The Terra-Luna Syndrome in DeFiby@cryptoparadigm5
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The Terra-Luna Syndrome in DeFi

by moebiousSeptember 10th, 2022
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Many users in DeFi have developed a special crypto-syndrome related with their recently acquired knowledge about the events happened with Terra-Luna tokens some months ago. Luna peaked at $119 and crashed to near zero at the beginning of may this year, wiping out some billions of dollars generating a cascade effect in the whole crypto ecosystem. The treatment for this syndrome is free, good for soul and no vaccination is required, so this are my personal recommendations: Learn what is a cognitive bias, know yourself and be curious.
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Case Example and recommended treatment

Def. Syndrome: a set of symptoms or conditions that occur together and suggest the presence of a certain disease problem or an increased chance of developing the disease problem.

Since the Terra-Luna crash, many users in DeFi have developed a special crypto syndrome related to their recently acquired knowledge about the events that happened with these two tokens some months ago. If you are just awakening from a comma or arrived from an island without internet, you just need to know for now that Luna peaked at $119 and crashed to near zero at the beginning of May this year, wiping out some billions of dollars generating a cascade effect in the whole crypto ecosystem.

Due to this newly developed crypto syndrome many users or investors, in the process to decide if they purchase a token, tend to draw a permanent comparison between the token researched and the Terra-Luna tokens.

These are some typical conclusions:

  • If the price has fallen exponentially, then it’s likely to be as Luna
  • If the supply is elastic is using the same dynamics as Luna
  • If there is a stable that depegs and it’s elastic, it’s like Luna.

Example of diagnosed degen with the syndrome

This kind of reasoning leaves aside any objective comparison. Blockchains are complex systems of persons, code, ideas and values, vision, tokenomics design, governance, technology, and use cases. Drawing this kind of conclusion is not different from saying: “I live in a democracy because I can go and vote for a 3rd party that will take decisions for me every 4 years”…

But don’t worry, the treatment for this syndrome is free, good for the soul and no vaccination is required, so these are my personal recommendations:

1.- Learn what is cognitive bias, know yourself and be curious. There is a good example in this recently published article also in Hackernoon.

2.- Read about the blockchain/token you are interested in, and check the facts (block explorers, governance votes, systems in force, development status, risk assessments, others…)

3.- Research the underlying facts that lead to the consequences in Terra-Luna

4.- Ask politely in the official channels of the token researched questions that include the similarities you have found to be informed.

With this easy treatment, you will be able to draw conclusions in a rational way, and in a Fearless mode. You will be able to move in the DeFi world with your own based opinion and knowledge, and you will have arguments to back your conclusions. It will also allow you to make productive decisions in your DYOR process, without dismissing projects with amazing growth potential.

Case Example: Terra-Luna vs XOR or XSTUSD

Since the last may events in relation to LUNA, I have noticed an increasing number of users questioning in the official SORA channels where I participate, if the XOR or XSTUSD tokens are the same as Luna. Curiously, in the previous 12 months, nobody suggested at any moment any similarity between both networks. It’s pretty clear that many users have come to an “ex-post” assumption due to a price behavior simplistic comparison. So let’s take a look at the underlying facts, as part of the recommended treatment for the syndrome.

The Vision and Objectives

While Terra-Luna (by the way, Earth-Moon translated from Spanish to English) is a stablecoin proposal with a double token system, based on the whitepaper Segnoriage Shares by Roger Sams with the double token system dynamics explained in the paper, SORA is both a supranational New World Economic System (NEWO) that decentralizes the concept of a central bank as well as a network in the Polkadot ecosystem that will connect to the Polkadot relay chain and the parachains with built-in tools focused on DeFi, designed for the common good.

In other words, Terra proposes an algorithmic stablecoin use case where you can benefit both from the volatility absorbed by the Luna token and the stability of the USDT. In SORA, the value proposition is a new crypto economic system that can boost countries’ GDP to the next level, being the XSTUSD just one of the many use cases available.

The Governance differences

With the majority of users and investors focusing on tokenomics design to forecast a price chart, little attention is paid usually to the governance of the Network.

The SORA community is actually using the on-chain Polkadot governance interface for the key decisions about money allocation for productive purposes, while an optimal democratic system is in development: The SORA Parliament.

In Terra-Luna, many times marketed as a Decentralized Finance service, the founder Do Kwon has managed (through the shadow foundation LFG where the community doesn’t participate) to mint millions of $USDT and give them away to the Anchor protocol, in order to provide a very attractive 20% yield that will attract all the DeFi users looking for a safe haven, with one of the highest and persistent yields from all available options both in crypto and fiat worlds. This situation propitiated an attack vector that was later exploited.

The Elasticity concept

Interestingly, the Terra-Luna elasticity dynamics with respect to supply have been described on several occasions as a decentralized bank with an algorithmic monetary policy. Not considering that the allocation of the money created is as much important as the same act of money creation.

With respect to XOR, the elasticity of the supply is a consequence of 2 facts:

  • The algorithmic Token Bonding Curve is designed for price forward guidance once reserves are depleted
  • The decisions are taken by the community regarding the new fund’s allocation

But regarding the XSTUSD vs Luna comparisons, the syndrome appears stronger: they must be the same because you mint one token to demint the other one…Some funny journalists have confirmed that LUNA has a dynamic supply of 1 billion coins.

The Peg

In Terra-Luna, the minting and deminting take place when arbitrageurs purchase or sale tokens for profit, with an incentive system designed to equilibrate the demand and offer with respect to a $1 target price. If the incentive disappears, peg is lost. If the arbitrageurs conclude there is no potential profit, trust in the future of the stable disappears.

Surprisingly, XOR currency doesn’t provide any economic incentive to mint or demint XOR for XSTUSD. This is simply driven by real demand or offer of the XSTUSD synthetic applying the exchange rate for the XOR-$ pair (DAI price feed) at any given moment.

Given that XSTUSD is protected by a floor price governed by the community and will also be protected by a Token bonding Curve with reserves, a Soros attack type is not possible to perform.

The Segnoriage vs the Common Good

The Segnoriage is the profit made by the authority issuing a currency, especially the difference between the face value of coins and their production costs. In the case of XOR, the cost of minting or deminting XSTUSD is the same as swapping any other token (not considering slippage). SORA tokenomics are designed to revert the value generated by the use of the Network back to all the users, being therefore a global economic system designed for the common good of humanity.

In a sense, Terra-Luna is acting like any central bank, because a fee (segnoriage) is applied just for the right to mint a coin. This kind of profit is not very different from paying miners for the coin they are minting.

Post-Treatment considerations

The idea is that many times our decisions ( I include myself here) are usually based on concepts and ideas raised by mainstream crypto media. Just after the Terra Luna attack, hundreds of articles appeared advocating for fiat-backed stablecoins, claiming their “safety” and robustness.

Elastic supplies are not new in crypto but are difficult to understand when users are biased with the BTC fixed supply vs Fiat Quantitative Easing policies.

In the end, by following the suggested recommendations: reading, learning, researching, and asking, at least you will be sure that you are taking your decisions based on your own ideas.