LFG killed its own creation because of flawed design
Leading blockchain analyst Willy Woo has exposed a major flaw in Terra STU design that may have potentially created a “death spiral” for LUNA and UST assets.
Woo saw the main flow in the backing mechanism in which Luna Foundation Guard is pledging to sell its BTC holdings in favor of UST, which should have increased the value of the stablecoin and not leveled any pressure on Luna.
But the reality is not even close to what should have happened on paper. Luna Foundation Guard held billions of BTC which it immediately dumped into the bleeding market, creating a horror show for market makers and investors.
The additional selling pressure from LFG caused a crash in BTC, which in turn dragged the entire market with it, including LUNA. With rising Bitcoin dominance on the market, Luna continued its fall, which practically meant entrance into a death spiral in which LFG had to sell more BTC and Luna would drop dragging UST with it.
Woo’s point was that LFG’s actions were counter-intuitive and accelerated the de-peg due to LUNA’s support mechanism.
A less counterproductive and potentially correct way of handling the situation was not the immediate dump of BTC on the market, but a slow and steady inflow of funds into UST, which should have created less pressure on the market, and on Luna in particular.
At press time, Luna has lost around 100% of its value, falling well below one cent. As for the UST algorithmic stablecoin, it is trading around $0.1 and needs to gain around 1000% to get back above the peg.
