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UST and LUNA: What Went Wrong?

Sarson Funds Analysts React to the Collapse of UST and LUNA.
Key Takeaways
  • The Terra Ecosystem has collapsed. Terra's UST stablecoin lost its peg to the dollar and the LUNA token has lost more than 99% of its value in just a few days.
  • The Terra ecosystem has lost $50 Billion in value.
  • Sarson Funds analysts digest the unfolding and what may be next.

Stablecoin UST, from Terraform Labs, lost it’s pegging to USD, which led to a cascade of events and saw a run on the algorithmic stablecoin, leading to a collapse of UST and LUNA.

What happened and what does this mean for the digital asset landscape? We asked the Sarson Funds cryptocurrency analyst team for their take. Here’s what they said:

Zachary Profeta, Portfolio Manager:

“Its no secret the recent market dumps has been extremely tough on all of crypto, but this is nothing we haven’t seen before. Tokens that did a 10x in November are now down to where they were or below exactly a year ago today. One project to take notice in a time of downward price movement is Helium (HNT). This time last year Helium was trading around $17 a token. There were less than 40,000 Hotspots supporting the decentralized wireless network around the world. Majority of the data credit usage was from location assertion of new hotspots. This past year the network grew to about 800,000 Hotspots around the globe. Helium has secured about half a Billion dollars in equity funding from Major Telcos and Venture Capital firms, onboarding over a dozen new hotspot manufacturers to field the emergent demand.

The 5G network has grown to 5,500 hotspots compared to its blueprint stage a year ago and is soon onboarding DISH and Gigsky for data roaming through their network. Companies like Senet have begun using the Helium network to increase efficiency of water monitoring services and freight tracking in Municipalities on a global scale. It won’t be long till every IOT device is operating on the Helium network as its low cost of data transmission has proven to be best in the game. May 11th marks a special day in Helium’s existence as the day light hotspots go online, which is possibly the largest update to the Helium network since the introduction of validators last July. All this being said, Helium has shown to be the most viable real world use case for crypto currency incentive-based models. Smart devices, rural 5g cell connection, water monitoring and agriculture tracking is just touching the surface on the range Helium can have for future development. In a Market downturn like this, it’s important not to lose faith in projects that have only built a stronger thesis and have continued to show the true power of cryptocurrency.”

Jonathan Cagle, Portfolio Manager

“My take on the LUNA/UST: With algorithmic stablecoins, there are always risks of exploitation - this risk is magnified in inefficient marketplaces. In volatile markets such as these, M1 asset-backed stablecoins (such as USDC) will be preferable, as the coin has a much higher probability of maintaining a 1:1 tethering to the USD. The cryptocurrency space as a whole is still in its infancy when compared to the traditional financial system. Because of this, fewer dollars are needed to move markets significantly in either direction, and with leverage trading now becoming more prevalent, buy and sell pressures can be logarithmically amplified by orders of magnitude.

Irrespective of inflation pressures, the utmost important factor is being able to maintain the value of $1 (hence the classification 'stablecoin') being equal to $1 USD of fiat money. For the time being, I’m willing to sacrifice decentralization for security of the peg. USDC is the stablecoin play for the time being until Terra and UST can work their way back to $1, if they ever do.”

Jenny Mongan, Research Analyst

“While the market today continues to stay bloody, I have found some green. At current time of writing, Maker (MKR), a governance token for the decentralized lending platform, MakerDAO, is up 18%. The Maker tokens unique quality is its ability to act as a voting share for its holders to make direct decisions to the Maker Protocol. Although only partially backed by USDC, MakerDAO is currently one of the most popular DeFi applications on Ethereum. Maker's main focus is to maintain and operate the soft-pegged stablecoin, DAI. DAI has successfully maintained its stability through these trying times, unlike its cousin UST whose value is tied to its balance with Terra's native token, Luna. Because of the imbalance between the UST and LUNA token economics, what was once championed as the most scalable stablecoin, UST has failed to maintain its dollar peg. Terra UST is currently trading at 54 cents.”

David Gamble, Portfolio Manager

“The Terra ecosystem, which is comprised of Luna and UST, has been one of the leading projects within the decentralized finance niche. In the last several days the instability of a flawed algorithmic stablecoin and questionable tokenomics led to the historic exit of nearly 28 billion dollars from the terra ecosystem causing some distrust in DeFi. That flow of capital is now finding its way into over collateralized stables like DAI and USDC also forcing a spotlight on more seasoned projects such as AAVE & Maker. As the decentralized finance space takes a couple of steps back, I believe this creates an amazing opportunity for derivative specific projects to be what will continue to create true value in DeFi. OPYN is a DeFi-native derivatives and options infrastructure project. I believe there will be significant growth in derivatives DeFi projects that bring light to the power of blockchain technology for derivatives markets. ”

About Sarson Funds:

Sarson Funds is an independent provider of blockchain technology and cryptocurrency marketing and educational services. The firm serves the Financial Professional community and its clients by providing cryptocurrency and blockchain technology educational services and investment solutions. Sarson Funds maintains a Fiduciary Standard at all times, bringing Wall Street standards for research, risk management, and transparency to digital asset investing. Along with our Investment Manager and Financial Advisor partners, we believe that disruptive innovation requires a disciplined approach to risk management and education.

Key Takeaways
  • The Terra Ecosystem has collapsed. Terra's UST stablecoin lost its peg to the dollar and the LUNA token has lost more than 99% of its value in just a few days.
  • The Terra ecosystem has lost $50 Billion in value.
  • Sarson Funds analysts digest the unfolding and what may be next.
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