On the verge of death, Terra cuts off his arm to survive

On the verge of death, Terra cuts off his arm to survive

Terra’s death spiral has finally arrived.

Since May 11, the price of LUNA has almost completely collapsed, and it has now fallen to US$0.18, and it is still falling, with a single-day drop of more than 95%; the de-anchoring of UST has also intensified, with the lowest dropping to US$0.225.


LUNA/USDT, data from Binance, as of 11:15 on May 12


Regarding the evolution of this black swan event, there have been many introduction and interpretation articles on the market (refer to “The Beginning and End of the UST Crash: $84 Million Leverages a 40 Billion Financial Empire”), this article will discuss Terra’s current self-rescue plan Is it feasible to (accelerate the LUNA additional issuance plan and raise external funds).

In Terra’s economic model, the price stability of UST is regulated by the arbitrage system and protocol mechanism. Market participants can mint UST by destroying equivalent LUNA, and vice versa, they can also destroy UST and exchange it for equivalent LUNA.


Therefore, if the demand for UST exceeds the current supply (assuming a price of $1.01), arbitrageurs have the opportunity to burn LUNA on-chain and mint UST, taking the difference as profit on the open market; conversely, if the demand for UST is greater than Supply (assuming a price of $0.98), arbitrageurs can buy 1 UST for less than $1, then burn and mint $1 LUNA for profit.

Since the price of UST has been underwater since May 8, the market balancing mechanism of “burning UST, casting LUNA” has been in continuous operation in the past few days (reflected in the circulation of LUNA supply changes), but under extreme panic, the mechanism has not been able to achieve its ideal regulatory effect.

On the afternoon of May 11, Terra founder Do Kwon tweeted the latest progress of the community report, mentioning that the only way to save himself is to absorb excess UST supply in the market, and help UST gradually return to anchor by balancing market supply and demand. At the same time, Do Kwon also proposed some specific solutions in different directions.

Externally, Do Kwon said the team is still continuing to explore options to bring in more external capital to the entire Terra system.In the morning, some people familiar with the matter had revealed that the Luna Foundation Guard (LFG) was seeking to raise $1-1.5 billion in outside funding to provide more support for UST, and several institutions, including Jump Trading, Celsius and Jane Street, had agreed. Contribution, the condition is to get the LUNA spot at a 50% price discount and lock the position for one year. However, people familiar with the matter also emphasized that the financing has not been confirmed, and everything is subject to change. Given the collapse of LUNA prices, the progress of the financing is not expected to be too smooth.

Internally, Do Kwon wants the community to vote for the governance proposal Proposal 1164 the proposal aims to increase the size of BasePool (UST-LUNA virtual liquidity pool) in the LUNA-UST minting and redemption module, and reduce the PoolRecoveryBlock (the number of blocks required for BasePool to automatically return to a balanced state), thereby increasing the ” The execution efficiency of this balancing mechanism of burning UST and casting LUNA accelerates the absorption of excess UST supply.


As of 11:00 on the 12th, Proposal 1164 has won more than 60% of the votes in favor, and the vote will end in 6 days, but given the urgency of the situation and the total number of votes (136 million) has approached 50% of the total vote base (288 million). %, the community is seeking immediate adoption of the proposal.

In Proposal 1164, the proposer GS390 pointed out that the reason for the need to make parameter adjustments at this point in time is because the current arbitrage balance mechanism returns to excess UST supply at a much lower rate than market demand. During the period from the 10th, about 8 billion US dollars of UST circulation was withdrawn from Anchor, but only about 1 billion US dollars of UST was recovered through the redemption mechanism during the same time period. Affected by panic, these have not been recovered. UST has become the main source of selling pressure as its price continues to de-anchor.


In this case, the price of UST cannot be regulated by the balance mechanism in the economic model at all. With the further fermentation of panic, FUD, selling and shorting have come one after another, and the prices of UST and LUNA are also falling rapidly. Because of this, Do Kwon and Proposal 1164 hope to improve the execution efficiency of the balancing mechanism, speed up the burning speed of UST, and recover the excess circulating supply as soon as possible.

Obviously,This scheme will put considerable pressure on the price of LUNA, because accelerating the burning of UST will in turn mean significantly accelerating the additional issuance of LUNA.What is even more frightening is that, although in theory, the decline in currency prices and the increase in circulation will not have much impact on the overall market value, this is only an ideal assumption based on a peaceful market environment. In extreme markets, more LUNA holders will The choice to sell due to panic makes the price of the currency fall much faster than the increase in circulation, which in turn leads to a continuous decline in the total market value of LUNA.On the one hand, the supply of UST gradually decreases with recycling, and on the other hand, the total market value of LUNA, which is the indirect value support of UST, is also decreasing. The balance between the two will come later than the static estimate.


According to SmartStake data, as of 10:20 on the 12th, the circulating supply of LUNA has increased by 1.35 billion in two days, and the total circulating supply has reached 1.739 billion.

Do Kwon is well aware of this, and Do Kwon also mentioned it in the tweet.This will come at a ‘high price’ . GS390 also clearly stated in the proposal: “Yes, billions of UST will be burned and LUNA will be greatly diluted…. Allowing more efficient UST burning and LUNA minting will put pressure on LUNA prices in the short term, but will is an efficient way to bring UST back to the peg, which will ultimately stabilize LUNA prices as well.”

It is not difficult to see from Do Kwon’s statement and the Proposal 1164 that the Terra community is pushing hard,The remediation concept currently chosen by Terra is to prioritize the UST de-anchoring and supply-demand imbalance at the expense of the LUNA price in the short term.It’s like Terra had to take a powerful medicine in a desperate situation. If you take it, you have to face a series of pressures brought by the decline of LUNA, but if you don’t take it, UST and LUNA may both die in a spiral.

Some readers may ask, doesn’t LFG reserve billions of dollars worth of Bitcoin as a potential value support? Is the money still there? Regarding this point, GS390 pointed out in the proposal that LFG did have a Bitcoin reserve worth 3.5 billion US dollars (which is no longer the same amount), but now Terra has become a fish in the eyes of various funds, rashly using this Part of the reserve funds will only be surrounded and suppressed by various funds, and may eventually be eaten up.

Regarding this point, I am willing to recognize the statement of GS390, not to believe who and what, but to objectively see that the current hole in Terra is too big (as of 10:25, the total amount of UST in circulation is 13.1 billion, and the total market value of LUNA is Only $1.9 billion), the reserve fund is simply not enough, so the main task now is to squeeze the bubble (reduce the UST supply), wait for the hole to shrink a little, and then use the reserve fund and possibly external funds that come back to implement other remedial measures.

Although Terra’s self-rescue measure is not necessarily successful (in fact, it is more likely to fail), but thinking about it from Terra’s standpoint, it seems that this is the only feasible measure without adjusting the core economic model. Yes, this economic model once gave them unparalleled light, but now it seems to be a knife that will continuously cut off the “value” of LUNA.Of course, Terra might have opted to decouple UST from LUNA, as some readers suggested, but doing so would be like asking Terra to admit that her past was a complete failure.

Looking further afield, the current problem is only the first difficulty facing Do Kwon and the entire Terra team. Even if the solution can successfully save UST and stabilize the price of LUNA in the future, there will be other problems that follow. a gate of hell,For example, the reputation crisis after the black swan event, such as the economic losses caused by the falling price of LUNA to the community and partners, and the regulatory sword that is already hanging over the head…

A number of institutions and platforms have chosen to “cut” or “avoid” when Terra is about to fall, in order to protect themselves and prevent the spread of risks.

On May 11, the South Korean cryptocurrency exchange Upbit listed LUNA as a prudent investment project, and a detailed review will be carried out to determine whether to extend, lift or terminate the transaction support; Solana’s ecological algorithm stable currency project Nirvana will completely UST in the platform AMM. Replaced with USDC; CEOs, founders and investors of companies like Dragonfly Capital, Multicoin Capital, Framework Ventures, 6th Man Ventures, OnJuno, ByWassies, FingerprintsDAO also tweeted to assure the market that they did not hold UST and LUNA Or make related investments; even Binance temporarily adjusted the LUNA U-margined contract leverage margin ladder and minimum price accuracy, and the 24-hour trading volume of LUNA exceeding BTC ($5.901 billion) also provided some hints for Binance to urgently maintain the C2C function direction.

On the other hand, the collapse of the UST breakout zone has also attracted regulatory attention. At a meeting on Capitol Hill on May 10, U.S. Treasury Secretary Janet Yellen mentioned the UST’s decline and argued that legislation to regulate U.S. dollar stablecoins is imminent. On the 12th, two former SEC lawyers revealed that the SEC has every reason to and may have been investigating what happened at UST in the past week. The corresponding regulator declined to comment on UST for now.

The heavy pressure from the outside may make Terra involuntarily choose strategies. This road to self-help is more difficult than everyone imagined.

(The above content is excerpted and reprinted with the authorization of our partner Mars Finance, link to the original text | Source: Planet Daily)

Disclaimer: The article only represents the author’s personal views and opinions, and does not represent the objective point and position of the block. All content and opinions are for reference only and do not constitute investment advice. Investors should make their own decisions and transactions, and the author and blocker will not be responsible for the direct and indirect losses caused by investors’ transactions.

When this article was on the verge of death, Terra Broken Arm first appeared on Blocker.


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