Welcome anon to another week of paid content.
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Please feel free to skip around or ignore certain sections if it does not apply to you. The Table of Contents is made to preserve your time in this manner. You can always simply read the conclusion if you are in a hurry.
All times given in this update are in US Central time (UTC-6 clock).
Song of the Week - Propain, Z-Ro, Sauce Walka - H-Town Remix
Table of Contents
$LUNA Collapse
Economic Calendar
US Inflation
Bank of England Interest Rates
Crypto Macro
Conclusion
1. $LUNA Collapse
Well, yesterday, Terra ($LUNA) collapsed in value. I have briefly touched on Terra ($LUNA) before in the Advanced DeFi guide #2 for stablecoins, but we are going to discuss it in a broader sense today due to it’s collapse.
From roughly ~$80 over the weekend, to now priced in the teens (~$16). Why? Well, the stablecoin $UST that can be minted using $LUNA began to lose it’s peg. The concept of a stablecoin depegging is explained in detail within the Advanced DeFi Guide #2, and I suggest reading that if this section is hard to follow. Below is a chart of UST against Tether so you can see the depegg as it occurred.
The initial worrying event is circled in red above. During the day on Sunday withdrawals began occurring against the Curve pools and I was alerted of this by a good friend and manager of a crypto hedge fund when $UST was still at $0.985 (if you are an accredited investor, their is no better choice than these guys). The way Curve works, is essentially it’s a pool of stablecoins, you put one in and you can pull one out the rate is based on how much of each asset is in the pool. If you deposit liquidity, you are then paid interest, and the interest rates vary based on supply and demand. So as the curve pools get more out of whack, they offer higher interest to incentivize users to bring the pools back into balance.
The above was sent to me on Sunday as users began withdrawing large amounts of $UST from the Anchor market, which at the time had $10B in TVL of $UST earning interest within that market. There are only a handful of places to exchange $UST for something else. One place is the Curve pool, above you can see that at the time (Sunday night), there was only $192M of available assets that could be exchanged to from UST in the curve pools. This was exhausted pretty quick, and if you connect your Metamask to the Curve Pool for UST now, you will see that it is essentially 92% $UST and exchanges are basically frozen with only $1.5M of assets left in the pool.
So after the Curve pool was exhausted, the only places to exchange $UST for any value that remained are on centralized exchanges, or through the redemption process within $LUNA that would mint $LUNA which could then be sold.
So it follows then that as $UST value continued to drop as users were selling it for other assets, the centralized exchanges eventually blocked transactions with UST as it’s value fell too low yesterday.
Users who used the redemption function of $LUNA also found that many other users were racing to sell $LUNA and this also drove the price of $LUNA down to where it is now in the teens, and many centralized exchanges also blocked transactions of $LUNA as well.
So what now, is the protocol dead? Not quite, but essentially yes. The LFG council deployed $1.5B of their reserves to provide liquidity for UST against Bitcoin.
However, faith in $UST and it’s ability to function within the crypto market have been lost, and likely will never come back. A lot of liquidity and stablecoin holdings that were previously in $UST moved to $USDC and Tether ($USDT). It’s unlikely that all or even a majority of the liquidity that left can be coerced to come back to $UST. So even if the deployment of all of the Bitcoin that was in the LFG fund is enough to restore the peg, I think that the damage has been done (especially considering the shape of the Curve pool for $UST) and $UST is fated to fade away as another trend that emerged in crypto and then died.
One thing that should be noticed here is just how quickly the US government had a statement ready to talk about what happened with $UST. Consider, they brought it up before I finished my post about it here.
I’ve spoken at length here about how stablecoins (and centralized exchanges) will likely be the target for regulation soon. Seeing Janet Yellen being up on the news in this fashion so that she had a statement prepared for an appearance at the Financial Stability and Oversight Council of the US treasury, shows you just how closely they are watching stablecoins. As I have been stating in the Crypto Macro posts, this will be the attack vector for regulation within the US. I would not be surprised to see language entering legislation by the end of the year or early 2023 and something on the books by the middle or end of 2023 impacting stablecoin issuance or trading for US users on centralized exchanges. You can read the Regulatory Risk Section (Section 5) of my latest stablecoin post to see my thoughts on the matter. The end result is that you as a user need to be comfortable and competent using a VPN, and self-custody crypto wallets, as your ability (as an American) to use centralized exchanges and make withdrawals will be negatively impacted. For now you still have time, but please be wary of that clock, it’s still ticking.
2. Economic Calendar
Refer to Economic Calendar Settings Post for filter settings used.
This is a short news week in terms of major meaningful events, while last week was a much more significant week including the US rate hike which was covered separately here. For this week we will only discuss US Consumer Price Index, as I promised to stop beating you all over the head with the same exact forecast for Europe in Section 5 of this post. I will at a later date create a summary post for European Macro and link to that from here on out until my outlook changes.
We will also be discussing the Bank of England’s rate hike from last week.
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