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Will UST collapse?

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Given LUNA's relationship with UST and the breadth of its utility, how likely is UST to collapse? Or will there be a mechanism to fix the crash? This is how we see Terra's demise today.

原文标题：《研究｜UST 会崩盘吗？》

原文作者： CryptoYC Tech

This article is from wechat official account: CYC Labs

我们每天都在说 Terra 崩盘的事情，这是因为我们对于他这种「左脚踩右脚」的经济模式保持怀疑。但是，如果我们聚焦于它的两大核心之间的关系，即 LUNA 和 UST 的关系以及效用广度上，这种崩盘的可能性有多大？或者哪怕崩溃是否会有机制来修正？所以，我们今天就从这个角度来看下 Terra 会不会走向灭亡。

The foundation of Terra's empire ----Anchor

First let's take a look at Terra itself.If Terra were the Federal Reserve, UST would be the dollar, and LUNA would take on some of the role of reserve gold(There's a difference between LUNA and gold, of course. It's just saying that it works similarly as a store of value. Don't forget, though, that Luna's own value is in turn supported by the utility of UST.) So we should first look at the current supply of both. According to the information provided by Terra Dashboard, the latest numbers are as follows: & NBSP;

图片来源：Terra dashboard：https://terradashboard.com/

If you still remember the Terra chain itself mentioned before, you will remember that the official issued total amount of UST is 10B. If calculated according to the price of USD, the total supply should be 10B. We do not know the reason for the overissue, but we can temporarily believe that the current demand of UST has exceeded the previous setting. We have also talked about the PVC mechanism between UST and Luna before, which also means that overissued UST will drive the price of Luna to increase, and then enter a benign upward spiral. Everything seemed pretty good, but, uh,Let's take a look at the real effect of UST.

This is when we need to look at the application of the foundation upon which Terra was founded --Anchor. Why watch it? Because, at present, the total UST is 10.54B, and TVL on Anchor is as follows in terms of UST valuation:

Image: Anchor dashoard:https://app.anchorprotocol.com/

Among them, the UST pledged for lending is 5,572,388,550. In other words,50%+ UST spot goods are directly stored in Anchor. If all the assets of the whole platform are underpinned by UST, then more than 98% of UST are in Anchor. All right, so let's remember this fraction right here. Let's move on to other applications. That's when we turn our attention to Abracadabra, the site of the recent fire.

Terra's magician ----Abracadabra

Let's first take a look at the lock-up situation of UST on Abracadabraca:

Photo credit: https://app.powerbi.com

Of course, if you know a little bit about the project, you know.UST is in full swing on Abracadabra related to the recent Degenbox(Released on November 3, 2021). I was just going to tell you about Degenbox, but if I just tell you about Degenbox, you might not understand it. So, let's take a quick look at the project itself.

The magic wand of the sorcerer -- Leverage revenue & NBSP;

First of all, we know,Abracadabra is very similar to Alchemix. It is nominally a lending agreement, but in essence it issues its own MIM tokens by releasing token liquidity. I don't have to do anything else, but there's an interesting feature calledLeverage income positions". The whole process can be represented as follows:

Image source: https://docs.abracadabra.money/

The official process is as follows:

To explain this more clearly, let's take the example of a user who wants to take advantage of his yvUSDT position:

Steps 1 and 2: the user selects the desired lever, takes it to yvUSDT, and deposits it as collateral.

Step 3: Depending on the leverage selected, the agreement will borrow the corresponding amount of MIM.

Step 4: These MIM will be converted to USDT (current price pegs and sliders play an important role here).

Step 5: These USDTs will be stored in the Yearyearn Vault to get the yvUSDT.

Step 6: These yvUSDT tokens are deposited back into Abracadababra to be used as collateral for the user's position.

In fact, it looks like many steps, summed up in one sentence:For the collateral you ask for, he will not give you MIM directly. Instead, he will give you the profits of leveraged (up to 10 times) farming set by yourself in the form of flash loans, such as the profits of yearned in corresponding multiples.

All right, let's get down to business, Degenbox.

Image source: https://docs.abracadabra.money/

There are only a few steps here. In summary, users can pledge UST to obtain MIM. But Abracadabra's profits come from Anchor. To be a little more specific,The agreement will pledge 85% of the user's pledge across the chain to Anchor on Terra(via EthAnchor), the pledge proof aUST is then cross-chain back to Degenbox to pledge, increasing the value of the user's mortgage assets.

In addition,Leveraged income positions also work for Degenbox. This is important. It is also important to note that this leveraged gain position does not mean that you have $100 to gain $1000 in collateral gains, but rather deduct slip points, borrowing costs and other loss expenses, as follows:

Image source: https://abracadabra.money/

So all in all,If the slide point is set to 1% and you choose 90% TVL, 10x leverage gives you 6.7 times the original cost.

That is to say, this feature allows me to profit from nesting dolls in Yearn. 100 ETH pledge to get 100yvWETH, and then yvWETH to Abracadabra open 90% TVL 10 times leverage to get 6.7 times of Return of Yearn ETH. So let's take the latest Interest rate of Yearn ETH (1.18 percent) and Abracadabra's yvWETH (0) and figure out what the payoff would be:

The total interest rate =Ryearn ETH x 0.9 x 1.18% x 6.7-0 = 7.1154, and the return without leverage was: 1.062, much worse.

But high yields are risky.Since leveraged income positions don't give you MIM directly, you don't own any tokens in the event of liquidation.

That's it for Abracadabra, and we can look at how it works.UST fusionWhat it's like to get up. Since both UST and MIM are stable coins, the liquidity scenario should undoubtedly look at the mim-UST pool on Curve:

Image credit: https://llama.airforce/#/curve/pools/mim-ust

It's holding steady at 1B. If the average data is pulled out, the total amount of mortgage + loan on Anchor accounts for 90% of the entire UST supply, then the remaining 10% is basically in the abracadabra pool. This means that these two agreements are essential to Terra's stability. Especially, Anchor has most UST in it, and its promised 20% fixed annual interest rate. If an accident occurs, which leads to the decoupling of UST and USD, will the storm come? That's what I'm going to focus on today.

A warning of an approaching storm

If you take the extreme case,There is something wrong with Anchor(It's P2P, after all, and the APY is still so high that a crash is not out of the question),To what extent will UST and LUNA be affected?This needs to start from the TVL structure of Anchor.

First of all, as mentioned above,Users can pledge UST to Anchor and get an APY of about 20%(there will be fluctuations, generally the average is 20%), this is the above cent, about 5 B; The remaining 5 B's are the mortgage of the borrower, mostly composed of LUNA, and the remaining part is ETH. The distribution is as follows:

Image: Anchor dashoard:https://app.anchorprotocol.com/

At this time, we need to see how Anchor can repay 20% OF APY lent to its users. Generally speaking, the simplest way we can think of for P2P to make profits is to let the person borrowing from Anchor pay APY higher than 20%. However, if the interest rate is really so high, I don't think many people are willing to borrow money on Anchor. This can be seen in its lending rates:

Image: Anchor dashoard:https://app.anchorprotocol.com/

As you can see, the latest lending rate is only 2.3%. (The real lending rate is the Distribution Apr-Borrow APR. D APR is the ANC incentive rate on loans). Even with a Borrow APR of 15.76, it still doesn't cover the 20% annualized interest rate that needs to be paid. So there must be other ways to improve solvency. That's when you turn your gazeThe collateral of the loan userThe above,LUNA and ETH.

Officially, LUNA as collateral will be pledged to Terra for an annual interest rate, while ETH will be pledged to Lido for an interest rate. The two rates are currently as follows:

Photo credit: http://defirate.com

图片来源：https://lido.fi/#networks

Assuming that the amount of APY payment should be obtained according to the current amount of Anchor pledge, it is not difficult to find that the current profit output cannot cover the interest after comparing with the amount of profit output. Of course, before this, we need to look at the comparison of borrowing amount on Anchor.

Image: Anchor dashoard:https://app.anchorprotocol.com/

As you can see,The amount of the loan agreement far exceeds the amount of the loan, which is far from enough to pay the deposit interest even if calculated at 15% of the Borrow rate.So let's just do that.

Calculated according to the interest rate of 19.34% of the latest pledge UST, the amount Anchor needs to pay every year is:

19.34% of the 5572 m x 1077.62 m

At current interest rates, the annual profit output is:

Luna: 4865.11m x 7.02% 341.53m

ETH: 478.92m x 4.7% 22.51m

Borrow: 1938.87m x 15.76% 305.56m

Total revenue: LUNA+ETH+BORROW = 669.6m

Well, sure enough, Anchor now looks like it's losing money. This can be seen from the daily revenue change of the agreement:

Image source: http://www.mirrortracker.info/anchor

But if I look at the deposit up there,We'll see that there are far more borrowers than lenders just recently.We don't have to tell you what happens. Now consider a question: Anchor is not stupid, what should it do in this case?

The simplest way to think about it is:Reduce this fixed APY by 20%.

However, this leads to another problem: more than half of the spot UST of the whole network are in Anchor, which focuses on its 20% stable currency APY.Once this APY is reduced, will it have a great impact on the stability of UST?In addition, UST-MIM is now a very large plate, will it further affect the stability of MIM or even Curve and other stable coin pools? To summarize, this is an update on our opening question:Suppose Anchor interest rate is sharply reduced, what will happen to UST?

Will the building collapse, or will it survive?

Once the Anchor interest rate is sharply reduced, we can make some assumptions. And just by the usual way of thinking, the hypothesis should be divided into the optimistic hypothesis, the usual hypothesis and the pessimistic hypothesis. Let's take it one by one.

See firstOptimistic hypothesis:Suppose this happens, but the market still regards UST as a low-risk asset. Even if the interest rate decreases, people are willing to believe in the stability of UST.So there is no real impact on UST in this case.

Take a look atUsually: Markets are stable, but market participants are profit-seeking.This means that everyone has a threshold in mind. Once the Anchor interest rate is lower than this threshold, it will stimulate the market to take certain behaviors. Let's say the threshold is 10%. Once the deposit APY is lower than 10%, people will withdraw the UST pledged by themselves, leading to a decrease in the number of UST pledged in the pool, further leading to the rapid rise of borrow interest, which in turn will stimulate the rise of deposit APY. In turn, they attract people to pledge UST and repeat the cycle. This is a phenomenon we often see. It's the one that's most likely to happen under normal market conditions.

And finally, let's look at one of the things I want to know today, which isPessimistic situation: The premise for this to happen isUST is considered a risky asset by the market: Once the interest rate of Anchor is lower than their psychological threshold, panic will be caused and a large number of pledge UST will be pulled out instantly, and the UST extracted from this part is the most unstable factor.

Where do these unstable UST go? All right, the clearing arbitrage robots are going crazy. Let's look at a few cases:

,Hold UST:* * * * * * * * do you believe? I just think UST is risky.

,Change UST into other stable coins after selling UST:This unquestionably decouples UST (for any length of time) :

I. It will affect Curve and Degenbox of Abracadabra. But how much of an impact we'll talk about later.

Ii. Will cause selling pressure on Luna. There are too many UST in the market, and Luna is needed to buy back UST in the agreement, which affects the price of Luna.

I,Use UST to redeem Luna for arbitrage:People with knowledge of the Terra mechanism are likely to take this approach. Buy back LUNA with ust and sell It on the open market. Again, there are two cases:

I. Luna depth is good in the open market, and centralized exchanges can eat up this volatility (without causing protocol enforcement).

Ii. Can't stand it. As more LUNA is available on the open market, the agreement recycles LUNA with UST, and the cycle repeats itself into a death spiral (UST severely decoupled). According to the modeling of 0xHamZ (according to 519), it is estimated as follows:

Image source: https://twitter.com/0xHamz/status/1479261217298468865?s=20

Now, let's look at the influence on Curve and MIM.

Where will the domino effect stop?

We know that vampire attacks are famous, but there's another attack that's been very popular lately, called.Viking Attack. That's it.Degenbox's bloodsucking of Anchor. In the pessimistic scenario we assume, the decline of Anchor interest rate will lead to the decoupling of UST and US dollar, which also represents the decoupling of MIM, and will also affect the 3CRV pool. However, due to the existence of Curve, after decoupling, a large number of arbitrage robots will carry out crazy arbitrage and gradually add this hook back. This can be seen from the mim-UST or UST-3CRV pool history of Curve.

Image source: https://cryptorisks.substack.com/p/on-abracadabra-degenbox-strategies

However, here we need to take a closer look at the specifics:

Once UST floods into the market in large numbers, it means that UST will become cheaper, and a large number of UST will be turned into MIM or 3CRV.At the same time,Degenbox will initiate liquidation, turning a large number of UST into MIM, which in turn will lead to Luna selling pressure... So what's going to happen? To paraphrase another bigwig, Naga King:

"Currently there is a quantity of 1B in the mim-UST pool, of which 950m MIM is guaranteed by UST. If 95% of the UST is withdrawn and traded into MIM in this pool, it will result in more than 90% UST in the composition of the pool, which is predicted to be 93%".

Of course, Degenbox took that into account,Therefore, a fault-tolerant approach is proposed:In case of large-scale extraction of UST from Degenbox, once the total amount of extraction exceeds 10% of the total amount in the Degenbox pool,Withdrawals will be limited.Until UST extracts from Anchor back to the main network. This can take hours. And normally, in that process, market arbitrageurs would play a role in bringing prices back to normal levels. Of course, this is all without a complete loss of consensus, or arbitrageurs wouldn't have arbitraged anything that was worthless.

Why didn't I mention the 3crv pool?The most important reason is that the volume of UST-3CRV itself is acceptable. Comparatively speaking, Curve can eat this fluctuation by itself, which has a good influence on Curve.

conclusion

Through UST, we can see that,Stability depends more on the arbitrage mechanism designed by itself.But if the consensus breaks or there is a super-extreme market, the wave may end, after all, so extreme that arbitragers don't want to arbitrage, it is useless to talk about anything. And again, this proves,Something like Terra with infinite nesting dolls is effectively profitable in any era.Will Terra be the trigger for the next financial crisis? Will the financial edifice's wind dampers withstand the storm of reckoning that will soon sweep over it? It remains to be seen whether the tower will topple.

References:

1. Abracadabra gitbook: https://docs.abracadabra.money/

2. The Anchor dashoard:https://app.anchorprotocol.com/

3. Terra dashboard:https://terradashboard.com/

4. On Abracadabra Degenbox Strategies, than Anchor Protocol Yield Reserves, and risk to Curve liquidity providers: https://cryptorisks.substack.com/p/on-abracadabra-degenbox-strategies