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UST Roundtable

Tom Dunleavy, Chase Devens, Dustin Teander, John_TotalValue_LockeMay 10, 2022 ⋅ 16 min read

The Messari team reacts with a breakdown of the UST drama and what implications they see moving forward for the broader crypto space

UST Primer

UST is an algorithmic-backed stablecoin native to the Terra ecosystem. It operates using a seignorage shares model with LUNA absorbing the volatility of the UST stablecoin. Stability is achieved through a mint-and-burn mechanism: as demand for UST increases, LUNA tokens are removed from circulation. That is, 1 USD worth of LUNA is burnt to mint 1 UST and vice versa. Besides collateralizing Terra's stablecoins, LUNA is used for staking, governance, and paying for transaction fees on the Terra network. In recent weeks, the Luna Foundation Guard (LFG) executed moves to add BTC and AVAX reserves to support LUNA’s role in backstopping UST’s peg to the US dollar.

Further background can be found in the appendix.

What Happened? (TLDR)

Last week, LFG purchased an additional 37,000 BTC for the UST reserves from 3AC and Genesis Trading to bring their total holdings to almost 80,000 BTC. This event was likely the first domino to fall in a series of events that led to UST depegging from $1 and dropping to $0.61.

Saturday marked the start of the UST depegging cascade. First noted by 0xHamZ, Binance experienced a slight 25 bps depeg May 7, likely due to 3AC and Genesis unloading their UST from the LFG BTC purchases. Between the two firms, there was approximately 1.5 billion UST introduced to the exchange. This led to significant supply on Binance that needed to flow to productive locations. With a supply outflow this large, pressure would be put on critical peg stabilization junctures like Curve. Around the same time, the Luna Foundation Guard was also pulling funds for liquidity for the 4pool.

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Tom Dunleavy
dunleavy89

Tom is a Sr. Research Analyst at Messari. His primary focus is on Layer-1's as well as the relationship between traditional finance and crypto. Prior to joining Messari, Tom worked in Investment Consulting at Meketa and Investment Management at SSGA. Tom studied Finance at Bentley University and earned his CFA and CAIA Charters.

Chase Devens
chasedevens

Chase's interest in crypto lies at the intersection of economics, psychology, and social coordination.

Dustin Teander
Saypien_

Dustin was previously the Enterprise research director at Messari. He has a broad focus across crypto with a particular interest in AI x Crypto, Consumer financialization, DeFi, and general infrastructure.

John_TotalValue_Locke
john_tv_locke

Before joining Messari as a Senior Research Analyst, John worked in Equity Derivatives on the buy-side and sell-side for over five years. He studied macroeconomics and markets for almost a decade. Now, John spends time thinking about token design, DeFi protocols, and governance.

Mentioned Assets
Outline
  • UST Primer
  • What Happened? (TLDR)
  • Are we out of the woods yet?
  • Any hope for $UST in the future?
  • Death for algorithmic stablecoins?
  • What does this mean for Luna?
  • Implications from the UST de-pegging?
  • Appendix
Authors
Tom Dunleavy
Tom is a Sr. Research Analyst at Messari. His primary focus is on Layer-1's as well as the relationship between traditional finance and crypto. Prior to joining Messari, Tom worked in Investment Consulting at Meketa and Investment Management at SSGA. Tom studied Finance at Bentley University and earned his CFA and CAIA Charters.
Chase Devens
Chase's interest in crypto lies at the intersection of economics, psychology, and social coordination.
Dustin Teander
Dustin was previously the Enterprise research director at Messari. He has a broad focus across crypto with a particular interest in AI x Crypto, Consumer financialization, DeFi, and general infrastructure.
John_TotalValue_Locke
Before joining Messari as a Senior Research Analyst, John worked in Equity Derivatives on the buy-side and sell-side for over five years. He studied macroeconomics and markets for almost a decade. Now, John spends time thinking about token design, DeFi protocols, and governance.
Mentioned Assets