Author: 江卓尔

Original Link: 《 从真金白银的资金易手，看Luna崩盘的底层数学规律》

Translator: Diane; Maxwell; Carole; Claire

Revisor: Diamond; Evelyn

In the past two days, a huge wealth transfer has taken place in the crypto currency area. During this flood, are you the winner or the loser? Well, if you are not good at Math, I’m sure you will definitely lose some. Because the case of \(LUNA went to zero this time was pretty extreme, like \)40 billion market value was wiped out in two days.

So far, I haven’t seen a single article from the perspective of capital flow to analyse $LUNA dumping to zero, so let me be the honorable one. And this will be one of the most insightful articles I have ever written, please catch up with me.

Don’t ask me why I missed the article on 11th May. When market sentiment is extreme (panic or mania), it’s easy to earn some (like picking up money everywhere). I’m sure many people just like me, only slept a few hours in these two days. So it would be good enough for me to make time in the evening to write an article (No Risks of USDT Breaking Anchor in the Near Future) to avoid excessive market panic.

1. The mechanism of $UST stable coin

When we talked about \(LUNA dumping to zero, firstly we need to learn the stabilization mechanism of the \)UST stable coin. \(UST is an algorithmic stablecoin targeted at \)1. The anchoring mechanism is dual-coin destruction minting.

1. $Luna is the governance token of Terra, and its price of it is free to rise and fall.
2. \(UST anchors \)1 through a “dual-coin destruction casting” mechanism with $LUNA.

a. When the price of \(UST ＞ \)1 (i.e. \(1.01), you can burn \)1 worth of \(LUNA to get 1 \)UST, and trade it with \(1.01, then you can arbitrage \)0.01.

b. And vice versa, when the price of \(UST < \)1(i.e. \(0.99), you can buy 1 \)UST with \(0.99, then burn it and mint \)1 worth of \(LUNA. Later when you trade the \)LUNA for \(1, you can also arbitrage \)0.01.

The arbitrage mechanism is shown above, of course, there will be some gas fees (like mint gas, transaction gas, etc). Therefore, when the price of \(UST rises to \)1.01, it is not enough for arbitrage costs, and we need to wait for the price to be higher.

Thus, through the continuous arbitrage behaviors, \(UST can stabilize at \)1 as long as the total market value of $LUNA is normal. With the development of the \(UST ecosystem, it will feed profits such as transaction fees and commission charges, back to \)LUNA to increase the total market value of \(LUNA. (\)LUNA is the essential equity stake in this system).

Then why \(Luna still collapse? **To understand its essence, we must first understand the basic concept of Virtual Market Value.** In my previous post, *[How much does it Take for Bitcoin to Reach \)100,000?](https://weibo.cn/sinaurl?u=https%3A%2F%2Fweibo.com%2Fttarticle%2Fp%2Fshow%3Fid%3D2309404768073403203895)* on October 29, 2019 (when \(BTC is about \)9,204 price at that time), I talked about it once. If you haven’t read it, let me talk about it briefly.

2. Fake Market Value

One Word : Total Market Value is just a stats, not the cash generation. Let me cite a brief example: John Doe launched a coin with a 100 million supply, and sold it to Richard Roe for 10\(/coin, in that way the total value for this coin would be 100 million \* 10\) = $1 billion. What if John Doe said he wants to sell the whole amount to you for 100 million, with 90% off. Would you pay for it? Definitely not, right? These coins are of no value here because of the low trading volume.

And it’s just a beginning, basically no one would be fooled. There will be lots of people being cheated if we put a slight difference, also I made an example here How much does it take for Bitcoin to reach $100,000.

A stock fund making 10%~30% annually profit with nicely historical growth, and a few stocks owned by this fund with a net value of \(10 billion. **Are you willing to buy that if you can get 50% off with the whole \)5 billion (including the shares)**?

Give you a minute to think about it.

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It’s the same trap. Would it worth \(1 billion if you own \)100 million stock with 10$/share?

Of course not. You must sell this \(1 billion stock on the market to get the real money, which is far away from \)100 million.

People would want to buy 3 million shares for \(10 and 5 million shares for \)9 if you’d like to sell the whole 100 million shares. The lower the price, the more people would pay, which means we may have to sell the rest of them for $2. In combination, you will get only 300 million real money.

Then where is the rest of \(700 million? Actually, \)700 million has never been real money, but fake data. The last share sold for \(10 and multiply it by 100 million shares to get the total market value of \)1 billion, which differs a lot compared with the real money. The greater ratio of 100 million shares in the total capital, the greater the difference. Selling 100 million shares is enough to dump more than 90% of the price if just have 110 million shares.

3. How to earn with a fake market value

Simple, using the “Total Market Value” as stats to exchange real money from people with low perceptions. How to get 10 billion stock? As we mentioned, it probably just gradually made a market by controlling the price, and cost 3 billion only.

Bouncing to this chart, 1 billion stocks end up selling for only 300 million real money, which means if you spend 300 million to get involved, a huge market value can be created with a small amount of money under the high-controlling situation.

At last, 1 billion market value came out with fabrication, and can be sold for 300 million only, then how?

Simple, just sell it to the retail investor with low perceptions and make a story: Look, this fund could gain 20% per year, and owns 10 billion value, which is really worth considering.

See? Stay foolish and keep the low apperception would never know how you died.

4. Virtual market value in LUNA

Luna achieved 40$billion market value before it depeg.

If there is someone who dumps unlimited \(LUNA, they will realise that the value which could be converted from LUNA to USD is far less than 40\) billion, which is based on the theory of fake market value. it’s hard to calculate the specific value that could be sold during that process, but we will demonstrate it later in this paper. \(UST is created by burning \)LUNA during the development of the LUNA ecosystem, and the total market value up to 18.7\( billion when that of Luna achieved 20.4\) billion before depeg on May 9.

Someone said UST is difficult to maintain stability if the total market value of LUNA is less than that of UST, is that right?

You guys could think about it in one minute, to see whether you truly understand the theory of “Fake market value” or just know about that.

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That’s certainly not true, the fact is that UST will depeg before the LUNA achieved 1:1. The real value that LUNA could be converted into USD is far less than the total market value. Based on the results of this social experiment, LUNA would have to be at least 10 to 20 times as valuable as UST that UST is possible to remain anchored.

For LUNA to work for a long time, it’s necessary to set a hard top for UST which is 10% of LUNA’s value (preferable 5% ). And destroy UST correspondingly when the total market value of LUNA is dropping. Of course, it can’t stop the death spiral when the LUNA’market value continued to decline, but at least an improved mechanism will maintain stability longer. Nearly 40$ billion market value went to zero in just two days (including 20.4\( billion and 18.6\) billion UST).

5. Huge cash out from Do Kwon, LUNA’s founder

So, here’s an interesting question, when did Luna cross the threshold of “too large a share of UST’s total market capitalization”?

UST circulation skyrocketed in the chart below. It was Do Kwon who destroyed a lot of LUNA and mint it into UST.

LUNA has a total market capitalization of \(20.1 billion and that of UST is \)2.88 billion accounted 14% of the total nominated value before the secondary offering on November 9, 2021.

After the additional UST was released on November 20, 2021, the total market value of LUNA went up to \(18 billion, and UST issued \)7.17 billion ($4.29 billion in additional issuance), which is 40% of the total. LUNA entered its “crash and fall” countdown to zero.

These LUNA are nominally owned by the community pool, but are in fact controlled by Do Kwon himself. So it’s essentially owned by Do Kwon.

This is an intelligent method to cash out, which means if Do Kwon sold 8.8 million (total 400 million) LUNA when it has a total capitalization of 20.1billion, he could earn at most 2 billion. As of May 11, 81.2 million LUNA would have knocked the total market value of LUNA from \(19.6 billion to \)2.5 billion (87%), while only 1.94 billion UST was burned.

Do Kwon gained 4 billion UST by converting the fake market value of LUNA into UST with no market fluctuation. This is where the most puzzling blindfolds comes in:

UST is part of Luna’s virtual market value, which is heavily discounted, UST is not real money, so it also wasn’t given real value But UST looks a lot like the dollar Can also be converted to US dollars at a 1:1 rate in small amounts

At this time, it depends on which people who are not good at math are willing to accept “fake money” UST.

6. The 80 thousand BTC that Do Kwon bought

So the 4 billion “fake money” UST that Do Kwon produced by burning LUNA, where did it go?

If you have fake money, you will buy hard currencies that maintains value. So Do Kwon bought BTC.

Check from one of the deposit addresses published by LFG

bc1q9d4ywgfnd8h43da5tpcxcn6ajv590cg6d3tg6axemvljvt2k76zs50tv4q

The average price of 42,530 BTC bought in is $42,152 (assuming transfer time is bought-in time). It times 80.4 thousand BTC equals 3.389 billion dollars, which is close to the amount of minted UST. And Do Kwon might keep the rest of USDT as backup (yes, he swapped UST for 1.2 billion USDT).

And more ironically, Do Kwon also sold $1 billion of LUNA to institutions.

Jump Crypto, Three Arrows Capital, Republic Capital and GSR will be forever nailed on the pillar of humiliation for no one examined the simple math blindfold in Terra. Why can’t these institutions see such a simple mathematical trick? Don’t be superstitious about institutions. Even the most powerful institution in the traditional industry are big suckers in crypto industry. And the analytical managers in these institutions are just ordinary people, many of whom are also fools who don’t understand maths.

So, the next question in the spotlight is:

7. Did Do Kwon use 80 thousand BTC to bail out?

If it were a traditional money market, this would be a black box that no one would know about. But unfortunately, Do Kwon is manipulating the blockchain where everything is transparent, and that is clear to see.

Do Kwon transfered 42,530 BTC in bc1q9d4ywgfnd8h43da5tpcxcn6ajv590cg6d3tg6axemvljvt2k76zs50tv4q and 12,581 BTC in bc1qkhl4pt957urd8sleys3p00ua2h23nl3hghhtkyaatgzapj9kflhqar0jdv at 2:00~4:00 am, May 10th. The above 55,000 BTC was transfered out from the Luna Foundation address, and another 25,000 BTC was only claimed by Do Kwon and cannot be confirmed to be real.

These BTC were deposited in CEXes. According to the mark of bitinfocharts.com, 30,000 of these BTC ended up in OKEX addresses 1NYAd6fA2dc5xowuweFUSDRqRTEzDwk28.

However, the BTC price after 2:00 on the 10th did not fall significantly and kept moving sideways. It is not a sign of 80,000 BTC dumpping at all. And it was not until on 20:30, May 11th (when the US released April CPI inflation data) that the BTC price fluctuated dramatically.

Another more solid mathematic proof is that assuming Do Kwon really used 2~3 billion dollars in 2~4 hours to save the market after UST depeg (00:00, 10th May), it would left evident traces in various statistical curves, especially in the data segments at the beginning of depegging. After all, UST has only fled (burned) a total of \(7.4 billion out so far, and a \)2~3 billion bailout is enough to cause a significant curve deformation.

But, the following statistical curves from the point of depegging (0:00 on 10th May) are very smooth and consistent with the performance of free-fall depeg.

The “Cumulative amount of UST burned” is slow at the beginning (for market hasn’t panic yet), fast in the middle, and slow at the end (for LUNA is all swapped out), which is basically symmetrical.

What’s this? This is a standard Pearl Logistic Curve.

Explanation of Pearl Logistic Curve: When changes in the development of economic variables show an initial slow growth rate, followed by a gradual acceleration of growth, then a gradual slowing down after reaching a certain point and finally a tendency to reach a saturation state, i.e. the ring of the first order difference of the inverse of the original time series is a constant and can be described by a Pearl Logistic Curve.

The destruction of the UST after this depeg fits this mathematical model perfectly and draws a standard Pearl Logistic Curve. Where’s the trace of a $2-3 billion artificial bailout intervention in this? I reckon Do Kwon just symbolically bailed out the market with his pinky finger and embezzled all 80,000 BTC.

The metric that“UST Cumulative Destruction of LUNA Total Market Value” is also smooth, indicating that destroyed UST is evenly absorbed by the reduction in LUNA’s total market cap.

It is said that some people tried to find Do Kwon in person off-line, and Do Kwon went police for help. I have to say that this way is useful. Do Kwon must hold many BTC, and might even haven’t spent any BTC for saving the market. He knew the result for his own trick. Every CEX is responsible for investigating the trading behaviors of Do Kwon after depositing BTC.

It is easy for Do Kwon to proof innocent, just publish the UST buy-in records testified jointly by CEXs. And withdraw at least 4-5 billion UST bought for bailout to the on-chain address.

8. Where did those all funds flow when \(LUNA & \)UST fall to “zero” value?

Half of those assets losses are \(LUNA houlder, but they are \)Luna investors before, so profit and loss are in balance.

What’s worse is the people bought $Luna under the death spiral. They thought such a project as Luna, which of 10 billion worth and top 10 market value, would stop falling after it lost 90%, 99%, and 99.99% of market value.

And there is someone put all assets for gambling.

To sum up the above analysis, we should know that Luna will have the secondary public offering of unlimited dumping before all the \(18.7 billion \)UST outflows. All those who bought \(Luna with real money during the dumping are actually saving the holders of \)UST. \(Luna will gain nothing unless Luna receives more than \)18.7 billion funds to support.

And is it possible that LUNA, with a market cap of \(20.4 billion, has \)18.7 billion in real money to take over? Of course not, LUNA escaped with just \(2.38 billion of UST after falling from \)57 to $4.10 and shrinking its total market cap by 90%.

\(UST, which has escaped from \)2.38 billion to \(7.4 billion, thanks to funders who bought “cheap” \)Luna wothout thinking.

• Bottom-fishing \(Luna between \)57 and \(4.10 rescuered \)2.38 billion of $UST.
• Bottom-fishing \(Luna between \)4.12 and \(1 rescuered \)2.92 billion of UST.
• Bottom-fishing \(Luna between \)1 and \(0.10 rescuered \)1.68 billion of UST.
• Bottom-fishing \(Luna less than \)0.1 rescuered \(420 million of \)UST.

To sum up, the above charity funds saved more than \(7.4 billion of \)UST, and the \(11.3 billion \)UST that locked in the Terra-Chain, went to zero.

Therefore, the second question of my homework on May 11th is:

Do you understand that bottom-fishing funds are in essence to rescue $UST, because the lower the price, the more bottom-fishing funds can be attracted.

\(2.1 billion of \)UST was rescued by the bottom-fishing funds of LUNA at \(0\~1 (corresponding to a \)1.13 billion change in market value).

That’s almost as much as the \(2.38 billion rescued by bought \)LUNA at \(57 to 4.1 (corresponding to a market value change of \)17.67 billion). So the answer is less than.

9. How to make money in UST depeg?

This was the first question of my homework on May 11th. The methods of making money can be roughly divided into four layers: Dao, Ti, Yong and Shu.

Dao:

1. Balance of energy.
2. Entropy Increment is irreversible, and entropy decrement (order) cannot be created out of the air.

All systems will develop into chaos unless there is an injection of external energy. For example, your room will always get an even bigger mess unless you consume energy to clean it. Once again, the gap between knowing certain rules (such as energy balance) and understanding them is huge.

Why do science students often earn more than liberal arts students and lead the society more? Although both science students and liberal arts students know about the balance of energy, science students do more exercises to understand the “energy conservation” (the way things get done) deeply by instinct.

When facing the same problem, it is easier for science students to realise that energy is not conserved here.

Ti：

1. The “algorithmic stablecoin” can be regarded as an independent system since the Entropy Increment is irreversible. Unless there is a steady external energy injection (such as the growth of sustained external input, bail out, etc.), the algorithmic stablecoin will be in chaos (Depeg).
2. When death spiral occurs due to the fake market value, 10 times worth of \(Luna’s market value cannot support 1 times worth of \)UST’s , let alone the market value of \(UST was even close to \)Luna‘s.

Yong:

① Profit-making way: In the homework, many people said that they should short Luna. Is this answer correct?

Wrong, the ups and downs of $Luna cannot be predicted in any time except for the beginning of de-peg, which get the higher chance to falling. The chance to win on short-selling are slim at the other points, here is an example of shorting Luna but being blown:

$Luna rebounded 11 times in this rally, casuing bear raiders all forced liquidation.

In this rally,

The first short-selling people who lost Billionare property, had only millions left.

The same situation occurs to another people, who gained millions interest arbitrage.

Different choices, same fate, life is really dramatic.

Of course, there’s nothing new under the sun, as I wrote in 2016’s “Pouring Cold Water on Zcash - With Deep Black, Does the Market Really Need Pure Black? “. I wrote a personal experience: when I mined in Zcash at the beginning, \(BTC had risen from fraction of a cent to \)3200, which led to the margin-call of my small position. Then I relied on the 10BTC price limitation of Bitmex futures and earned 100BTC back. Although the margin-call of my position was nothing serious, what happened next was the most outrageous mistake I made. According to a rational prediction of Zcash, referring to the two existing anonymous coins of Monero and Dash, the reasonable valuation should be 0.01~0.03 times. It was already a bubble with 100 times of the reasonable price when I shorted 1.7 times $BTC. What cannot be predicted was the market would still rise 2,000 times above the 100 times bubble.

Although I made a profit in the end, it was made by the Bitmex futures price limit rules, and since then, I would never short any cryptocurrency. So here is my advice to you:

Do not short pegged any cryptocurrency,

If you go long, it will fall by up to 100%, and if you go short, it may increase by 100,000 times.

Do you think it will fall back?

The time when the market is irrational,

It will always be longer than you can survive without going broke.

Therefore, the correct way to profit is: short UST with leverage. UST is anchored at \(1, and it is almost impossible to be higher than \)1 for a long time & significantly. So the higher the leverage, the better it will be, which can be as high as 10~20 times.

② Prediction of $UST depeg time：

”Stablecoin interest rates are as high as 20% for a long time, is Anchor also a Ponzi? ”. This article puts forward a point of view that UST provides a financial management agreement Anchor with an annual interest of 20%, while Anchor’s own operating income does not reach 20%, and it will lose $4.18 million per day. The loss will consume the subsidy provided by the Luna Foundation. Now there are 360 million US dollars left. According to the current burning speed, it can only support for another 3 months.

This articale argues that:

According to the current consumption rate of Anchor reserves, we will most likely wait for the breaking point of this financial game this year

It turned out the result was right, but the logic is wrong. Anchor’s high-interest deposit which bears 20% interest, did accelerate the death of \(UST, but the reason is not the insufficient interest. Do Kwon can easily withdraw 4 billion US dollars from the system, buy 80,000 \)BTC, as the market kept expanding he can withdraw hundreds of millions of US dollars to pay interest, and won’t have any problems within 3 years.

And there is another point, the interest paid by Anchor is still UST. As long as the credit of UST is not broken, it does not even need to pay interest in real dollars. This is a common sense of central bank arbitrage: national currency national debt never default. If it can’t be paid, just print more domestic currency.

So, the key point is when will the credit of UST be broken? In other words, when did the market begin to doubt the ability of UST to cash?

As mentioned earlier, according to the real data of pump-and-dump, the time cannot be cashed would be : when the total market value of UST exceeds 10% of Luna. Most of people do not good at the math, which cannot figure out what the fake market value is. When the Do Kwon issued 4 billion \(UST shares, they would not know the \)UST cannot be cashed even the UST’s market capitalization reached 40% of $Luna’s.

The wise follow the fool,

A fool’s consensus is also a consensus.

Therefore, the time point of UST’s credit bankruptcy is when the total market value of UST is close to or even exceeds that of Luna.

In recent days, I have seen people point out the risk many times: UST’s total market capitalization has approached Luna. No matter how obtuse and stupid people are, they will also realize: So the total market value of Luna seems to be insufficient for UST to pay?

The logical transmission of death is not that the interest is not enough, but that the high interest quickly attracts a large number of UST, which increases the proportion of the total market value of UST.

Shu:

How to short UST with leverage, such as umbrella funds, lending UST to sell with leverage on the exchange, how to arbitrage by destroying UST in the process of Luna zeroing, etc.

Although I slept for 13 hours last night, it is very late now. All the knowledge points about Shu are trivial, which are boring to write. What’s more, many people have said about arbitrage, and this article has already written 8,000 words. There are almost 10 thousand words if pictures are counted as well. The longer the article is, the worse the reading experience will be.

So this article ends here.