The UST Unwind and Its Implications

May 10, 2022 • 7 Min Read

The Makings of a Quasi-bank Run

As if investors needed more reasons to be bearish, the market was thrown into a slight bout of chaos on Monday after a quasi-bank run on UST. Please refer to our prior work on the topic for further background information on UST’s functionality, Luna Foundation Guard, Anchor, and stablecoins.

First Peg-Break

We have ample reason to believe that the “run” on $UST was not a coincidence, but a deliberate exploit of UST’s (clearly fragile) architecture.

On Saturday, prior to any market panic, the Luna Foundation Guard removed approximately $250 million in two separate transactions from the UST-3pool Curve pool, reportedly in preparation for the launch of the upcoming 4pool. Immediately following the first LFG transaction, a seller took to Curve to swap $85 million of UST for $USDC, putting the Curve UST-3pool consisting of UST, USDC, $USDT, and $DAI noticeably out of balance. It seems apparent that this party was reacting to the already-reduced liquidity in the pool and taking the opportunity to push the pool out of balance. The seller of UST was flooding the exchange with supply at a pace that exceeded marginal demand. The sight of a supply/demand imbalance for UST created a positive feedback loop that caused bids for UST to fall. ...

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