UST and LUNA: What Went Wrong?

Sarson Funds Analysts React to the Collapse of UST and LUNA.

Stablecoin UST, from Terraform Labs, lost it’s pegging to USD, which led to a cascade of events and saw a run on the algorithmic stablecoin, leading to a collapse of UST and LUNA.

What happened and what does this mean for the digital asset landscape? We asked the Sarson Funds cryptocurrency analyst team for their take. Here’s what they said:

 

Zachary Profeta, Portfolio Manager

 

 

 

 

 

 

 

“Its no secret the recent market dumps has been extremely tough on all of crypto but this is nothing we haven’t seen before. Tokens that did a 10x in November are now down to where they were or below exactly a year ago today. One project to take notice in a time of downward price movement is Helium (HNT). This time last year Helium was trading around $17 a token. There were less than 40,000 Hotspots supporting the decentralized wireless network around the world. Majority of the data credit usage was from location assertion of new hotspots. This past year the network grew to about 800,000 Hotspots around the globe. Helium has secured about half a Billion dollars in equity funding from Major Telcos and Venture Capital firms. Helium has onboarded over a dozen new hotspot manufacturers. The 5g network has grown to 5,500 hotspots compared to its blueprint stage a year ago and is soon onboarding DISH and Gigsky for data roaming through their network. Companies like Senet have begun using the Helium network to increase efficiency of water monitoring services and freight tracking in Municipalities on a global scale. It won’t be long till every IOT device is operating on the Helium network as its low cost of data transmission has proven to be best in the game. May 11th marks a special day in Helium’s existence as the day light hotspots go online, which is possibly the largest update to the Helium network since the introduction of validators last July. All this being said, Helium has shown to be the most viable real world use case for crypto currency incentive-based models. Smart devices, rural 5g cell connection, water monitoring and agriculture tracking is just touching the surface on the range Helium can have for future development. In a Market downturn like this, it’s important not to lose faith in projects that have only built a stronger thesis and have continued to show the true power of cryptocurrency.”

 

Jonathan Cagle, Portfolio Manager

 

 

 

 

 

 

 

“My take on the LUNA/UST:  With algorithmic stablecoins, there are always risks of exploitation and this is magnified in inefficient marketplaces.  In volatile markets such as these, M1 asset-backed stablecoins (such as USDC) will be preferable, as the coin has a much higher probability of maintaining a 1:1 tethering to the USD.  The cryptocurrency space as a whole is still in its infancy when compared to the traditional financial system.  Because of this, fewer dollars are needed to move markets significantly in either direction.  And with leverage trading now becoming more prevalent, buy/sell pressures and movements can be logarithmically amplified by orders of magnitude.

Irrespective of inflation pressures, the utmost important factor is being able to maintain the value of $1 (stablecoin) being equal to $1 USD of fiat.  For the time being, I’m willing to sacrifice decentralization for security of the peg.  USDC is the stablecoin play for the time being until Terra and UST can work their way back to $1, if they can at all.

 

Jenny Mongan, Research Analyst

 

 

 

 

 

 

 

“While the market today continues to stay bloody, I have found some green. At current time of writing, Maker (MKR), a governance token for the decentralized lending platform, MakerDAO, is up 18%. The Maker tokens unique quality is its ability to act as a voting share for its holders to make direct decisions to the Maker Protocol. Although only partially backed by USDC, MakerDAO is currently one of the most popular DeFi applications on Ethereum, opposed to the late Terra Luna token. Makers main task and focus is to maintain and operate soft-pegged stablecoin, DAI. DAI has successfully maintained its stability through these trying times unlike its cousin UST which can be used in conjuction with Terras native token, Luna, and while being supposedly the most scalable stablecoin, it has proven to not be indestructible. Terra UST is currently trading at .54 cents below the US dollar despite its main purpose to stay pegged to it.”

 

David Gamble, Portfolio Manager

 

 

 

 

 

 

 

“The Terra ecosystem which is comprised of Luna and UST has been one of the leading projects within the decentralized finance niche. In the last several days the instability of a flawed algorithmic stablecoin and questionable tokenomics led to this historic event of nearly 28 billion dollars exiting the terra ecosystem causing some distrust in defi. That flow of capital is now finding its way into over collateralized stables like DAI and USDC also forcing a spotlight on more seasoned projects such as AAVE & Maker. As the decentralized finance space takes a couple of steps back, I believe this creates an amazing opportunity for derivative specific projects to be what will continue to create true value in defi. One of those projects that aids in shedding light in my opinion is OPYN, a defi-native derivatives and options infrastructure project, I believe the path forward are projects such as this that are derivatives based and able to show the power of what defi can do for this space.