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How I Lost Respect for Terra UST (And May Never Get It Back)
Like a lot of people, I was shocked by TerraUSD’s (UST’s) de-pegging this week. What happened?
Just to be clear, I wasn’t surprised by the market crash. The entire market is down right now, though bitcoin is back over $30,000. That’s just business as usual.
What precipitated the crash is the Fed raising the interest rates more than it’s done in two decades. The market responded. In other words, institutional investors pulled their money out of crypto and slid them into safer investments to ride out the tide. Right now, there is a lot FUD around future rate hikes. The Fed is expected to issue several more this year in order to combat inflation. Many people fear a recession.
I fear no recession.
That doesn’t mean it won’t happen. It probably will, but it will happen because people fear it and act on that fear. I’ve got better things to do.
But a recession could be on the way, and when recessions show up at the bus stop, a lot of people jump off the bus. The problem is, you still must get to your destination. So, you choose to walk, which takes you longer to get there, instead of riding the bus because you don’t want that wicked recession sitting next to you. The reality is, markets move in waves. Ups and downs. All the time. Sometimes those ups and downs are extreme. The key is not to get off the bus but to manage the time you spend on the bus. Read a book! Don’t take a nap.
There’s my rant. Back to LUNA/UST.
UST fell to 30 cents, de-pegging from the dollar. A stablecoin isn’t supposed to do that. But the way LUNA/UST works is a bit like a hotwife.
A stablecoin is a cryptocurrency pegged to a more stable currency, like the U.S. dollar. Both Tether (USDT) and USD Coin (USDC) maintain their pegs to the U.S. dollar because they are backed by the dollar. It’s the same principle the U.S. used to operate on in pegging the dollar to the gold standard. Back the currency by the precious metal and the currency will maintain its value longer. As long as the precious metal is stable, the currency will be stable.
UST falls into the category of algorithmic stablecoins, a term that means it is not backed by a stable currency but maintains its peg through a clever coding mechanism.
In UST’s case, to create one UST, users have to burn LUNA. As more people buy UST, more LUNA is burned making it more scarce and driving up the value of LUNA left in circulation. To incentivize users to burn LUNA and create more UST, backers created Anchor Protocol, a decentralized lending mechanism that paid 20 percent to people who staked their UST. Until last weekend, about 70 percent of all UST was staked on Anchor Protocol.
To maintain its peg to the U.S. dollar, market players burn either UST or LUNA. If UST falls below $1, users burn LUNA and receive more UST, which drives up the price of UST. If UST goes above $1, they trade UST for LUNA and the price of UST down.
That works because people are predictable, right?
Well, last weekend, likely in response to the interest rate hike, $2 billion of UST on the Anchor Protocol was unstaked and millions of it sold immediately.
Market players rushed to take advantage of the LUNA/UST arbitrage. Because UST fell to 91 cents, they could exchange 90 cents of UST for $1 in LUNA. Big profit opportunity! But, because only $100 million worth of UST can be burned in one day, the blockchain reached its freaking limit.
Terra Luna’s hotwife ran out of lovers.
There is a theory floating around that the Terra/LUNA/UST ecosystem suffered a malicious attack that caused the price of LUNA to drop to below 1 cent and UST to plummet like an airborne soldier whose parachute has collapsed. It’s now down to 17 cents. It could fall even further.
Terra has a plan to get his hotwife back again. The woman he fell in love with. The virgin cheerleader he courted in high school and who gave him his first oral experience when he didn’t even know such a thing was a thing. But at this point, the virgin has been de-virginized and will never be a virgin again. Nor will she be the sweet, chaste lover he married. Once a hotwife, even after a lengthy cool down, she’ll always be known as a hotwife.
I don’t care about market crashes. Markets move up, markets move down. I plan for that. What I don’t plan for is another man’s wife knocking on my door and asking me if I want to bop the sock hop girl who danced with every jock at the prom. Unfortunately, I got a knock on the door and wasn’t told the sock hop girl was somebody else’s wife.
As it turns out, I’ve been playing around on Loop Market’s Community board for about three years—back then, it was called Trybe. Last year, Trybe moved to the Terra blockchain and rebranded to Loop.
When that happened, all my Trybe was transferred to LOOPR, the community token. Each month, I receive an airdrop of LOOP based on how many LOOPR I have in my account (and, at this point, I’m no slouch). I don’t cash it out. Instead, I’ve kept it in my account so I could play around on the Loop DEX to learn how their staking, liquidity pool, and yield farm work.
I haven’t been impressed.
For starters, in order to participate in any of those, one must hold UST. That’s because Terra’s gas fees, as inexpensive as they are, must be paid in UST. I didn’t want to buy UST. To get around spending money, I started transferring AMPL I earned on Publish0x to Kucoin, converting it to UST, and depositing it into my Terra wallet. I used it to pay for gas fees.
I also used it as a trading pair in Loop’s liquidity pool and yield farm. But I quickly learned that I wasn’t going to earn much if I didn’t have more UST. I had thousands of LOOP, but just a few UST and you can only farm or pool an amount of LOOP equal to the UST you put in the pool or farm. I converted some LOOP to UST.
Just as I was beginning to get comfortable with the liquidity pool and yield farm, the market crashed and LUNA’s hotwife told me she was married.
Damn! Suddenly, I realized I was an adulterer and breaking one of God’s commandments. I felt like Samson. I felt like King David after Nathen the prophet called him out in a public way. I felt like Solomon after realizing that all my wealth, wisdom, and thousands of concubines couldn’t satisfy my thirst for more. I’d been had.
Now I sit with almost 2,000 LOOP in a liquidity pool, along with some UST, virtually useless. I have another 95 UST sitting in my Loop account waiting to be plundered by the Queen of Sheba. At this point, I feel like giving up on Loop Markets completely. It would be pointless to cash out my LOOP and UST. It’s not that much to speak of. On the other hand, if I don’t, UST could fall until it hits zero, like a drug addict with a death wish. The bright side: I’ve invested no money. Everything I have in is what I’ve earned blogging on the platforms, either Loop or Publish0x.
It doesn’t help that I also have frequent technical challenges uploading my posts to Loop. Wednesday this week, the platform wouldn’t upload an image. I didn’t post my usual newsletter because the image never loaded. On Telegram, their tech support is always the same - refresh your browser, clear your cache, and try again. The last time I did that, I got locked out of my Facebook account and had to start another one. I had more than 5,000 connections.
I was hoping Loop Markets was going someplace. It’s been one of my best earners in cryptosocial media, but that means nothing when the value of its tokens are worth nothing. If today’s post doesn’t load, I think I’ll count it all as a loss and move on.
What do you think? Should I stay or should I go?
Cryptocracy is a decentralized newsletter published 4 times a week. I curate the latest news and crypto analysis from some of the brightest minds in crypto, and sometimes offer a little insightful and snarky commentary. Always fresh, always interesting, and always crypto.
First published at Cryptocracy. Not to be construed as financial advice.