently the Bitcoin is custodied by the Luna Foundation Guard.
Not the best scenario, will be moved to a trustless decentralized process
Risks of depegs
José Maria Macedo
Important to concede that there are risks
$DAI prioritizes safety and protection from tail risk while $UST prioritizes growth and capital efficiency over downside risk
Bitcoin reserves breaks that reflexivity death spiral
Is 3 billion enough? No one knows
Psychological impact is huge
Lindy Effect and network effects can help $Luna prolong its lifespan Jordi Alexander
Reduction in $UST demand because of decrease of Anchor Protocol yields
Terra is buying time for $UST to get wider adoption outside of $UST
Nothing stopping other already successful Layer 1 to get a native Algostable
José Maria Macedo rebuts that there is still that same problem to generating demand for that Algostable
Has UST been tested?
Ryan Sean Adams: Stablecoins must hold its peg not just in bull runs, but also in bear markets
José Maria Macedo
May 2021 was quite a testing time for $UST. $Luna had a price drop along with some coordinated fud
when there was a death spiral ongoing, deposits on Anchor Protocol actually increased
Jordi Alexander rebuts that it's just intra community capital movement, does not indicate faith by the broader market
Both Jordi Alexander and José Maria Macedo agree reduction of Anchor Protocol rates will be a test like none other
Thinks there will be other tests, but $UST has been battle tested
Decentralization and Do Kwon
Ryan Sean Adams: Do Kwon as a key man risk
Jordi Alexander
Personally does not want to focus on this, doesn't think it is big deal
Thinks that powerful backers kind of kickstarted $Luna growth inorganically
2 main big group building lots of primitives - mixed feelings José Maria Macedo
Believes in progressive decentralization
Stablecoins require good execution to push integrations, usage
Thinks Terra is doing it right
4Pool - UST-FRAX-USDC-USDT
4pool UST-FRAX-USDC-USDT
José Maria Macedo
Partnership with Frax Finance to make it the most liquid pool in Decentralized Finance
Being the most liquid is a huge win - not a direct threat to a $DAI
Not enough to just maintain the peg, the stablecoin must grow, which is what $DAI is not doing Jordi Alexander
Experimental land, interested to see how it plays out
Not sure on $DAI prospects
Don't think $USDC will be affected in a significant way
Nightmare scenario (tail risk events)
Jordi Alexander
Big players can monopolize the daily redeeming cap of the Bitcoin reserve, leaving little or none for retail
Joseph Khan - whales do have to suffer slippage
Curve pool can be wiped
Closing Arguments
Jordi Alexander (bear)
$UST depeg
Layer 1 replicates the same mechanism
Be aware that big funds are pulling strings
Too many variables to get to the conclusion that $Luna will succeed José Maria Macedo
How misunderstood $Luna it still is
Upside is huge for $UST as the biggest decentralized stablecoin
Model is becoming more and more resilient with Bitcoin reserve
More and more smart builders are building on Terra