The fiat-backed terra_money has become the third-biggest stablecoin in the market. But experts say it’s a ticking time bomb.
“All the UST in Anchor is just rotator capital, farming for the subsidized yield,” said Zhou. “Rotator capital” means money that is moved rapidly from one protocol to another in search of high yield . If Anchor’s yield drops below the competition, there could be a significant rush to the exits, during which “rotators” in the staking pool would look to unload their LUNA and UST.
There are two reasons to wonder whether this is a real solution. First, it doesn’t change the basic math of UST’s exit liquidity in a crisis. According to Zhou, the total of all non-LUNA reserves and all UST being used in applications on the Luna chain only amounts to about $3 billion, against $18 billion in stablecoins outstanding.
“This could create an incentive to utilize strategies to acquire discounted BTC,” Clements says of the plan. Such a coordinated, intentional attack could look similar to George Soros’s legendary. The Bank of England spent more than 3.3 billion pounds countertrading to defend the pound’s peg against other European currencies, but ultimately failed.
There are other concerns, both with the BTC reserve plan and terraUSD’s basic structure. For instance, one aspect of a leading proposal for the reserve would rely on offering traders arbitrage incentives to replenish the BTC reserves once a crisis has passed. That’s perfectly sensible from a decentralization perspective, since in the long term you don’t want to rely on outside groups like LFG.
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