Binance and Terra - Investment Thesis
Binance is leading the industry, in a trusted fashion. They have a plan with DeFi built around Stable coins
Binance, the exchange industry leader in TVL(trade volume), is paving the way towards decentralization. While they custody client funds through a centralized exchange; they also have a blockchain, Binance $BNB, supporting the movement of Decentralized Finance. Grants are issued to developers building on $BNB. One of which (4.5m) was given to Matt Cantieri ex Microsoft Ventures M12, and claim-to-fame former founder of Anchor Protocol: ‘the famous decentralized app built on the Terra $LUNA blockchain allowing for 20% apy on an algorithmic stablecoin, Terra $UST.’ The now de-pegged stable coin $UST, currently trading at .02/1USD is in a unique position to be re-collateralized and profited. Binance is up at bat and speculators look to be rewarded.
Anchor Protocol was comprised of two sides, lending and borrowing. The borrowers would put up collateral in the form of LSD (LiquidStakingDerivatives), moving value from other blockchains, on the terra blockchain. b (Bonded) bETH, bAVAX, bATOM, bLUNA, and various other blockchains were used as LSD, allowing to withdraw $UST loans up to 100% LTV (LoanToValue). As the LSD was staked collateral, Anchor Protocol would auto capture inflation block rewards and charge interest, thus earning income. This was paying out floating 18-37% apy. The income (yield reserve) was then flown to the lending side of the protocol into $UST staking, where users would simply stake to earn a fixed 20% on their stable coin. Matt Cantieri has begun working on his next project, Ambit Finance, on the $BNB chain. A refined version of Anchor Protocol on $LUNA.
Terra plummeted in early May, 2022 in a de-pegging event. This coordinated attack was taken place when $UST reserves were being moved from a smaller currency pool of 3 ($USTC, $USDT, $USDC) to a larger currency pool of 4 (added $FRAX) for deeper liquidity, a necessary play as $UST was growing in popularity. While the stable coin was moving pools it had a brief period of illiquidity. This moment of weakness was attacked via large amount of $UST swapped for a fiat- backed stable coin $USDC, sending $UST off-peg, creating a massive minting of $LUNA reserve outstanding. In order to prevent continuous spiraling, mass minting of $LUNA had to be shut down. The market making mechanism between $LUNA and $UST was then manually turned off as it was no longer a favorable arbitrage play, the bank run was already over in a matter of hours. The reserves in $LUNA were not close to cover the amount of bad debt needed to re-peg $UST (11.8b peak). $UST is still filled with this bad-debt.
Do Kwon (creator of terra blockchain) went to create a new coin $LUNA, renaming the old couple to: terra classic $USTC and luna classic $LUNC. Today, the two largest holders of bad debt $USTC is Binance/Terra(60%); Binance bought most of, along with $LUNC, shortly after the depegging event. It would be highly profitable for them to re-peg and sell to the open market. They have two possible routes: collateralize the $USTC stable coin with a fiat-backed stable coin, or create a platform used to mass-stake $LUNC and $USTC, incentivizing new money to buy up $USTC bad debt for profit.
Binance cannot fund this themselves. Allegedly, it must be in-direct as there are legal issues with manipulation around stable coin and who can/cannot mint them. In the past, Binance would strategically use outside entity’s for off and on ramps of stable coin. The Binance gold-backed stable coin $BUSD was minted from Paxos, a NY registered trust company. Paxos was since ordered to stop minting $BUSD, as Binance was printing so much. Clients may still off-ramp and redeem physical gold for $BUSD. Binance craves more stable coin exposure, as many trade pairs are denominated in it. It seems they need a new printer.
First possible route: Without banks, there cannot be fresh minting of stable coin. One hole closes, another one opens. New off-on ramps are added through newly formed crypto friendly banks in Hong Kong, with the faith of the Chinese government. The support needed for minting new fiat-backed stable coin such as True dollar $TUSD or Tether $USDT can be funded using these banks. The fiat-backed stable coins can then collateralize $USTC. Example: Yuan-backed bonds>$TUSD>$USTC, leading to quick, quantum re-peg. Binance will then flip to open market and profits.
Second possible route: Ambit Finance is released, allowing for LSD borrowing, and $USTC lending. The apy paid out on $USTC lending would be at a rate enticing enough for liquidity to pour back in; to the point of $USTC buyers re-paying the 9.8b of bad debt left. Ambit Finance is set to be open to users sometime this Spring (2023).
There is ample evidence to believe $USTC algorithmic stable coin will re-peg one way or another and the psychology of investor will greed back in as quickly as the bank run occurred originally. $USTC can be purchased on a centralized exchange. As for $LUNC, I am undecided coin burning will happen as the market making mechanism is still turned off. It no longer plays the role of reserves; therefore, I do not expect it to harden (supply burn) during the quantum re-peg. Only after $USTC re-pegs and the market making mechanism is turned back on will I consider investing in $LUNC again.
The DeFi industry is able to offer very high yields to stable coin lenders due to massively high blockchain inflation posted as collateral. There is much to profit in algorithmic-based stable coins long term, so long as there is infrastructure built around it (the currency must be in circulation). I am confident to believe 50x ROI on $USTC is achievable in the short-term. Mainly driven by Binance.