Death Spiral

in LeoFinance4 days ago

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Well that escalated quickly...

And it still has a higher market cap than Hive... lol.

The problem with LUNA is the debt ratio.

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See look at that I step away for an hour and the price is down another 70%. LUNA is the perfect example of a death-spiral in action. I never thought I'd see such an obvious case. This is bad... this is REAL BAD.

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LUNA can't live without intervention.

Just a few days ago LUNA's debt ratio was like 80%. For every dollar of UST debt LUNA had like $1.20 in reserves backing it up.

  • Then it was 100%
  • Then it was 500%
  • Then it was 1000%
  • And now it is 4400%

All in a matter of 3 days.

LUNA can't pay back the debt using conversions.
The money simply does not exist.
LUNA needs VC intervention or even more likely to sever the peg.

There's also a very good chance that LUNA forks to a snapshot point before three days ago and "airdrops" everyone's tokens back to them before it was inflated to the moon. No matter what happens this is a situation most dire. I prefer the fork method because VC intervention just creates more centralization and ownership of the network. However that will completely kill UST and everyone who has value there.

Types of crypto death spirals.

There are surprisingly many types of death-spirals in crypto. I was beginning to think they were just pure alarmism because they never actually happen.

Type #1: Bitcoin Mining Death-Spiral.

In this situation (in theory) Bitcoin Black Swans and loses a bunch of value. Then miners have no financial incentive to keep mining, which makes blocks get mined exponentially slower. This causes a panic which dips the price and increases the mining time even more. So on and so forth until Bitcoin dies or bottoms out.

This is an interesting one because Bitcoin measures time in blocks. We might think that Bitcoin would just adjust the mining difficulty lower to make sure that blocks get mined in this situation, but Bitcoin would never make it "two weeks" to the adjustment because "two weeks" is actually however many 10 minute blocks two weeks is (6 per hour; 144 per day; 2,016 per two weeks). If no one is mining Bitcoin anymore because the energy cost is higher than the reward, two weeks never happens. The only solution to this problem is a hardfork that changes how the difficulty change works, which isn't a big problem (and has already been solved by Digibyte technology) but Bitcoin would lose a lot of reputation and value in the short to mid term.

Type #2: Collateral Liquidations.

Many algo coins (like DAI) are really a derivative of another asset. When MAKERDAO/DAI first launched the only way to mint DAI was to lock Ethereum in a CDP contract and pull stable coin DAI out of it to be paid back later. This is essentially longing Ethereum because if the price of ETH crashes the position will get liquidated to pay back the DAI.

The death spiral happens when a Black Swan event pushes liquidity lower than the debt owed back. For example, if a couple billion dollars of ETH needs to be liquidated to pay back the DAI loans, but there aren't enough buyers at the current price, then ETH will spiral lower, creating more liquidations. In this case there wasn't enough liquidity on the market to prop up the debt and everything crashes. MakerDAO has some killswitches in place to prevent this from happening and will also print out MAKER to pay off bad debt should this happen (and it has happened at least once to my knowledge).

Type #3: Token Conversions.

This is how HBD and UST work. The governance token can be destroyed or created to mint the stable coin or pay back the debt. HBD is much safer than UST because our debt ratio is capped at a 10% haircut in addition to a 3.5 day average of the price being used to mint/destroy the token. LUNA/UST has none of these safeguards in place, and billions of tokens were printed at the current market price.

Now we see the outcome of LUNA's flawed model. The price has crashed 99.9% in days and the debt ratio has ballooned over 4000%. Even with over a billion dollars worth of Bitcoin collateral backing it up, this was just a drop in the bucket and didn't help the situation at all.

Both type 2 and 3 of the death spiral scenarios revolve around pegging stable coins with thin liquidity pools. Obviously this is a very flawed way to provide elasticity and stability to a market because more often than not the volatile asset ends up getting dumped at the bottom. Pegging a stable asset with a volatile asset just makes the volatile asset more volatile. Everyone celebrates the higher highs but no one wants to pay for it on the way down. Classic crypto tokenomics. LUNA/UST was the ultimate example that will be showcased in the history books for decades.

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Sharks smell blood!

Another huge problem with the LUNA debt ratio is that short-sellers know it's basically impossible for LUNA to pay back the debt. This is true no matter what the price of LUNA is a this point. That means that short sellers can basically short LUNA at any price with the reasonable assumption that it will just keep dipping lower and lower. Now that one entity has exploited the terrible tokenomics, everyone is doing it, and there are no signs of it slowing down. Without serious intervention the value of LUNA and UST should drop to basically zero over the course of the next few weeks. Sad times.

Conclusion

The market is very depressing right now, but there's a lot to be learned and a lot of work still yet to be done. Crypto is in its infancy, after all. That being said, bear markets are for building. We see the biggest developments and evolutions when we are the most under threat. I'm excited to see what we come up with this time around. A full blown recession is right around the corner, and we can only hope that crypto will outperform the stock market over the next 18 months. I think we will, but you know me; ever the permabull no matter what happens. Crypto is already oversold at this level. Hopefully that will flip into an advantage rather than a liability after the dust settles.

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Death spiral indeed, a friend of mine weeped to see his $300 Luna run down to $3 😳 I can only imagine what would become of those who depend on crypto solely when they are supposed to just have it as a side hustle.

Well, we've got to face our reality

It's the bear time and no one knows when it's going to come to end but I will still applaud those who buy the dip (Would have joined if I had enough money to spare).

but you know me; ever the permabull no matter what happens

Yey! This is so cool, just keep it up sir... Better days ahead for sure 🙌

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Yea, some people got smoked really badly. I've heard some individuals lost millions

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I've heard so too, I only hope they get through this somehow 🤦‍♀️

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I honestly understand very little of what you wrote. Despite hanging out in LeoFinance, much of this stuff is still over my head. I'm glad people like you get it. I hope enough people who understand the situation can provide enough influence to protect Hive from anything similar.

!PIMP

Here's another attempt at describing a death spiral that may help (I just read that one, before reading this one): https://hive.blog/hive-167922/@lordbutterfly/luna-ust-shitshow-you-should-probably-avoid-buying-the-dip

The good news is, Hive community has long been aware of the potential threat of a death spiral and therefore there are strong safeguards to prevent it.

I've been having this discussion with quite a few others on HIVE.
What exactly are the safeguards that HIVE has?
Is it the fact that HBD is limited to 10% of HIVE?

Could you point me to an article if possible? Thanks! 😊

Is it the fact that HBD is limited to 10% of HIVE?

Yes, this is the big one. Currently the proposal is to increase it to 30% with the next hard fork, but that's still a very conservative value.

Could you point me to an article if possible?

This is a good starting point, and I've added some comments to attempt to clarify the key protection:
https://hive.blog/hive-167922/@taskmaster4450/hbd-defenses-how-hbd-is-different-from-ust

Sometimes these things won't click until you come back to it from other angles over time.
Learning takes a lot of time and energy.

exactly

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You must be killin' it out here!
@dbooster just slapped you with 1.000 PIMP, @edicted.
You earned 1.000 PIMP for the strong hand.
They're getting a workout and slapped 1/2 possible people today.

pimp_logo


Read about some PIMP Shit or Look for the PIMP District

I bought $20 of LUNA as a total gamble, lost 50% of the value, now it bounced back to like 75%

fun :)

I saw that in your previous comment and was wondering if you're gonna do a post on what it does over the next little while. If nothing else, it will be an interesting experiment. I can see people doing a betting pool on this kind of thing in offices.

well right now my $20 turned into $2 as they turned off the network :)

but it is still tradeable on kucoin and it is wild rollercoster of +/- 50% gains and losses :P

Lol ok, well that ended quickly then...not too much of an experiment but hey, it was worth it for that brief moment of rollercoastering right? You seem to be an adrenalin junkie hahaha. I'm glad you shared this humour with us. Thank you :)

To rise back with such a heavy fall wouldn't be easy as the crash of LUNA is shocking.

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Without serious intervention the value of LUNA and UST should drop to basically zero over the course of the next few weeks. Sad times.

That's a basic fact. A debt of over 4000%? LUNA is really gone. I wonder how they were able to rise to stardom with such holes you pointed out in their tokenomics.

BTW, what do you think will happen if mining cost of BTC is consistently higher than the rewards? Will it die a natural death or just loose it's market dominance?

The situation in the crypto market really needs serious intervention.

The theory of a Bitcoin mining death-spiral falls flat on its face in reality.
That's because many miners pre-pay for energy (or create the energy themselves).
Also Bitcoin can be bought on sold on exchanges off-chain which stops the spiral.
For example how can Bitcoin crash to zero if you can't even transfer it to an exchange to dump?
The theory is full of holes and is instantly fixed by a hardfork.

Leveraged stable-coin death-spirals are clearly much more dangerous.

There's also a very good chance that LUNA forks to a snapshot point before three days ago and "airdrops" everyone's tokens back to them before it was inflated to the moon.

I've seen other people mention something similar. I'm not sure how I feel about it though. Going that route seems to be rewarding risky behavior. Like there are no consequences. I guess if it was a bad actor then that might be okay, but getting burned can be a learning experience too.

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It's not rewarding risky behavior it's just picking up the pieces of a broken community.
There is no reward.
They've permanently lost reputation and can only earn it back after years of hard work and dedication.

True, so you think even if they were to fork it wouldn't be a sudden recovery. Like a long long long long long long game scenario?

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very long
they can't get back to the old market cap because the old market cap's entire foundation was unsustainable LUNA > UST conversions. they destroyed so much LUNA to get that market cap, and now they can't repay the debt.

i thnk they should abandon the Stable coin. Sucks for the people in the coin but then use the BTC they had to pay everyone as much as possible. Keep the coin as it was, bin the unstable stable coin. I guessing it wont work but its just a quick glance idea.

The thing those who have invested in Luna should tell themselves now is, when there is life, there is hope if not, they might end up losing their life.

For those that are not affected directly it is wise we learn from what's happening now because is a really big shock to a lot of people. Take this opportunity and make good use of it.

You did really well explaining this to us, all I have to say is Well done 💕💕.

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Luna!! Luna! Luna! What an experience, in a way, I can’t help but have the feeling that it’s a scam. It was rugged so hard and bad. Someone must have pulled the plug somewhere

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To be honest, what I can see in this situation with luna is that the most viable solution is the launch of a token 2.0 but with rewards of 15% or 20% to those who owned tokens before this crash, as trading will not make the price grow and it will slowly fall into oblivion.

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We are still learning.
Hive is a different beast compare to Luna.
Slowly grow is a lot better than quickie
!BEER

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Sorry, out of BEER, please retry later...

I agree, only with slow growth can difficult situations be controlled and have time to fix them

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I saw the crash and bought 10 bucks worth of Luna. Looks too good to pass up as far as a trader is concerned

Crypto is in its infancy, after all. That being said, bear markets are for building.

I've never had a single LUNA but it affected the whole market. In my opinion, there will be so many depegged and attacked stablecoins until we can totally save ourselves from these frauds.

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The HBD debt level is low at 10% right now, but from July it will raise to 30%.

We need to be careful with that.

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Maybe Justin will take over and make a token swap to TRON, seems like his type of action. But the USDD will be frozen for 500years after the airdrop and the only way to unfreeze the coins is to massage his feet.

More hands make for a better massage.

  • Aristotle 344bc

There are actually degens who believe this thing is going to magically recover 🪄🦄🧌 This thread is hilarious…

Crypto_com/comments/uo8146/thoughts/?utm_source=share&utm_medium=ios_app&utm_name=iossmf reddit metadata:fENyeXB0b19jb218aHR0cHM6Ly93d3cucmVkZGl0LmNvbS9yL0NyeXB0b19jb20vY29tbWVudHMvdW84MTQ2L3Rob3VnaHRzLz91dG1fc291cmNlPXNoYXJlJnV0bV9tZWRpdW09aW9zX2FwcCZ1dG1fbmFtZT1pb3NzbWZ8 ~~~

Well that was something to behold. I didn't think I'd see a project die in like 3 days.

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I went back to see how IRON did on their stablecoin and it looks like UST had a similar problem. So I think this death spiral was always possible and I saw a few videos where they showed how Do Kwon was angering the billionaires. Either way, it just looks like a huge mess after everything ended.

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The article is detailed and crypto traders in Nigeria where am from are feeling the heat. Lets hope for it to rise again

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Really nice summary of events that could happen! I wonder if something from this will be useful for future improvements of the system we have in place with hbd/hive

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Thanks @edcited for breaking this down for a pleb like me. :')

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The memecoin degens are currently swinging the burning carcass that is LUNA. Are LUNA stackers trying to catch a falling knife or are they playing hackysack with it?

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Today May 15, in the coinmarketcap ranking, HIVE is in 134position, TERRA in 209 position. I never imagined that this DPOS blockchain challenge could go like this

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i feel like pretty soon you'll be batting for bitcoin myk edicted. this just the beginning of the end of your world. it's going to get alot worse than that as soon as Elizabeth Warren get here. You'll be sorry alright. remember how you taunted us? i told you it would be a cost to that

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