We talked yesterday about the ongoing collapse of TerraUSD, or UST, the $18 billion algorithmic stablecoin from Terraform Labs. The basic idea of an algorithmic stablecoin is that you can always exchange one UST for $1 worth of Luna, Terraform’s other cryptocurrency, which is meant to guarantee that UST always trades at $1. The risk with this sort of algorithmic stablecoin is that nothing props up the price of Luna, and so if people get worried about UST and try to cash out, they will get $1 worth of Luna, which they will sell, which will drive down the price of Luna, which will make people more worried, which will lead more of them to cash out UST and sell Luna, which will further drive down the price of Luna, etc., in what is known as a death spiral. Eventually cashing out $1 of UST might get you, like, a trillion Luna that no one will want to buy, and the whole thing might collapse.
When I wrote about this yesterday UST was trading at about $0.53, down about 47% from where it was supposed to be, and Luna was trading at about $2.20, down about 93% in 24 hours. Which sounds pretty death-spirally. And yet it wasn’t that death-spirally. Most of the holders of UST had not cashed it in for Luna, in part because the smart contract that turned UST into Luna was moving too slowly to cash out all the UST holders who wanted out. People were just selling UST on exchanges, for prices below $1, and those UST were not being bought by arbitrageurs and transformed into $1 of Luna because the arbitrage mechanism had broken down. Do Kwon, the founder of Terraform Labs and the face of UST and Luna, tweeted to endorse a plan to print Luna faster so that, you know, the death spiral could hurry up. The collapse in UST and Luna prices was not purely a death spiral happening; rather, it was market prices reflecting traders’ anticipation of the death spiral.
Today, though, things got more death-spirally. As of 11 a.m. New York time, Luna was trading at about $0.013. According to CoinMarketCap data, it peaked at $116.41 in April, and was trading above $80 a week ago. It lost 98.7% of its value between last Thursday and yesterday, and then another 98.8% so far today. It is down about 99.98% in a week. At $0.013, the market capitalization of Luna — the total value of all 3.5 billion Luna tokens outstanding — was about $45 million.
Meanwhile TerraUSD, which had rebounded a bit yesterday, was trading at about $0.49, and there were about 11.9 billion UST outstanding (down from 18.7 billion last week). People have cashed out almost 7 billion UST for Luna, which increased the supply of Luna from about 343 million Luna last week, to about 1.5 billion yesterday, to about 3.5 billion this morning. This increased supply, and the accompanying loss of confidence, drove the price of Luna down by 99.98% in a week.
Meanwhile there is still 11.9 billion UST remaining, which in theory could be cashed out for $11.9 billion worth of Luna. But as the supply of Luna has ballooned, its total value has fallen to just $45 million. If you tried to cash out 1% of the remaining UST — $119 million of face value — you would get back something like 9 billion Luna, more than double the current amount of Luna outstanding. If you sold those 9 billion Luna you would not get back $118 million. The price of Luna would drop by another … I do not have a precise number here, but let’s estimate that it’s a two-digit percentage where the first digit is a 9, and the second digit is a 9, and probably some of the digits after the decimal point are also 9s. That’s if you cashed out one percent of the remaining UST. Then you’d have to cash out the other 99%. That’s a death spiral.