Luna is continuing to outperform. However, this has alerted its critics. The point of criticism is related to “A Bank Run and UST de-peg event.”
Jose Maria Macedo clarified his take and we have it presented here for you.
Jose Maria Macedo Twitter Thread
What is good about debt-based overcollateralized stable coins? Why should a not overcollateralized stable coin be criticized? Obviously, with an external backing the value of the over-collateralized stable coin will be more than $1 at any point in time and therefore it will be subject to resilience during times of volatility.
What is the downside of overcollateralized stable coins backed by external assets? These stable coins grow slower as their growth is limited by the demand for credit than the demand for the stable coin.
Growth Struggles faced by debt-based stable coins? Debt based stable coins should onboard centralized censorable assets like USDC as a collateral. Since all debt-based stable coins are competing with money markets and other credit protocols – they forever have a demand for leverage – and the leverage should be facilitated by a competing product.
What are the stable coins that do not require debt or external collateral? Algorithmic stable coins do not require debt of external collateral. Thus, eventually, they are capital efficient and their growth rate is quick. However, Algorithmic stable coins have a higher tail risk and not resilient to black swan type events.
Death Spiral and UST: “Black Swan Type Events” are the death spiral. The death spiral debt describes a type of convertible bond which forces the creation of an ever-increasing number of shares, which will inevitably lead to a steep decline in the price of shares.
The Endogenous collateral (LUNA) creates reflexivity, a self-reinforcing positive loop; UST contraction leads to LUNA being minted and declining in price, which leads to fear and more UST redemptions. And, investors will be cashing out their position.
Reportedly, several algorithmic stable coins have fallen a victim to the death spiral. And, a death spiral is not fun. Assuming if LUNA is subject to the fate of “Death Spiral” is all the fear about.
However, as with any kind of venture investing, what if LUNA would not be subject to Death Spiral? What if it works? Is there a bull case for UST?
Technically, decentralized stable coins are the ultimate network effect product – there are a few huge winners and he who grows fastest will wins.
Resilience of UST: The design of UST is made in to make it grow faster. UST already thrived as an algorithmic stable coin. It sustained its tight peg, improved supply and withstood shocks like that of May 2021. What Terra has achieved so far is truly unprecedented. How did it happen?
Is $3b in BTC is enough to backstop the UST LUNA peg? The answer is no one knows. This is uncharted territory and we’re definitely not out of the woods
UST has a dependence on anchor protocol and events like regulatory pressure, global recession, hard enough can lead to contractions in UST supply which can eat up all BTC reserves leaving LUNA to the death spiral.
However, those who hold the majority of their net worth in LUNA, UST, and Terra alts are bullish, thinking this is unlikely.
A finance graduate, Maheen Hernandez has been drawn to cryptocurrencies ever since Bitcoin first emerged in 2009. Nearly a decade later, Maheen is actively working to spread awareness about cryptocurrencies as well as their impact on the traditional currencies. Appreciate the work? Send a tip to: 0x75395Ea9a42d2742E8d0C798068DeF3590C5Faa5
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