There’s a lot of confusion and panic on the MIM and UST today. Hoping this thread can provide a clear unemotional take on the situation
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As a recap - degenbox allows you to lever up on Anchor yields by borrowing MIM against aUST, selling the MIM for UST, borrowing more MIM against the new aUST, repeat...
You end up with a long UST, short MIM position earning 100%+ APY via Anchor
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You end up with a long UST, short MIM position earning 100%+ APY via Anchor
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Now if MIM peg falls under stress, there becomes an attractive opportunity for degenbox participants to cover their MIM shorts at a discount and unwind the position. So degebox unwinders effectively end up with UST instead of MIM
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They end up putting upward pressure on MIM during this process, pushing it closer back up to peg and making it less attractive for the next degenbox participant to unwind this position back to UST
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Let’s talk about the MIM peg - Overcollateralized stablecoins that use the CDP model don’t have any incentives for market participants outside of the borrowers to purchase the stablecoin at a discount
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In the MIM case, the borrowers looking to close 1%-2% arbs would be giving up their 100%+ APY yield to unwind the position, so we ‘could’ see a a continued MIM depegging for a bit until it becomes an attractive enough opportunity. Certain game theoretic element to this
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Unless it turns out that Sifu ran away with the money, seems tough to imagine mercenary capital continuing to take a hit for ideological concerns around the project. Demand for levered Anchor yield hasn’t gone away and quality of collateral in the MIM cauldrons hasn’t changed
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It’s difficult to imagine a sustained mass exodus to UST given the circumstances. In the event it occurs, there is potential for UST to be sold/burned and provide some downward pressure on Luna price. Worth noting that the UST supply is >$11B and UST in Abracadabra is ~$900M
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A $450M contraction of the economy (assuming a highly conservative 50% don't find the UST useful anymore) should be manageable over a couple days and not impactful to prospects of the project. Crazily enough, on this ‘bearish’ day, there has been a net burn of LUNA
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For full disclosure - Both, Jump and I personally, haven’t participated in the Abracadabra protocol, and have no current exposure to MIM. We do hold positions in LUNA and UST. This is not meant to be a judgement on the moral character or actions of involved parties
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The primary reason I wrote this is to understand what I got wrong. Please fire away
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