The Weekly Wrap: LFG buys, Crypto hub Britain, USDN loses peg, FOMC minutes

Apr 8, 2022

1. Luna Foundation Guard buys $231m worth of BTC and $100m worth of AVAX

The Facts:

  • On Wednesday, Luna Foundation Guard (LFG), a Singapore-based nonprofit bought an additional 5,040 BTC boosting their reserves to 35’768 BTC valued at $1.55b.
  • On Thursday, LFG also announced a buy of AVAX worth $100m from the Avalanche foundation for its reserves. Moreover, Terraform Labs swapped an additional $100m in LUNA for the same value in AVAX.
  • UST’s growth of $6.5B in supply YTD resulted in a continuous burn of LUNA supply, with only six net positive days of supply change in 2022.

Why it’s important:

  • With UST being the biggest decentralized stablecoin with a marketcap of $16b, LFG seeks adoption outside of Anchor and Curve Finance to ensure stability and create demand in other Layer1 platforms, such as the thriving Avalanche ecosystem to mitigate liquidity fragmentation.
  • LFG’s buy pressure furthermore served as catalyst for the recent shift in crypto market sentiment settling a psychological floor.
  • The increasing number of large public buyers, be it companies or crypto related foundations, is a great proxy for crypto assets and especially Bitcoin becoming a pristine collateral and reserve asset.
  • LFG collateralizing UST achieves higher security through a second mechanism supplementing the arbitrage function to defend UST’s peg.
Number of the week

Circulating Supply of Bitcoin

2. The UK aims to become a global crypto hub and wants Royal Mint to create an NFT

The Facts:

  • UK Finance Minister Rishi Sunak asked the Royal Mint to issue an NFT along plans to regulate stablecoins in order to become a cryptoasset technology hub.
  • The approach targeting more regulatory scrutiny aims to bring stablecoins into existing regulations on electronic payments, regulate trade in cryptoassets, consider legal status of DAOs by law commission, examine tax treatment of DeFi, establish a Cryptoasset Engagement Group and explore the application of blockchain technology in issuing debt instruments.

Why it’s important:

  • As industry insiders call for clarity about the U.K.’s position on crypto, the European Union just recently voted on cracking down of anonymous crypto transfers and AML measures.
  • Therefore, the timing of recent developments is interesting as Britain and London being one of the biggest financial hubs might aim to outplay the EU in term of crypto regulations that might lead to GBP- overtaking EUR-stablecoins.
  • Especially pushing stablecoin regulation amid accelerating adoption be it crypto native or in a global regulatory race might set the stage for Britain really becoming a major hub for crypto.
  • While Sunak clearly shows support for crypto, there are lots of critical voices such as Andrew Bailey’s, Bank of England Governor, as he states that crypto is a “front line” for scams.
3. Waves’ USDN loses dollar peg after a huge surge in TVL

The Facts:

  • USDN, an algorithmic stablecoin of the Waves ecosystem, started to lose its Dollar peg on April 1 and fell by more than 35% to $0.65 (KuCoin) on April 4, and as of April 8, it is trading back at $0.95, still below peg.
  • Alongside, the Total Value Locked (TVL) of the Waves ecosystem dropped by ~$1.9 billion, more than 35% as WAVES dropped up to 57% from its recent end of March high.
  • The depeg was accompanied by various claims of upward price manipulation via lending platform finance and downward price manipulation of Alameda Research.
  • Like with LUNA-UST, users lock WAVES in Neutrino’s smart contracts to mint USDN.

Why it’s important:

  • WAVES rallied up to 640% since the war in Ukraine started as WAVES backed USDN adoption might be pushed by US sanctions.
  • A depeg of a rather low capped stablecoin such as USDN does not affect the DeFi ecosystem, yet bigger players such as UST that come with almost identical systemic risk as USDN might pose significant risk to DeFi if the protocol fails to maintain the peg.
  • USDN losing the Dollar peg is a serious reminder that stablecoins must be rated individually as attractive yields might lure users into higher risk alternatives.
  • Interestingly, Zoran Kole claimed that Near, a sharded smart contract platform, will announce USN, a native algorithmic stablecoin with ~20% APR as Near rallied >41% this week.
(...)it's better to offend millions by standing aggressively for what you believe in than it is to try to keep everyone happy and end up standing for nothing. Be brave. Fight for your values. Be a maximalist.

Vitalik Buterin, Co-Founder of Ethereum (via Vitalik.ca)

4. FOMC meeting minutes send risk assets lower

The Facts:

  • The FED remains hawkish as the minutes indicate further rate hikes ahead.
  • Moreover, the minutes reveal plans to reduce the central bank balance sheet by $95 billion a month, that would double the rate of the last balance sheet reduction from 2017-2019, likely starting in May.
  • According to Fed Governor Lael Brainard, a combination of rate hikes and a rapid balance sheet reduction is the best approach to neutralize the U.S. monetary policy.

Why it’s important:

  • After the first rate hike in more than three years from the last meeting, the Fed is preparing markets for its next meeting on May 4-5, signaling a half-percentage point rate hike and what to expect in order to curb inflation in the upcoming months.
  • Quantitative Tightening via a more aggressive balance sheet reduction, with the Fed sitting on $9t in assets accounting for ~36% of the US GDP, will very likely impact markets negatively, driving down prices of various assets.
  • Market participants were caught off guard by discussions about mortgage-backed securities (MBS) sales as Nasdaq and S&P500 went down, and crypto assets fell even lower towards $1.9t overall market cap.
In other news
  • Elon Musk joins board of directors as largest shareholder of Twitter, shares close up 27% (via Sky News)
  • MetaMask integrates Apple Pay (via The Defiant)
  • Near protocol yields $350m funding round led by Tiger Global (via Bloomberg)
  • Arbitrum Nitro Devnet is launches (via Offchain Labs)
  • Strike integrates Shopify via Bitcoin’s Lighting (via Business Wire)
  • SEC Approves Teucrium’s Bitcoin Futures ETF (via CoinDesk)

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