The Weekly Wrap: UST collapse, April U.S. CPI, German crypto tax guidance

May 13, 2022

It’s not arbitrage if you don’t exit the position.

@mhonkasalo, crypto researcher, on stablecoin depegs that are often resolved by arbitrage (via

1. UST depegs as LUNA implodes alongside

The Facts:

  • LUNA, sparring partner of Terra’s controversial stablecoin UST, has collapsed to $0 (TradingView algorithm calling it a 100% loss) after its flawed peg mechanisms resulted in hyperinflating LUNA from ~300m to ~6t circulating supply within hours.
  • UST, supposed to be pegged 1:1 with the U.S. dollar, fell sharply below the $1 mark, currently trading below $0.1.
  • Binance announced Thursday that it is delisting its LUNA USDT-margined contract by conducting an automatic settlement and halted trading across all its spot, cross margins, and isolated margins pairs shortly after.
  • On the same day, Terra released a statement, declaring that they halted their blockchain to disable further delegations to their dPoS via a patch, just to halt the chain shortly after block production resumed again.
  • Anchor, the borrowing and lending platform providing yields for UST deposits, has seen TVL drained by more than $19.5 billion from $20b as LFG reserves plummeted from almost $4b to $76m alongside.
  • USDT saw a depeg as well from $1 to $0.945 at its lowest point on FTX but has repegged in the meantime while USDN, Waves’ dominant stablecoin, is still trading at $0.94 and therefore 6% below peg.


Why it’s important:

  • With LUNA, which acts as an arbitrage cushion for UST, and UST imploding, yet another algorithmic stablecoin fails to deliver on its purpose by a flawed mechanism design, revealing structural and systemic risks.
  • Trapped in a downward spiral induced by their peg mechanism, UST holders kept minting LUNA, not only massively diluting Luna but also putting significant sell pressure on the token and therefore leading to even more supply minting.
  • Amid the UST collapse, Yellen declared all decentralized stablecoins as risky and called for more regulation.
  • It is therefore key for the crypto industry to make regulators aware of these risks algorithmic stablecoins bear when building a framework vs. off- and on-chain collateralized stablecoin providers.
  • Moreover, not only did the influence and active involvement of the Luna Foundation Guard (LFG) expose that UST is vastly centralized but also the fact that Terra just halted their chain two consecutive times is a red flag for any chain claiming to be decentralized.
  • Their flawed peg mechanism furthermore exposed how a PoS chain that runs on a hyperinflating token is going alongside an ever-decreasing cost of attack.
  • The violent loss of value also showcases, how low reserves to market cap ratios are not sufficient in building confidence related to maintaining a peg.
  • Rumors about a coordinated attack were denied by BlackRock, Citadel, and Gemini.
(Source: Tradingview, Terrascope, Bitcoin Suisse Research)
2. CPI slightly decelerates in April but remains close to 40-year highs

The Facts:

  • CPI printed 8.3% in April, 0.2% more than the 8.1% estimate.
  • The core CPI at 6.2%, that excludes food and energy, was also higher than expected with shelter cost, making about one third of the CPI, rising fastest since 1991.
  • Due to the ongoing surge in living expenses, the inflation-adjusted earnings continued to decline with 2.6% for workers.
  • Economists warn that prices could remain elevated. The issue is how fast inflation could decline when it comes to determining how the Federal Reserve will respond with interest rate hikes.


Why it’s important:

  • The ongoing inflation increase is very likely to reinforce the Fed’s ambitions to keep raising rates to further tighten its monetary policy.
  • As efforts to curb gasoline prices show little to no impact, a survey shows that Americans are indecisive on who to blame, the pandemic, supply chain disruptions, corporations, the American rescue plan or the war in Ukraine.
  • Inflation remains surging globally as for instance, the German CPI for April hit 7.4% particularly due to rising food prices, thus reaching an all-time high for the second month in a row since German reunification.


(Source: U.S. Bureau of Labor Statistics, Bitcoin Suisse Research)


U.S. CPI for April

3. Germany announces crypto gains to be tax-free after one year, even if lended or staked

The Facts:

  • With high anticipation, Germany’s Federal Ministry of Finance has finally outlined tax guidance on crypto announcing it to be tax-free after a one year hold.
  • The new guidance also addresses tokens to be tax-free after that one year period that were staked or used in lending applications.
  • The letter contains tax guidance on income tax treatment of mining, staking, lending, hard forks, and airdrops.


Why it’s important:

  • More sophisticated users will be pleased with the new guidance as the holding period for lend and staked tokens was extended to 10 years beforehand.
  • As Germany is ranking among the nations having the highest crypto adoption with 17% of residents owning crypto, the letter also contains highly desired advice on airdrops, a popular way to attract users and liquidity, that was lying in a grey area before, stating that if no action taken, Airdrops are not taxed.
  • Interestingly, the letter does not advise specifically on NFTs, yet the various digital assets were assigned to categories such as utility, security, equity, debt, payment, and hybrid.
  • Full node stakers might be not pleased by the letter as it renders it commercial activity, which has big tax implications.

To digest the recent events regarding stablecoins, we provide some insights into the different classes below:
Off-chain collateralized stablecoins (e.g. USDT, USDC):

typically backed by bank deposits, which are regularly audited (including Tether as of this year), and minted by a centralized entity that maintains these reserves. They keep their peg to fiat currency by trust in that entity to always honor creation and redemption requests of tokens versus bank deposits. USDT and USDC offer different risk profiles as USDC is 100% backed by fiat and U.S. Government debt where USDT has ~36% in commercial papers, a form of unsecured debt, that comes with a higher risk profile. Historically not precarious, inherit trust from collateral backing


On-chain collateralized stablecoins (e.g.: DAI, LUSD):

minted permissionlessly through DeFi protocols by depositing collateral. The peg is maintained by high collateralization ratios that is liquidated for the protocol’s stablecoins if threshold is hit. Historically not precarious, inherit trust from over-collateralization, yet might come with protocol-specific risk


Algorithmic stablecoins (e.g.: UST, FRAX):

aim to maintain peg through dynamically controlling supply and demand of the stablecoin by the protocol. The protocol acts as the “central bank”, increasing supply when the token shows a deflationary tendency, and reducing it when the purchasing power of the stablecoin drops. The rules for doing so are embedded in a smart contract, and changing them is only possible through social consensus or more formal governance votes tied to a governance/seigniorage token. Historically precarious, hard to build trust in the system


For more in depth insights, we refer to “Algorithmic Stablecoins” and “Stablecoins - Navigating Crypto Volatility”. Moreover, we are preparing another Decrypt on the most recent stablecoin developments scheduled for next release.


Read the Research Briefing


In other news
  • The fourth Ethereum mainnet shadow went successful (via Twitter)
  • Polygon announces $1b treasury allocation to fund the development of zk technology (via Polygon)
  • Coinbase posts $430m loss resulting in plummeting stock (via Blockworks)
  • Instagram to launch NFT support for multiple chains (via The Block)
  • Six consecutive red weeks for BTC (via Cointelegraph)
  • First spot crypto ETFs in Australia start underwhelmingly (via CoinDesk)

Bitcoin Suisse