“If something is too good to be true, it probably is” - Unknown
Ahlan wa sahlan, and welcome to the 23rd edition of CoinMENA’s weekly newsletter, Kalam Crypto. Every week we will bring you the latest news and developments from the exciting world of cryptocurrencies. This week, we deep dive into the biggest collapse in crypto history, Emirates airline to accept bitcoin payments, and bitcoin prizes from CoinMENA. All that and more, so let's dive into this week’s letter, and talk crypto:
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Deep Dive 🔬
The UST/LUNA Collapse: We just experienced the biggest collapse in crypto history. $50 billion in value was wiped from the Luna / UST ecosystem within one week. We have been keeping an eye on Luna Foundation Guard’s (LFG) experiment with their algorithmic stablecoin UST for a couple of months now. It was interesting because LFG was buying up hundreds of millions of dollars in bitcoin reserves, and at some points, surpassed Tesla and became the third-largest institutional holder of bitcoin in the world. Less than a month later, they became the first crypto project to go to zero. In today’s newsletter, we will deep dive into this watershed moment for the crypto industry and explain what LFG was doing with their UST “stablecoin” and why it collapsed.
Background on stablecoins: Off the bat, it is important to note that UST is not a stablecoin. It is an algorithmic stablecoin. Stablecoins like USDT (Tether) and USDC are tokens pegged to the US dollar. Meaning that every one USDT or USDC is worth $1 and (should) always be. The peg is maintained by the issuing company, which ensures that for every stablecoin in circulation, an equivalent amount of US dollars are held in their treasury. UST was not doing that. Instead, they were backing up their UST through a complex mechanism that involved the LUNA token.
Brief on UST / LUNA mechanism: The only way to create “mint” UST is by spending “burning” LUNA. Users can redeem LUNA for UST dollar-for-dollar and vice versa. If LUNA is at $50, you can redeem it for 50 UST. Conversely, you can redeem 50 UST for 1 LUNA. You can learn more about how Luna/UST in this thread.
UST growth phase: Despite not being backed by sufficient collateral, UST became the fastest-growing “stablecoin” in the world, and at its peak reached a market capitalization of $18 billion and was the third-largest “stablecoin” in the world after USDT and USDC. The increased demand for UST was driven largely by the Anchor Protocol, which paid UST depositors 19.5% interest on their UST deposits! This should have been a red flag to any investor. 20% yields on a “stablecoin” sound too good to be true, and it proved that it was. At its peak, 70% of all UST in circulation was staked on the anchor protocol. During this growth phase, LFG used a lot of their newfound wealth to buy bitcoin to use as collateral to “defend” the peg. Their goal was to reach up to $10 billion worth. They managed to reach $3 billion.
The beginning of the end: In summary, we have an algorithmic “stablecoin” backed by volatile digital assets instead of cash/bonds. So when the market started to dip, UST began to wobble and lose its peg. The depeg caused a UST sell-off, which caused LUNA’s supply to increase dramatically and its price to fall sharply in an attempt to stabilize the peg. Due to the reflexive relationship of the LUNA / UST mechanism, the lower LUNA’s price falls, the higher the risk of UST’s overall solvency. Panic selling ensued, and the death spiral was on. In April, LUNA’s price was at an all-time high of almost $120, it has since lost all of its value and is now trading at $0.0002, and UST is now trading at $0.16 at the time of writing. This marks the first time that a crypto project has actually gone to zero, making it the largest collapse in crypto history.
Lessons learned and perspective: Crypto is still a nascent industry, and like any industry, it has good projects and bad projects. UST/LUNA was a highly risky project that promised an unrealistic 20% interest on deposits. We go back to the age-old saying, “if something sounds too good to be true, it probably is.” This unfortunate incident is a learning opportunity for crypto investors and builders. Always make sure you do your own research and invest responsibly. Due to this and other macroeconomic factors, crypto prices dropped sharply last week, but the long-term trend for crypto remains positive. For example, in the past six months, bitcoin and Ethereum are down 55%. However, over a five-year period, bitcoin is up over 1,300%, and Ethererum is up over 1,500%.
Local News 📍
Emirates en-route crypto by accepting bitcoin payments: Emirates announced its intention to add bitcoin as a payment option and make NFT collectibles tradable on its website. The Dubai-headquartered airline also hopes to utilize blockchain technology in tracking aircraft records. This is a significant move by the airline industry to expand its reach and meet the needs of its customers.
CoinMENA News 🗞
ONE BTC Giveaway is back by popular demand! Once more, we are giving ONE FULL bitcoin to 21 winners this month! For a chance to win, all you have to do is place one trade (buy or sell) for 25 USD or over anytime before Tuesday, May 31, 2022, at 12 midnight Bahrain/KSA time. It’s as simple as that!
Win $200 in BTC every week with our crypto quiz! Since our users greatly enjoyed CoinMENA’s nightly crypto quiz in Ramadan, we are bringing it back every week! The Crypto quiz will be posted every Wednesday at exactly 8 pm Bahrain/KSA time. Check out our Instagram and Twitter accounts to learn how to participate and win!
Tweet of the week 🐥
The first tweet in a thread from Do Kwon, the inventor of UST and LUNA, admitting defeat.
Quiz Corner ✅
Last week’s question: Where is the Bitcoin central server located?
Answer: Bitcoin does not have a central server
This week’s question: What was Tether (USDT) initially named?
See the answer in next week’s newsletter.