In today’s analysis I want to explain in detail what happened to LUNA and to its stable coin UST. It’s a difficult subject so I’ll do my best to keep it short and simple.
UST is an algorithmic stable coin, connected to its native token LUNA. This means that, in order to peg UST to $1 it makes use of algo’s that either sell or buy LUNA to keep it at $1. Example: UST is worth $0,98 USDT. The algorithm will now market-sell LUNA tokens for UST and use said UST to buy USDT on the UST/USDT pair. This means that the value of UST should rise against USDT and therefore defend the peg. This can trigger a massive selling cascade as the algorithm can trade in a circle, constantly making it worse and worse
1) The further away UST is from 1 USDT, more LUNA tokens it has to sell in order to get back to the $1 peg. 2) The more LUNA tokens are being market-sold, the lower the price. 3) The lower the price of LUNA tokens, the more tokens have to be minted (created) and sold in order to buy UST to defend the $1 peg.
This creates a waterfall effect on LUNA’s price. And, eventually, can lead to LUNA being worth ZERO, as the algorithm keeps on creating more and more LUNA tokens to sell. See the UST/USDT peg below, this “should” always be 1.
To prepare for events like this, the LUNA foundation has bought around 80k BTC to serve as collateral (around one billion dollars). It can lend money to defend the peg further in case of need. However, they have depleted their TOTAL Bitcoin reserves in just two days. This means that they have no other ways to defend the $1 peg, apart from printing more LUNA tokens and selling them. See chart below for the LUNA foundation’s BTC reserves
Why has this happened? Simple, some entity saw that this algorithmic peg was going to be a problem and broke the system in order to make HUGE profits. Some entity market-sold billions of dollars’ worth of UST against USDT do destroy the 1:1 ratio and made a bet that the algo would create and sell huge amounts of LUNA tokens and would lead to a massive decline in value, like we have seen over the last three days.
A lot of people lost huge sums of wealth, while a couple of entities got very rich by shorting LUNA into the ground.
The only way on how fix this waterfall to $0 is to destroy UST and stop the algorithm.
Comment
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LUNA reversing because exchanges either ran out of LUNA tokens or because they flat out disabled shorting.
Great insight as usual. Thanks for your hard work. I believe Luna will follow a pump and dump scheme
SmartNerd
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thank you so much for the article what will happen if they destroy UST ?? could this affect other stable coins ??
FieryTrading
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@SmartNerd, A lot of people will lose their investments and we can expect the government to look into it. Generally this would not be good news for other stables.
@jackpet, SLP and AXS was just people selling due to hype dying, the sell-off wasn't as bad as LUNA's by a mile. LUNA is selling off because it's used to peg the UST stable coin to the dollar. Governments HATE stable coins because it's money they can't control, hence they will use this specific case to enforce more regulation.