In the first chapter, one can derive that 1 UST is actually only worth like 0.72 dollar using the non-redeemable discount of ~28% that is calculated using the public data from Grayscale Bitcoin Trust.

In fact, if taking into account of the US CPI of ~10% per annum, one can say 1 UST is worth even less, only ~0.62 dollar in one year’s time presuming the same CPI throughout the year.

So Anchor Protocol exists in Terra Luna’s ecosystem as a yield platform, to create utility for UST mainly.

If a stablecoin has no yield, no one will even want to hold them.

“Yield is the holy grail of Defi. High APY is the best sales pitch”

Chapter 2: Why Anchor Protocol is a Ponzi Scheme

So Anchor Protocol warrants 19.5% APY, not bad huh?

Let’s have a look based on the 6 April data from Anchor Protocol’s perspective.

Liability side

$12.45 billion UST paying users 19.5% APY so it means $-2.45 billion of UST payout in 1 year’s time.

Assets side

$7.09 billion collaterals (bonded Luna, bonded ETH, staked AVAX) generating staking yields and UST minting/lending income.

Staking yield examples are 6.5% on Luna, 3.9% on ETH, 11% on AVAX. So let’s say on average 6.5% APY staking yield.

Collateral backed UST minting/lending (borrowing for users) yield is a net of 5.92% APY. This is a sum of actual lending yield of 13.29% and a payout of ANC rewards of 7.38%.

Income vs Cost

Income 1 is staking yield of $0.46 billion, which derives from the $7.09 billion collaterals generating 6.5% APY.

Income 2 is the collateral backed UST minting/lending income of $0.27 billion, which derives from the 65% borrowing limit over the $7.09 billion collateral that is charging a net 5.92% APY.

So total income (sum of income 1 and income 2) is $0.73 billion in 1 year’s time.

There are still $0.34 billion of yield reserve remaining.

So total income plus reserve is $1.07 billion, not sufficient to cover the cost of $-2.45 billion payout in one year’s time.

The annual $-1.35 billion Income vs Cost Deficit of Anchor Protocol

So this is a huge deficit, the elephant in the room that no one talks about.

As the projected annual income is only to meet ~43% of the projected annual cost.

In other words, the runway (the days left till bankrupty) for Anchor Protocol is 0.43*365 = 157 days or 5 months if nothing changes.

Or UST needs to devalue 57% to breakeven.

So it means 1 UST = 0.43 dollar, so this is an even lower intrinsic valuation for UST compared to using the GBTC non redeemable discount.

That’s why the protocol/community is trying to change to a lower dynamic yield as the current one is heavily subsidized and not sustainable in the long run.

One can argue that Anchor Protocol is no different than the infamous DeFi 2.0 the high APY projects like Olympus DAO OHM (>900% APY)and Wonderland Money (>80000% APY), both are ponzi-schemes according to many people.

Anchor Protocol is only using lower APY to have a longer runway.

Unless Anchor Protocol is making some drastic changes to fix this loss-making/bleeding situation. Sooner or latter there will be a bank run like what happened to USDN and Wave today.

This is not an attack, this is a Call to Change on UST to avoid future systematic failures on the #DEFI space.

Guys, let’s be realistic, there is no such thing as “free lunch”.

Chapter 1: Why 1 UST = 0.7223 dollar

By design, UST is backed Luna another crypto currency, so essentially it is a crypto currency “derivative”.

This sounds familar? CDOs that caused the sub-prime financial crisis in 2008 are also “derivatives” that derived nominal values from the underlying assets thus having certain flaws by design.

During the Normal Market Conditions (when there are abundunt liquidty from retail/institutional investors), 1 UST could be swapped (i.e. traded) back 1 USDC or 1 USDT or directly with fiat currencies through many CEXs.

USDC and USDT are only two real dollars or dollar assets backed stablecoins in the crypto world.

1 USDC is fully backed by 1 fiat dollar and could be redeemed (or “burnt”) back to 1 fiat dollar.

Similarily, 1 USDT could be redeemed through a process (though takes time) via its issuer back to 0.99 fiat dollar roughly after fees. So almost as good as 1 USDC.

The above holds during the Normal Market Conditions as well as during the Stressed Market Conditions (think of a market panic, accompanied by stress, volatile price movements, chaos, fake news, and network jams, or simply lack of liquidity during the “crypto winter”).

However, UST can’t do any of this. Because UST is not “pegged” to 1 fiat dollar or not backed by 1 fiat dollar.

During the Stressed Market Conditions, UST might loss its anticipated 1:1 peg to 1 USDC, 1 USDT, or 1 fiat dollar easily.

First of all, the UST “peg” itself is not real since there is no fiat dollars circulating in the crypto world. So the “peg” of 1:1 to 1 fiat dollar itself is flawed.

It is really a “common agreement” or “gentlemen’s agreement” or just “confidence” in the UST/Luna/Terra system — which is now as the protocal is really hyped.

No fiat dollar is backing UST and nowhere you can “redeem” your UST back to 1 fiat dollar. Even Luna Foundation Guard can’t help you.

This is a common issue with many algo stablecoins or crypto-native stablecoins (for instance DAI). These non-backed algo-balanced crypto native stablecoins can’t get redeemed back to real world fiat currencies.

The only option is to trade, i.e. sell to the next willing buyer.

You can only sell or trade your UST to another cryptocurrencies like USDC/USDT/BTC/ETH/SOL through CEXs or DEXs or dApps.

So it’s not “redeem”, it is really a trade, or a secondary sell of UST. And the trading price is always subject to market conditions.

Under the Stressed Market Conditions, when no one has confidence anymore in Terra, Luna, UST, Anchor protocol, you will have to sell your UST deposits at discounts mostly likely.

Remember, traders, arbitrager, flash boys are not angels, they are mecenaries. They won’t be holding the bags. They only trade and arbitrage when there is a way out on the back-end to make a nice profit.

The so called market arbitrage mechanism that keep UST’s imaginary “peg” to 1 fiat dollar will only work during Normal Market Conditions.

In stressed times, everyone will run for themselves.

So the reality is, you keep your UST, and Luna Foundation Guard or CEXs keeps your hard earned fiat dollars (or any other assets they used your dollars to purchase).

In other words, your UST is worth at best 1 USDC/USDT/1 fiat dollar, and might be less than 1 USDC/USDT/1 fiat dollar during stress times.

The GBTC comparison

The same issue is faced by the very popular GBTC, whose trust shares once issued can only be sold in a secondary market to the next willing buyer & can not really redeemed back as Bitcoins. So GBTC is trading consistently at a discount over the past period like~10–30% discount to Bitcoins. Of course, this is also partly due to its ~2% management fees.

If we use the GBTC discount (-28.11% per 31 Mar 2022) as the industry benchmark as a rough proxy/indicator, your 1 UST is actually only worth 0.7189 fiat dollar.

See below the screen cap where you can calculate the discount = 30.54 (market price)/42.28 (intrinsic value) -1 = -28.11%.

Think about it guys, after earning 1 year of ~19.5%, your UST will be worth 0.8592 fiat dollar. Congrats still not yet breakeven after 1 year.

So if you buy a UST now, you suffer an immediate loss of -28%, which is greater than your return of +19.5% over one year’s time. Not a good trade in my view.

Remember, SAFETY is always the first question you ask for any assets incl. crypto. Yield only comes second after SAFETY.

When I have time, I will write more about UST/Luna/Terra Protocol and Anchor Protocol in Chapter 2.

In light of the recent hype around Bitcoin and Cryptocurrency, one could easily get lost by millions of flashy headlines and flooding new jargons. With the investor mania and the heated market sentiment, one could make wrong decisions because of the FOMO (fear or missing out), which essentially in my view is a sheep herd behavior influenced by the mass.

But it’s time to have a cool head especially in this era of information explosion and chaos (e.g. COVID, BREXIT, Trump…).

And it’s time to get to the bottom of the Bitcoin.

It will be a long yet interesting story, but I will try my best to keep it short and fun. To keep it readable, I will write it in a series of short articles.

Viewers please feel free to search on the internet and cross-check other sources (e.g. Wikipedia). Let me know if I make any mistakes (we are all humans) and have wrong understanding.

Below is simply my personal takeaways that may help you to understand Bitcoin better or in an easier way.

My articles contains no advice, and have no intention to sell you or persuade you to do anything. Take it as is for your personal reference only. You are sensible human beings so you are responsible for your own decisions and actions.

Here we go.

First two things

Firstly, Bitcoin is not a physical coin. It has no metal form, i.e. unlike a gold/silver/copper/nickel coin. All the pretty images (of Bitcoins being metal coins, an example below) out there on the internet are simply computer generated arts or artistic expressions done by artists. Some fans or community fellows are really into about bitcoins so there are actually physical realization of these artistic expressions, i.e. toy or souvenir coins manufactured by coin or toy-makers. Don’t get fooled!

Secondly, if you want to get to the bottom of it, Bitcoins are essentially just “bits” or the machine-level “binary data” — just a series of “0”s and “1”s that represent electrical or magnetic signals and stored on the data storages.

In the binary computer world, billions of tiny semi-conductors are used as data storage to store and represent data. Usually “0” means the electrical signal “off” and “1” means on. Simply put, the various combinations of “0”s and “1”s or “bits” represent the machine-level “binary data” that could be ultimately interpreted by chips and translated into the high-level human understandable data or information like “bitcoins” in the bitcoin programs.

Examples of data storages include the chip boards’ memory cards (see below an illustration) or a hard disk or a portable data storage.

If I use a vinyl music record as an example of data storage, the bitcoin’s physical form are actually the “grooves” on the vinyl records which are visible by eyeballs or by microscope (see below an illustration).The grooves’ shapes represent the music data just like the bitcoins are represented on the machine level as the binary data of 0s and 1s, i.e. semi-conductors’ electrical signals. You can’t really see it unless you tear up your data storage using a super microscope (then you destroy your machine as well as your bitcoins).

If the data storage (with bitcoins stored) is powered off or damaged, your bitcoins (binary data) will become no longer accessible or damaged.

If your bitcoins (binary data) are not interpreted using the relevant bitcoin codes or programs (i.e. imagine them as the music record players), your bitcoins are also not accessible or worthless. Theoretically, the same string of binary data could mean different things when running different programs and could be altered when running different applications.

So I guess until now you have a new perspective on bitcoins, and let’s continue the next time.

Hope you enjoy the article, and don’t forget to give me some hand-claps if you like!