Crypto Market Weekly Recap - May Week3

Wayne

The so-called "death spiral" is not only a sell-off following market distrust. But more seriously, as the price of $LUNA falls, additional $LUNA are minted at several orders of magnitude higher level and then enter circulation. This further leads to a rapid drop in the price of $LUNA, which then leads to more $LUNA being minted later.

Hi everyone,

This week was probably very difficult for most of us. Because of $LUNA, the whole market has crashed. BTC has fallen all the way to below $30,000, and ETH has fallen to below $2,000. Many altcoins have fallen by more than 90% compared to ATH. $LUNA even went to almost zero within a few days, and is becoming a MEME token now.

I won't go into details about $LUNA and $UST here, there have been many analyses about it already. If you are interested, the most crucial part of this, which is the mechanism the $LUNA and $UST's burns and mints.

  • When the price of $LUNA is $100, burning one $LUNA can mint 100 $UST, and this behavior will keep burning $LUNA in the market, resulting in a decrease in circulation of $LUNA and an increase in the scale of $UST.
  • When the price of $LUNA goes down to $1, the 100 $UST minted by burning 1 $LUNA can now mint 100 $LUNA when they are burned, and if the price of $LUNA is $0.01, then the amount of newly minted $LUNA is 10,000 by burning 100 $UST.

The so-called "death spiral" is not only a sell-off following market distrust. But more seriously, as the price of $LUNA falls, additional $LUNA are minted at several orders of magnitude higher level and then enter circulation. This further leads to a rapid drop in the price of $LUNA, which then leads to more $LUNA being minted later.

Then Do Kwon, the founder of Terra, came up with a plan for a "new Terra", which was actually a hard fork. CZ, the CEO of Binance, said that a hard fork would not bring value. Strangely enough, CZ has been repeatedly talking about Terra. Although he claims that the relationship between Binance with Terra was only a $3 million investment in 2018 and that $UST didn't exist at the time, it's likely that Terra hurts Binance's interests in this instance.

On May 15, CZ made clear his displeasure with Terra's team, particularly the flow of LFG's Bitcoin reserves, in his latest statement. (Previously, analyst firm Elliptic said LFG's Bitcoin reserve was going to Gemini and Binance.) CZ tweeted that the market can't rely solely on the analysis of third-party companies, and that Terra's team should step up and provide more transparency, meaning to tell the market directly where those funds are going.

In fact, once the money goes to the exchange, the on-chain analysis can't continue. But the exchange knows what happened with the money. The fact that CZ made this statement after a large portion of LFG's Bitcoin went to Binance probably means that CZ had already known something interesting, but he wanted to give the Terra team a chance to explain themselves.

The discussion of algorithmic stablecoin brought on by $UST is also intensifying, with more and more people believing that algorithmic stablecoin are going to fail. Regardless of whether such a judgment is right or not, there are bound to be people keep trying on this path in the future.

The collapse of $UST has affected many projects closely related to $UST. In addition to the complete loss of the Terra ecosystem, Cosmos has also been greatly affected. Another more familiar one is the "Curve War". The previous Curve War basically revolved around $FRAX and $UST, two projects that offered the highest voting rewards, which led to a huge price increase for related projects, especially $CVX and $CRV. If the algorithmic stablecoin were to fall silent for a while, then all Cruve-related projects would also be very affected or even fail outright, such as CVX, Redacted, etc. This has also seriously affected DeFi 2.0 to some extent.

But fortunately, DeFi had already fallen out in advance.

Market Dynamics

Some of the major events in Crypto in the past few days.

  • Terraform Labs proposes to initiate emergency measures to destroy nearly 1.39 billion $UST. This includes the destruction of about 1.017 billion $UST in the community pool; the destruction of about 370 million cross-chain $UST deployed to Ethereum as liquidity rewards; and Terraform Labs has just staked 240 million $LUNA to defend against network governance attacks. Implementation of the above proposals would destroy 1,388,233,195 $UST.
  • Data: 4,059,096,320 new $LUNA in circulation. Do Kwon tweeted about 4x increase in $LUNA, the gap is hard to recover, after that all you will probably see is $LUNA under $0.1.
  • The daily trading volume on Curve reached a new high. $5.8 billion set a new record since last year, but behind the record hides the extreme panic of the market.
  • Binance will delist $LUNA/$USDT perpetual contract. It has been delist for now, and Binance is taking it down in part for fear of causing another large upheaval, with $LUNA even bouncing to 6.5 at one point after hitting a low of 0.4 on Wednesday night.
  • The Sushi 2.0 community proposal passed the vote with 91.78% support. To summarize, it's about retaining existing talent and recruiting new people, and implementing a new accountability and compensation system.
  • SEC may have opened an investigation into the $UST incident. The $UST depeg incident can be said to have affected the entire crypto market, and now it's Big Brother's turn to step in.
  • Changpeng Zhao tweeted that Binance P2P trading is currently in maintenance mode. The spread of panic has led to the exchange of small amounts $USDT swept away, and today I also heard a colleague mention that $USDT may also be depegged, which seems unlikely at the moment, but if there is that day, then the whole industry is not far from collapse.
  • The Block Research Director: LFG's $1 billion funding plan has failed. The results of the failure are there for all to see.
  • MARA closed a $23 million funding round with Coinbase Ventures, Alameda Research and others, and MARA was announced as an official crypto partner of the Central African Republic. The company plans to launch the MARA Chain this year.
  • Public chain Flow launches $725 million ecosystem fund, backed by a16z, HashKey Capital and others. Flow will support developers through investments, $FLOW token donations and more, focusing on gaming, infrastructure, decentralized finance, content and creator areas to drive further ecosystem development.
  • RabbitHole says there will never be a related airdrop. The tweet mentions that they are only focused on building Web3 and ask speculative profiteers to change their focus on other project, implying that they are not make coins for profit.
  • Coinbase said that some Russian users' accounts may be blocked. The fallout from the Russia-Ukraine war continues, but unfortunately this week's main character is Terra.

This week's daily news roundup is here, in English and Chinese.

DeFi

Stablecoins

Terra

Public Chain

Wayne

I write about crypto and Web3, while trying to catch the wave of it shaping the future.