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Title : FSO Could Lose The Peg? Abradacabra, Degenbox and Le Stable Algoritmiche
link : FSO Could Lose The Peg? Abradacabra, Degenbox and Le Stable Algoritmiche

FSO Could Lose The Peg? Abradacabra, Degenbox and Le Stable Algoritmiche

Luna, the native crypto of the Earth, is suffering the effects of the negative sentiment that spread after the Wonderland scandal which saw Michael Petryn (co-founder of the Canadian exchange QuadrigaCX, guilty of an exit scam in 2019 with founder Gerald Cotten who disappeared into thin air and presumably died).

Luna, supports the UST algorithmic stablecoin, which fell more than 17% on Friday morning, according to data from CoinMarketCap. It traded for as low as $ 47.56, the lowest price since November. Luna experienced a 50% drop from its all-time high of $ 100.17 in December 2021.

The effects of this revelation were also felt on Abracadabra and its stablecoin MIM (Magic Internet Money). But what does Luna have to do with all this? Its stable UST can be used as collateral to borrow (in leverage) the aforementioned MIM (for what is called "degenbox"), coined by the Abracadabra lending platform. Basically he takes UST to Ethereum, borrowing MIM and running this loop up to 10 times. Let's say you have $ 10,000 that you want to deposit. If you choose a 90% settlement level, you will be able to borrow around 9000 MIMs. By running this loop 10 times, $ 10,000 will borrow $ 57,432 MIM (10x loop).

Also remember that there are some pools with the two stablecoins protagonists: MIM / UST. 

The price of Luna, as we know, is linked to the total frozen value of the UST stablecoin.

The more UST is created, the more Luna contracts (decreases) its supply, increasing its price (in theory). The more USTs are burned, the more Luna is created, increasing supply and driving down the price. In response to Sesta's unfortunate handling of the Wonderland situation, Time has dropped by about 40%, leading to -90% in the last month.

Similarly, the low liquidity in almost all the pools where MIM was contained (Curve for example), made it lose the peg up to $ 0.93 on Thursday afternoon. The stable later bounced quickly to $ 0.98. During the brief flash crash Thursday night, MIM-3pool's reserves were only $ 40 million, causing a depegging that temporarily bled UST as well.

MIM is essentially anchored to UST, so the emptying of the pools (including those used by Alameda) has also created some instability for UST (only indirectly connected to this scandal). Some observers are concerned that FSO and MIM may also act as a "contagion" destabilizing other pools on Curve.

Curve: "So far, the hard dips we've seen don't seem to affect other stablecoins. If anything, people are running away from MIM and UST to other stablecoins."

Concerns are centered on MIM and UST pools. The latter, had held up discreetly with a slight de-peg, the large dump of May 2021 with related liquidations on Anchor (remember that Bonded Luna is used as collateral and if the loans are closed, the users are liquidated and the Luna automatically sold, triggering further dumps). However, it should be emphasized that neither Luna nor UST had market cap values ​​comparable to those of today (neither listing on large exchanges and diffusion on almost all DeFi).

But how do stablecoins work?

For every $ 1 of USDC, there is $ 1 fiat of guarantee in a bank account

For every $ 1 of USDT, there is "presumably" $ 1 fiat of guarantee

For every $ 1 of UST, there is an algorithm to maintain dollar parity 

For every $ 1 of Dai, there is $ 1.75 of collateral in crypto

For every $ 1 of Iron, there was $ 0.75 USDC and $ 0.25 Titan

Here to learn more about stablecoins: What Are Stablecoins and Differences (DeFi, CeFi and Stable Con Elastic Supply)

In recent times, we have seen an increase in algorithmic stablecoins (ESD, AMPL, BAC) that experimented with different mechanisms. However, many of these have not spread, as they are worth well over $ 1 or less. And while there are stablecoins that hold their value (Frax, from which Iron forked), there's no real economic incentive to use them.

And that's where Iron came in with its USDC / Titan hybrid model.

This protocol had two characteristics, minting and redemption. When you make mint, you basically traded Titan and USDC for Iron ("minting"). Iron tokens decrease Titan's total supply, causing its price to increase (basic supply / demand mechanics). The redemption refers to the exchange of Iron for USDC and Titan.

Theoretically, if Iron's price falls below $ 1, arbitrage systems could buy it for less than $ 1 on the market, and then redeem it for Iron in exchange for $ 0.75 USDC and $ 0.25 for Titan. Without going too deep, this model shatters in the face of reality: referees are not degenerate gamblers who care about the appreciation of tokens for farming and cash pools. They are literally ... arbitrators so they dump it on the market to reap their profit without risk. This selling pressure on Titan has created a de-pegging.

For Luna / UST the situation is more or less similar, even if we are talking about enormously larger market caps, however when people leave the UST, the price of Luna goes down.

All algorithmic stablecoins face this risk. This brings out the common criticism: "collateralising a stablecoin with another currency in its ecosystem is a wrong approach that is doomed to fail!" So why did the Earth ecosystem survive? And why did Iron die?

The answer is simple: Luna is backed by a utility and a real value. Titan is unsupported and devoid of "intrinsic value".

Why didn't Iron work? Meanwhile, it doesn't have its own blockchain from which to get transaction fees for those who block Titan. So in the dump phases, what does Iron claim? Anything. In contrast, the Earth ecosystem collects transaction fees every time an action is taken in the ecosystem (even weekly airdrops), which adds value to Luna. Luna will never be worth $ 0 and, for this reason, UST will always return to its $ 1 value in the long run (and consequently always make arbitrage profitable). Within the Terra ecosystem, you can buy shares on Mirror, earn 20% interest on Anchor, farm, stake, take out a loan. Since Terra has applications and utilities, its main token Luna relies on the growth of UST, whose last hurdle is simply to have more and more adoption. This is where the robust ecosystem of use cases around the Earth ecosystem comes into play, resulting in a greater then mint spread of UST. UST creation is not only useful for farming but also for users looking to put their savings on Anchor for a stable 19% interest rate.

Furthermore, the Anchor system will be supported in the future by more collaterals, not only bLuna and bEth but also Solana and Polkadot. This eliminates the FUD that UST is "a stable collateralized by just a twin coin".

During times of mass sales panic, the Earth ecosystem imposes a limit on mint / burn. This is limited to $ 100 million per day. Let's say that if Luna's price drops to $ 1, this means that at most 100 million Luna will be minted that day. If Luna's price drops back to $ 0.1 the next day, another billion Luna will be minted.

Here to read more: The Earth-Moon-UST Ecosystem: Seigniorage

This is significantly a better model than Titan which brought about the infinite minting of 27 trillion Titan in a few hours, all worth $ 0.

Iron lost his peg, due to Titan's rapid loss in value from massive whale sales. To clarify, if you redeem 1 Iron, you get 74 USDC cents and 26 Titan cents, but Titan's price is based on a 10 minute average that takes the spot market as a reference, so if there is a flash crash, too. redemption price for Titan is high.

The spot price of Titan would continue to fall. People redeem Iron for 74 cents and some Titan and immediately sell Titan to market. The selling pressure is enormous and increases rapidly due to the panic caused by large sales, but also by people who redeem Iron for profit and instantly sell Titan to market.

This has led to super inflation of Titan on the market, with the price going down more and more. Titan sank like the Titanic and did not stop at any moment. Titan's supply was initially around 14 million, reaching 30 million during the descent to 27 trillion. Even though the maximum supply was supposed to be 1 billion, the developers did nothing to stop that.

In general, any large holder of that token (a "whale") can sell off a large chunk in an instant and start a chain reaction of automated liquidations.

Another stablecoin that inspired UST is sUSD, a medium through which synthetic assets (Synths) are traded within Synthetix. Initially, sUSD only accepted the platform's native SNX token via collateral and a high fee.

With the entry into force of Synthetix Staking reward + Liquidity Mining, strong demand has had strong positive feedback on Synthetix price: the higher the demand for sUSD, the greater the demand for SNX used to produce sUSD and the less SNX is injected. on the market, increasing its price. However, this process has highlighted the shortcomings of the sUSD, meaning a Stablecoin must not only be able to stabilize the peg but there must be the ability to purchase it in large quantities at a low premium. SUSD, however, cannot guarantee this last point (there is a high minting cost of sUSD).

Another factor is the scarcity of application scenarios. sUSD lacks more application scenarios except trading within the Synthetix system with other Synths and the mining part of the protocol. Therefore, when the DeFi Summer boom passed, Synthetix's ecology dwindled. In addition to the reduction in demand, the prices of the sUSD and SNX coins also fell in a negative cycle of reduction of the demand of the sUSD leading to the decline in the price of the SNX tokens.

UST is, in a sense, the successor to sUSD. In the ecology of Earth, UST has also taken on the same role that sUSD has in Synthetix, but in a more radical way. Compared to the high 8: 1 minting ratio between SNX and sUSD, Luna can synthesize UST 1 to 1, so the capital efficiency is also higher. As mentioned several times, as long as the ecosystem continues to expand, the greater the number of users, the greater the demand for UST. This is also reflected in Luna's growing intrinsic value.

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