TerraLUNA crisis? If just 6.4% of funds leave the fourth largest stablecoin UST, the peg could be severely compromised.

Twitter account 0xHamZ's analysis of potential risks with Terra blockchain stablecoin UST suggests that a mere 6.4% outflow of funds from UST could lead to significant price decoupling. Here's a summary:

0xHamZ notes that Terra is playing a new game under the old name of "capital control," allowing over 30 million UST stablecoins to be exchanged for LUNA on-chain at a certain price spread.

"In reality, if only 6% of Anchors' deposits are withdrawn, UST will completely deviate from the expected price anchor," according to 0xHamZ.

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0xHamZ's Inference: UST Hub Anchor in Peril

0xHamZ believes that the dwindling Yield Reserve can indicate the continuous deterioration of Anchor's lifecycle Runway.

Anchor heavily relies on borrowing behavior to pay interest to depositors. However, while deposits have grown by 20% in 3 weeks, both borrowing behavior and borrowing interest rates have been consistently decreasing. As shown in the chart below, you can see that the amount of deposits has far exceeded the borrowing demand.

Therefore, Anchor's lifecycle is now in a precarious situation. 0xHamZ illustrates Anchor's financial data in the chart below:

0xHamZ believes that the Terra founders may sell Luna Foundation Grants (LFG) to support the Yield Reserve. This indicates that the reserves of Anchor may continue to increase, but borrowing behavior will not increase accordingly. The purpose of LFG, as officially stated, is a non-profit organization set up to maintain the stability of UST and allocate resources to support growth and development.

90% of UST is used in fixed-rate agreements Anchor, especially for collateral. The other two places are: synthetic asset agreements on the Terra chain Mirror and the decentralized exchange Astroport. Anchor continues to offer around 20% annualized interest rates, making it increasingly attractive in the market. What would happen if Anchor reduces its annualized returns?

In response to concerns about Anchor, Terra founder DoKwon also explained. He stated that the purpose of the fixed-rate agreement Anchor is to allow people to have stable returns in stablecoin financial management, and the Yield Reserve is key, as long as the profits exceed the anchored interest rate, it can operate normally. Even if the Yield Reserve is depleted, Anchor can still operate based on actual market returns, and with collateral and borrowing incentives, it will still provide around 15-16% returns. Anchor can still offer the highest return. He also mentioned that Anchor is working on bridging the gap between deposits and borrowing, such as creating more collateral derivatives and providing liquidity for them, as well as attracting users to cross-chain adopt collateral derivatives for borrowing, etc. In the future, they will also actively reduce the dominant position of LUNA in collateral.

How Much Money Leaving UST Will Disrupt Stable Prices

0xHamZ believes that there are three ways to transfer UST into other assets to allow money to leave the system:

1. Convert UST to LUNA on TerraStation
2. Convert UST to LUNA on Astroport
3. Cross-chain to Ethereum, then exchange through Curve's 3pool

0xHamZ simulated how to withdraw thirty million U.S. dollars and found that Method 1: converting UST to LUNA on TerraStation would result in a 65% slippage, making it impractical.

Method 2, converting UST to LUNA on Astroport, would also incur a 30% slippage:

Method 3, cross-chaining to Ethereum and exchanging through Curve's 3pool, would result in almost no slippage. Therefore, it may be a pathway for a large capital outflow.

So how much money would cause the anchored price to become unbalanced? The answer is forty million UST, which only accounts for 6.4% of the current deposits; this shows that the liquidity of capital outflows is limited and quite fragile.

0xHamZ's Conclusion

In conclusion, 0xHamZ believes that because two of the three capital outflow paths for UST cannot be used for large-scale exchanges on the Terra chain, it is akin to capital control. Only through Curve can capital outflows be achieved, but with restrictions. 0xHamZ reveals the risks brought by the composability of DeFi. If one protocol encounters issues, in this economic system built on Lego blocks, the entire system will be affected.