TL;DR: The algorithms that work to maintain the value of algorithmic stablecoins like UST also function as death spiral convertible bonds. Exactly the same way. But really, read it all.

Many of you will have seen u/MovieUnderTheSurface‘s DD from last month on death spiral convertible bonds. If you haven’t, I would strongly recommend reading it but you don’t need to in order to understand this post. I’d also recommend taking a look at my post from the other day about UST and its potential correlation to GME. The TL;DR of that post is that UST has unpegged multiple times before on significant dates for GME, including apparently participating in the sneeze. Since that post, LUNA has gone to 0 and UST has also stopped trading.

• Intro to stablecoins

Stablecoins are a type of cryptocurrency that are designed to always stay the same value. Some of them track the price of gold (“being pegged to gold”), some of them track various foreign currencies, but a lot of them track the good old USD. Since cryptocurrencies are traded on the open market, there would be all kinds of natural pressures that would slowly shift it off peg. Different stablecoins use different mechanisms to counteract this. Some of them, like USDC, are fully collateralized, meaning that for every coin in circulation, the issuer has $1 of hard collateral reserve and thus the value of the coin is closely tied to the value of the assets. Others, like USDT, Tether, are “fully collateralized” with what is definitely totally not Evergrande bonds, but that’s another story.

• UST, LUNA, and Death Spirals

UST is a third type, an algorithmic stablecoin (“algostable”), which are designed to maintain their value through some other means, often through a relationship with another token. In the case of UST, the corresponding token is LUNA. The way that UST maintains its value is that, at any time, you can burn $1 worth of LUNA for 1 UST, or you can burn 1 UST for $1 worth of LUNA. You see where this is going?

A death spiral convertible security is similar to a normal convertible security, with one key difference: instead of getting X number of shares, I get X dollars paid in shares.

So, if UST were to fall below its peg, you would be able to buy UST and immediately burn it for more value in LUNA than you just paid for it. Then you sell the LUNA on the open market, driving the price down. Rinse and repeat, but now LUNA’s price is lower so you get more. To make matters worse, UST is essentially collateralized by LUNA, so as the value of LUNA crashes, it becomes harder and harder for UST to get back up to its peg and break the cycle. This then leads to runaway inflation of LUNA. A week ago, there were about 350M LUNA, by the end there were over 6.5T(!!!) a 20,000x dilution. And, as if all that wasn’t bad enough, whoever engineered the crash was also likely short selling into it before and during.

This is the exact mechanic that makes death spiral convertible bonds so dangerous. Only this time, it’s crypto investors buying the death spiral instead of failing companies. I am actually shocked with how close this parallel is, to the point that I can’t believe this is an accident. So, if this were some sort of intentional plot to create bagholders by selling death spirals directly to retail, surely there would be shills, right?

• The Shills

In this case, I’m looking through the coinmarketcap comments sections for UST and LUNA. This page is the first result on google for these coins, and so would likely be targeted by shills if a shill campaign were in progress. Just like we see with other shill campaigns (cough cough popcorn subreddit was created on 1/27/21 cough), there are attempts to co-opt ape style language and emojis all over.

There are the badly coded bots, like this bot which apparently failed to pull the price numbers, rendering the message hard to even understand at first. I suppose this could also be an extremely lazy copy paste, but the point is the same.

There are the painfully obvious political bait posts. So so many of them. How is he possibly relevant to UST?

Then there are the bald-faced lies. The minting of LUNA tokens cannot be stopped because they are freely interchangeable with UST. This process always values UST at $1, even if it has lost its peg. This, ironically, is supposed to ensure UST stays on peg. As long as UST is off peg, massive amounts of LUNA will continue to be minted as people buy UST for pennies on the dollar and convert it to a whole dollar of LUNA, no matter how low LUNA’s price is. This process cannot be stopped except by UST restoring the peg, and that’s not happening before they both go to 0.

Absolute pants on fire. You can check any other resource to confirm, but here’s coindesk showing supply in the trillions.

This is the opposite of the truth. One cannot recover without the other.

No, no it isn’t.

And on and on and on. I think I’ve seen my fair share of shilling in these 84 years, and these comments sections are a dumpster fire of shills. Take a look yourself, and you’ll see even more blatant shills if you sort the comments by newest instead of best, or look through the sub-comments on some of the top rated ones.

• The Bottom Line

It sure looks like someone decided that selling death spirals to failing companies wasn’t good enough, they wanted to sell them to retail too. And through the (dark) magic of cryptocurrency, their dreams were made manifest. How shocking that there are already rumors Citadel is involved in crashing UST/LUNA.