The Great LUNA Pump (A Kwon-Sestagalli-Cantieri Production)
Why are Anchor investors being sacrificed to pump up LUNA's price into an insider sale to new investors?
It’s pretty much an open secret that Terra is nearly done marketing a large LUNA private placement to a big list of big-name crypto investors. The deal has been marketed for at least 3 months with a fluctuating cast of major and minor investors. (I first heard about it over 2 months ago, and I’m the farthest thing from a Terra insider. I’m not sure how it would be perceived and also suspect it’ll be a major sell-the-news event.)
There’s only 1 insider with the capacity to sell the advertised quantity of LUNA: Terraform Labs (TFL), the creator and dominant entity within Terra.
The implicit goals of the deal, as I understand it, are:
Decentralize economically. A big critique of LUNA/Terra is that its decentralization is completely bogus: among other reasons, TFL / TFL’s CEO Do Kwon controls a lot (40-45% I think) of LUNA outstanding, and close Kwon allies/dependents like Matt Cantieri (the founder of Anchor) control more still. By doing a large insider sale, LUNA diversifies its holder base and blunts this valid criticism.
Doing it in public makes much more sense because it would put to rest fears that Kwon was somehow cashing out of his own creation.
Build a defensive wall around the UST peg. TFL wants to create some kind of stable multicoin reserve to act as a potential market maker of last resort for the Terra algorithmic stablecoin / insure the long-term robustness of the system.
If this chatter is correct, I think it’s a great rationale for a deal and I’d wholeheartedly support it.
At the same time, Terra insiders have put in motion a dizzying series of events to maximize their benefits from the launch. They’ve done many things that are just good business, but they’ve also done several things at the expense of other Terra ecosystem participants or future investors.
11/25: A massive ANC “whale” withdraws from the ANC-UST LP pool on Terraswap. This entity, likely controlled by Terraform Labs, quickly staked its ANC tokens to support a proposal on Anchor’s forums to participate in the Astroport launch.
The withdrawal of this whale, who comprised 2/3 of the ANC-UST Terraswap LP pool, caused incentives to rocket from 35-40% (annualized) to a mouth-watering ~115% APY, paid out in Anchor’s token (ANC) on the Terra blockchain. (Dashboard link here.)
This APY is effectively a very generous incentive for ANC liquidity providers to offer liquidity on Terraswap, which at the time was the main decentralized Terra exchange.
Normally, the protocol would slash LP emissions. Offering 115% LP incentives is not sustainable. But Anchor, instead, chose to advertise insanely, unsustainably attractive LP rewards. Hmm.
11/25-12/5: As most of crypto gets smashed by a late November de-risking, Terra implements Do Kwon’s previously ratified proposal to “burn” most of the remaining LUNA in the Community Pool (10% of the total outstanding LUNA supply). LUNA explodes in price during the late November cryptocrash—no doubt affecting the price the external investor syndicate will ultimately pay when they buy into LUNA.
12/1-present: A competing Terra exchange, Astroport, gathers ~$1.2bn of liquidity, over 2/3 of which came from either the Terra Protocol itself or Matt Cantieri’s Anchor Protocol.
Astroport is a JV of Terra insiders (Terraswap is not a Terra insider) so this is basically an attempt by TFL & Co to reclaim a key part of their ecosystem.
Astroport has 3 unstated missions, in addition to upgrading the extreme bare-bones UI and programmability of Terraswap:
Take away all of Terraswap’s market share.
Create a new token that can continue paying LPs their rewards, because ANC’s budgeted LP subsidies are running out.
Capture a very large share of trading fees (one third) for the TFL insiders backing Astroport. Currently, Terraswap redistributes all fees to its liquidity providers and doesn’t seem to take much if anything for itself.
12/9: ANC’s Yield Reserve starts falling steadily. ANC is effectively footing the bill for the UST pump: it very quickly attracts Sestagalli’s $1.1bn of hot money, paying its investors an annualized 90-110% (multiple leveraged layers of 20% depositor interest rates) even as ANC cannot find any material borrowing activity to offset it:
12/10-present: Between the LUNA token burn, the Astroport launch, Anchor’s record-breaking-but-unsustainable deposit growth (fueled very significantly by Sestagalli’s UST-MIM pump), Do Kwon’s brash-meets-Zen reaction to SEC harassment, and Sestagalli’s emphatic cheerleading of UST, Terra corners the market for crypto media coverage in December. The Terra hype train sends LUNA mooning 150% in a month when the rest of the crypto-verse is flat or down.
12/17: Anchor depositors ask, again and again, “Why the F are we throwing money at Daniele Sestagalli?” on the Anchor Twitter Spaces call. The call disconnects due to unspecified technical difficulties.
12/18: Anchor investors start bombing the Anchor forums: “Why the F are we throwing money at Daniele Sestagalli and his investors? What about us? This kind of growth is not healthy for Anchor’s business.”
12/18: Astroport’s “lockdrop,” in which Terraswap liquidity providers migrated their liquidity from Terraswap to Astroport and locked it up for up to 1 year, ends.
12/19: Not even 24 hours after Anchor has co-sponsored the successful launch of Astroport with over $300m in locked ANC-UST liquidity, Anchor management surrogate bitn8 announces a proposal to immediately end ANC-UST LP incentives. (Translation: “Remember how we hiked APYs from 40% to 120% a month ago into the Astroport? That was so you’d up your ANC-UST at Astroport for a year, after which point we’d take your APY from 120% to something way, way less. Decentralized fiat disruption one sucker at a time, I guess?)
12/21: Anchor/TFL continues to play dumb w/r/t community concerns about Sestagalli’s UST-MIM hot money. “Terra is an open protocol and anybody can” plug hundreds of millions into Anchor and take advantage of Anchor’s generous deposit rates, community relations member bitn8 says. Suuure.
This all adds up to a really disturbing pattern.
ANC, nominally a separate entity from TFL, seems like it’s being operated as a wholly-owned rentboy of Do Kwon and Daniele Sestagalli.
ANC shouldn’t attract depositors unless it can find borrowers. Deposits that don’t get borrowed just sit there and accrue a lot of interest that needs to be exported. Furthermore, Sestagalli’s $1.1bn of deposits isn’t ordinary deposits. It’s fractional-reserve crack cocaine which will disappear under a mushroom cloud if UST or MIM briefly deviate 4%ish relative to each other during high market duress.
Yet ANC management wants to burn hundreds of thousands of dollars per day participating in what amounts to a giant LUNA/UST pump, where ANC has no interest. Why is Matt Cantieri giving a gigantic free lunch to Sestagalli, if not to abet Do Kwon’s Terra mega-pump? Why does he prioritize UST/LUNA interests over his own company? What conflicts of interest has he not disclosed? Is he a full time TFL employee with no legal independence?
At the same time, ANC did something else very shady, by advertising overgenerous LP APY’s for a month, and then proposing to terminate them without any warning the minute Astroport successfully “took off.”
I had not locked up my ANC liquidity for very long (until March 15th to be exact) because I was worried about exactly this possibility. Nobody said what the APYs would be after the end of ANC’s first year in operation (3/18/2022, to be exact) and the Astroport terms left the door wide open to a massive slashing of ANC APY’s from the moment the lockdrop ended.
But going from 120% to 0% even before the first year ended, directly contravening the documented ANC emissions schedule, is dishonest. I really hope it’s a blunder by ANC management as opposed to a premeditated rugging of ANC LP’s.
This means Sestagalli creates a chain of leveraged cryptomoney as follows:
Sestagalli / his investors deposit the UST stablecoin in one of Sestagalli’s pools.
The UST is then deposited at Anchor, earning the depositor 19.5% less Sestagalli’s carry (~15%) as well as MIM borrowing fees (very low), a fee per turn of leverage used, and investor liabilities in the event of a forced liquidation. For one turn of leverage, the investor gets a ~16% return.
Sestagalli now has an Anchor-deposited UST, or aUST, receipt, for his investor’s deposit.
Sestagalli accepts the aUST as collateral to borrow MIM (another stablecoin) against that collateral at an attractively low rate. In the below example, I used an 80% LTV for each “loop.” I think the actual MIM-UST cauldron allows you to specify the actual loop and many people have selected a thoroughly degen, 95%-ish LTV threshold.
Sestagalli repeats the process all over again, but with 80% of the original balance. For an initial 100 UST deposit, the investor now has 180 aUST earning an effective APY of 1.9 * (Anchor deposit rate less Sestagalli’s carry) = ~31% effective APY on the 100 UST deposit.
Sestagalli repeats this “loop” as many times as the investor specifies. The loops-to-APY matrix looks like this: