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: https://www.youtube.com/watch?v=6eOU5OaKd8s
José Maria Macedo is a
$Luna bull
Jordi Alexander is a
$Luna bear
Fundamental Properties
- 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
- $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
- Unfair comparison to compare $UST with other failed algostables as they never maintained stability
Monetary schedule
- 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?
- 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
- 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
- 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
- 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
- Pretty universally agreed that having Bitcoin as collateral is a good move
Who custodies this Bitcoin
- 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
- 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
- Reduction in $UST demand because of decrease of Anchor Protocol yields
- 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
- when there was a death spiral ongoing, deposits on
Anchor Protocol actually increased
- 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
José Maria Macedo
- Believes in progressive decentralization
- Stablecoins require good execution to push integrations, usage
- Thinks Terra is doing it right
- 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
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
- 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)
- Big players can monopolize the daily redeeming cap of the Bitcoin reserve, leaving little or none for retail
- José Maria Macedo - whales do have to suffer slippage
- Curve pool can be wiped
Closing Arguments
- 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
Jordi Alexander (bear)