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The Tally Newsletter, Issue 70

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The Tally Newsletter, Issue 70

May 19, 2022

monetsupply
May 19, 2022
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The Tally Newsletter, Issue 70

newsletter.tally.xyz

Welcome back for issue 70 of the Tally Newsletter, a publication focused on defi and DAO governance. We’ll keep you updated on key proposals, procedural changes, newly launched voting systems, shifting power dynamics, and anything else you need to know to be an informed citizen. 

This week we cover impacts of the past week’s market turmoil across the ecosystems, focusing on pegged assets and lending protocols. 


Terra Stablecoin System Faces Death Spiral Collapse

TL;DR: A rush to withdraw from UST caused the LUNA token to hyperinflate as the protocol failed to regain the USD peg.

The market took a significant hit over the past two weeks as over $40 billion in market cap evaporated, taking down top 3 stablecoin UST and the entire Terra ecosystem. 

UST relies on algorithmic stabilization without collateral, which essentially means the platform’s native LUNA token is minted or burned to modulate UST supply. In expansionary conditions, this creates consistent buy pressure on LUNA which is needed to create UST; this effect played a large part in LUNA’s run up over the past year. But the system can become seriously vulnerable in cases where UST supply contracts, as declines in LUNA price could cause an accelerating cycle of LUNA minting, with the system ultimately unable to fully cover all UST seeking to exit.

Twitter avatar for @stablekwon
Do Kwon 🌕 @stablekwon
Probably the most retarded thread ive read this decade. Silence is a perfectly acceptable option if stupid. Billionaires in my following, go ahead, see what happens
Twitter avatar for @FreddieRaynolds
FreddieRaynolds @FreddieRaynolds
A few weeks ago I responded to @tbr90’s tweet with a brief outline of how a wealthy attacker could not only break @terra_money but profit heavily doing it with a Soros style Black Wednesday attack. Below I provide a detailed breadown...~$1B capital needed. https://t.co/MIbSH3Lwpq
10:04 AM ∙ Nov 28, 2021
2,465Likes757Retweets

Terra’s founder Do Kwon had notably brushed off warnings of this potential for death spirals. But despite later seeking to build collateral reserves through the Luna Foundation Guard’s Bitcoin purchases, which totalled up to $3.5 billion at their peak a week ago, Terra was not able to handle UST withdraws when the tide eventually turned.

Twitter avatar for @DegenSpartan
찌 G 跻 じ Goblin 𝙎𝙚𝙣𝙥𝙖𝙞 of the 𝙃𝙚𝙣𝙩𝙖𝙞 @DegenSpartan
FACTS anchor deposits from 14b to 11.7b tvl from 20.16b to 16.28b curve pools are imbalanced pragmatically speaking from a risk mgmt pov, i blv that the prudent move is exit any UST exposure and consider reducing LUNA exposure i am not short either of these, so i have no agenda
Image
5:19 AM ∙ May 8, 2022
620Likes73Retweets

After initially falling roughly 0.5% below peg on May 7, the peg began to fail on Monday along with the price of LUNA. This coincided with when the LFG organization was planning to move some of their liquidity from the UST 3pool to the 4pool on Curve. Over the coming days, UST made several more runs towards regaining peg but never was able to right itself. 

Source: Coingecko

LUNA began to be minted and released back to the market to support the peg, but a cascade of LUNA liquidations on Anchor lending protocol and collapsing buy side liquidity led to an increasing pace of issuance with token price falling to near 0. Total circulating supply expanded from less than 400 million LUNA to over 6 trillion within the space of just 3 days. This result bears out the death spiral fears associated with undercollateralized stablecoins.

Now, attention is turning to resolution plans that hope to recover some of the lost value of UST and LUNA holders. Terraform Labs has pushed for a plan to relaunch Terra as a new chain without native algorithmic stablecoins. Newly created tokens would be allocated across UST holders, LUNA holders (separate allocations for those holding before and after the depeg event), and developers, but would purposefully remove TFL’s own stake.

Twitter avatar for @TerraBuildersU
TerraBuilderAlliance @TerraBuildersU
1/🌖 The Terra Builder Alliance is excited to finally share a united proposal for the vision of the new Terra 2.0 chain. This united proposal has only been possible through a superhuman effort from everyone involved. agora.terra.money/t/luna-go-forw…
agora.terra.moneyLUNA Go Forward ProposalThis document has been endorsement by both the TBA and TFL. Motivation While UST has been the central narrative of Terra’s growth story over the last year, the distribution of UST has led to the development of one of the strongest developer ecosystems in crypto. The Terra ecosystem and its commun…
8:53 AM ∙ May 18, 2022
4,073Likes1,773Retweets

While there is some community support for a fork, the implementation and governance process raise some difficult questions. Terra had previously disabled new staking transactions to protect the chain from attacks with the hugely inflated LUNA supply, so any buyers after the depeg have essentially been stripped of voting rights. Additionally, UST holders are set to receive only 30% allocation to the new chain, which is relatively low considering Terra’s implicit commitment to put UST holders first. This shows the risk of unsecured credit to protocols, as debt holders can’t enforce their rights to preferential repayment during a default.

Twitter avatar for @FatManTerra
FatMan @FatManTerra
These guys are in deep trouble - they lost about $42m in funds from 4,878 customers and probably have no way to pay it back (they're a small startup) because they went all in on Anchor's invincibility. Conviction bets are great, but not when toying with people's savings. (2/2)
Image
5:06 AM ∙ May 19, 2022
1,150Likes121Retweets

We’re also still uncovering collateral damage outside of the immediate Terra ecosystem. Funds, defi protocols, and fintechs are all in the crossfire due to UST’s spectacular collapse. Among decentralized protocols, algo stablecoins and higher risk lending protocols faced the greatest losses: 

  • Kava’s USDX stablecoin faced massive losses due to fixing UST oracle price to $1, which allowed undercollateralized minting during Terra crash

  • Fantom based DEI and fUSD stablecoins lost peg, with collateral damage to Scream lending protocol due to fixed oracle price

  • Binance based Venus and Axalanche based Blizz lending projects faced losses when LUNA fell below their Chainlink oracle’s minimum permitted $0.10 price

Interestingly, in all of the above cases losses were caused by unsound oracle configuration rather than prices moving too fast to liquidate positions. Certain other defi protocols with Terra exposure, including Abracadabra’s MIM stablecoin and the Solend lending protocol, seem to have fared better with no apparent insolvencies.

Authorities are now beginning to take stock of the situation; US lawmakers are prioritizing stablecoin regulations, while Korea has reactivated a financial crimes team to investigate the Terra collapse and seek a tax settlement with Do Kwon and Terraform Labs.

Twitter avatar for @WatcherGuru
Watcher.Guru @WatcherGuru
BREAKING: 🇰🇷 South Korea has revived the 'Yeouido Grim Reaper' unit after two years of inactivity to investigate the $LUNA case.
4:39 PM ∙ May 18, 2022
4,995Likes794Retweets

Tether Faces Short Lived Loss of Peg

TL;DR: USDT faced a liquidity crisis but was able to recover within hours as market makers began processing redemptions.

While Tether is based on a fully collateralized model with cash and debt securities matching to issued USDT, it faced a short term panic and liquidity crisis as Terra UST began to spin out of control. Marketwide average USDT price fell as low as $0.96, while certain spot and perpetual exchanges fell below $0.90.

This had the unusual effect of briefly pushing up the reported price of certain other stablecoins including USDC, BUSD, and DAI, as much of crypto’s pricing data is centered around USDT pairs on centralized exchanges. 

While exact reasons for the depeg are less clear than UST, there are a few likely forces at play. In times of severe market distress often will try to obtain the most liquid, cash-like assets available. USDT has very high usage and volumes across the crypto space, but the cumbersome and costly (0.1% fee, $1,000 minimum) redemption process may have concerned users looking for a safe haven. 

Twitter avatar for @DegenSpartan
찌 G 跻 じ Goblin 𝙎𝙚𝙣𝙥𝙖𝙞 of the 𝙃𝙚𝙣𝙩𝙖𝙞 @DegenSpartan
tetherinos getting redeemed a bit is probably fine but tetherinos getting redeemed a lot may be a problem because idk how solvent they are and unlike instis or billionaire whales, i do NOT have direct access to redeem tetherinos switching cost to USDC is basically 0, for now
Image
Twitter avatar for @DegenSpartan
찌 G 跻 じ Goblin 𝙎𝙚𝙣𝙥𝙖𝙞 of the 𝙃𝙚𝙣𝙩𝙖𝙞 @DegenSpartan
not trying to incite panic or anything but i am already mainly in USDC https://t.co/TviJd1Gk5u
3:51 AM ∙ May 19, 2022
390Likes33Retweets

Despite improving transparency, Tether also faces continued concern over the safety of their reserves, including recent rumors of investments in struggling mainland China property developers. And the huge volatility and market dislocations raised market maker’s effective cost of capital, which made the multi-day process required for redeeming USDT less efficient.

As markets settled, the USDT peg has mostly recovered and Curve liquidity pools which previously were heavily unbalanced have trended towards equilibrium. While this depeg hasn’t been nearly as severe as UST, Tether has seen a drop in confidence as shown by their continuing outflows and declining market capitalization.

Source: Coingecko

The ability to redeem roughly $9 billion over a week seems to disprove some of Tether’s harshest critics, who maintained it was a fully unbacked scheme. But on the other hand, there are concerns that Tether invested large parts of their reserve into riskier or less liquid assets, rather than the cash and treasuries common in other stablecoin reserves. Growing redemptions could force Tether to release their most liquid assets first, potentially leaving late holders facing losses from fire sales on commercial paper or undisclosed credit impairments.

Twitter avatar for @DegenSpartan
찌 G 跻 じ Goblin 𝙎𝙚𝙣𝙥𝙖𝙞 of the 𝙃𝙚𝙣𝙩𝙖𝙞 @DegenSpartan
i honestly think the risks of holding USDT are very low but the risks of USDC are even lower if you hold USDT as inventory for farming, i doubt you have anything to worry about unless redemptions do not slow then you're betting the riskier parts of their BS are not impaired
4:15 AM ∙ May 19, 2022
119Likes6Retweets

stETH in the Spotlight as Peg to ETH Faces Pressure

TL;DR: Forced selling of assets and a general climate of fear have led to a nearly 4% discount opening up vs ETH.

Amid the general market panics centered on stablecoins, stETH also faced significant pressure. stETH is fully backed by ETH staked on the beacon chain with Lido, but because withdrawals aren’t currently enabled the stETH peg is maintained through liquidity on Curve. 

Jump Crypto may have kicked off the deleveraging cycle with tens of thousands of ETH withdraws from the Curve pool to help stem UST’s collapse. But in the market’s panicked state, it took on a life of its own with stETH falling as much as 5% below peg at its lowest point. Contributing factors included hundreds of thousands of stETH leaving Terra’s Anchor protocol, and forced deleveraging of stETH yield strategies on Aave which had ballooned to billions of dollars in value in April. Structured products based on the Aave leverage strategy including icETH may have also been forced to rebalance at a loss.

The Lido team responded quickly by incentivizing a second Curve liquidity pool between ETH and stETH (in addition to their existing pool). The new “concentrated” pool used a ramped up 1000 amplification factor vs the original pool’s 50, which means nearly all of the pool’s assets will be allocated to stETH while below the peg. Sopping up excess supply released from Anchor and Aave seems to have avoided the worst risks of disorderly stETH liquidations.

Takeaways from Recent Market Stress

With all of the bank runs taking place over the past weeks (including a potential run on Convex’s cvxCRV just this morning), it begs the question if any pegged assets are safe? There are a few learnings that we can draw from these events to help reduce negative impacts in the future.

Collateralization is key: While undercollateralized UST and DEI stablecoins (among others) seem to have permanently lost their peg, other pegged assets including USDT and stETH have largely recovered already. And assets with the greatest transparency and access to reserves such as DAI and USDC were largely unaffected.

Risk accumulates in “safe” places: The runs on pegged assets over the past week were exacerbated by the market’s overconfidence and reliance on their stability. stETH is an example, with hundreds of millions of ETH borrowed against it on the assumption that the peg was rock solid. Conditions can deteriorate quickly if this accumulated leverage is forced to unwind, and projects should place a greater emphasis on resilience and stress testing to avoid the worst impacts of these panics.


In Brief: 

Tally News

  • Check out our latest blog posts from the Tally content guild:

Twitter avatar for @tallyxyz
Tally @tallyxyz
Paid time off, liability, and taxes, oh my! In the latest from Tally Content Guild, @samanthajmarin tells us why it’s time for DAOs to get a little more boring.
blog.tally.xyzIt’s time for DAOs to get a little more boringTo gain wider adoption, DAOs need to be boring.
1:31 PM ∙ May 19, 2022
1Like1Retweet
  • June DAO NYC conference beginning to take shape:

Twitter avatar for @DAO_NYC_XYZ
DAO NYC @DAO_NYC_XYZ
🚨SPEAKER ANNOUNCEMENT🚨 @lsukernik of @hi_Reverie is bringing his community expertise & vision to DAO NYC! check out more: dao-nyc.xyz
Image
1:22 PM ∙ May 18, 2022

Ethereum Ecosystem

  • Tribe DAO moves towards modular governance structure:

Twitter avatar for @feiprotocol
Fei Protocol @feiprotocol
The Tribe DAO could become the first hybrid direct/representative democracy with this vote 👇 snapshot.org/#/fei.eth/prop… Lets explore why this is so powerful 🧵
snapshot.orgSnapshot
8:32 PM ∙ Mar 9, 2022
60Likes13Retweets
  • Coinbase to launch centralized liquid staking platform:

Twitter avatar for @hasufl
Hasu⚡️🤖 @hasufl
Coinbase has just entered the liquid staking game. I think, they plan to make the USDC of staking derivatives (compliant centralized alternative to stETH)
blog.coinbase.comEnterprise-grade Liquid Staking Standard with Support of Coinbase Cloud and FigmentTl;dr: Enterprise-grade liquid staking is an industry gap. The first-ever enterprise-grade liquid staking protocol is being launched by a…
5:37 AM ∙ May 18, 2022
560Likes69Retweets

Cosmos Ecosystem

  • Axelar wins Osmosis canonical bridge vote, with incentives moved from LUNA and UST pairs to bridged assets including ETH, USDC, and DAI through an accelerated proposal process and hard fork: 

  • Cosmos cofounder Jae Kwon offers controversial airdrop incentive for voters who oppose Cosmos Hub proposal 69:

Twitter avatar for @jaekwon
Jae Kwon, KwanJe East, IBCZeus 🧙‍♂️ @jaekwon
@buchmanster now calls the airdrop "unfortunate bribing" and continues to mischaracterize what is happening; the coordination of exit. Now that the quorum has reached 40%, with 80% saying NO to CosmWASM on the Hub, comes out and says he is against CosmWASM on the hub as well.
6:12 PM ∙ May 9, 2022
98Likes7Retweets
  • Juno proposal 20 includes error sending “Junowhale” funds to incorrect address, now corrected in proposal 21:

Twitter avatar for @Cryptocito
Cryptocito | YouTuber ⚛️ @Cryptocito
Lots of wild stuff happened in $JUNO over the past few weeks and now the seized 🐳 funds apparently were sent to the wrong address?! We are still early frens ... coindesk.com/tech/2022/05/0…
coindesk.comTypo Moves $36M in Seized JUNO Tokens to Wrong WalletValidators, developers and token holders grapple with who is to blame for the copy-paste error that moved the tokens to an address no one can access.
8:08 PM ∙ May 5, 2022
102Likes6Retweets

Thanks for joining us for Tally Newsletter issue 70. Be sure to check out the Tally governance app and join us on Discord for the latest updates!

Anything we missed? New developments or protocols you’d like to see covered? Drop us a line at newsletter@tally.xyz 

Best,

Nate, Tally

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