A Quick Take on flexUSD and TerraUSD (UST)

“Tempus Edax Rerum”

When comparing yields on our stablecoin, flexUSD, we always refer to USDC and USDT that pay 0% at the base layer compared to the variable rate that flexUSD pays no matter where you hold your tokens — currently about 12%.

When we speak to high net worth individuals, family offices or institutions we make a very important comparison to bank rates (0.5/1%) or other short term products that they may use to save in like money market funds. When we speak to potential savers from deep crypto native folk, it’s important to understand other yielding products in CeFI and DeFi.

When chatting to these crypto native DeFi folk, we often get asked/compared from a yield perspective to TerraUSD, otherwise known as UST and in particular the 19–20% yield that comes from staking UST in Anchor.

My co-founder, Mark Lamb, recently had an interesting telegram conversation with several CoinFLEX users on this subject and I wanted to relay and record that conversation as it’s an important reflection of both our views when comparing flexUSD and UST.

In our view it’s important for a stablecoin to be backed by “good collateral”, which is a subjective definition, that everyone should either (A) arrive at oneself or (B) respect the opinion of someone they trust who has done the step of A for them.

Lombard Street: A Description of the Money Market, was written 150 years ago but is still pretty relevant today. Lots of lessons around collateralisation and supply/demand curves on interest rates etc. are contained in that book & is well worth reading.

UST’s collateralised (in a sense) by LUNA, both of which have been conjured into existence and one of which aims to track a $1 price.

LUNA’s value really depends on UST demand. If UST is in high demand, LUNA has a upwards momentum (buy pressure) to it, but if UST is in low demand, or is being “redeemed” (redemption occurs in the form of new LUNA being issued and then sold on the market), then LUNA has a sell pressure to it.

Much of the UST demand is coming from Anchor:https://app.anchorprotocol.com/

Which is paying a high rate and which is being largely subsidised by the protocol and will run out at some point (has come close to in the past).

A few key differences with flexUSD, before we get into what the relative risks are:

UST’s collateral, LUNA, doesn’t have a fixed $ value. The value goes up and down with the market.

flexUSD is backed by a basket of repo positions. The crypto in that backing does go up and down in value, but the combined value of the Crypto + Short Perp positions (we can call this sum, a repo position) doesn’t go up and down.

TL;DR Lending in CoinFLEX repo is delta neutral. The value of a dollar deployed into CoinFLEX’s repo market doesn’t change as the prices of crypto assets go up and down.

This is the key difference in our view between UST and flexUSD. flexUSD is backed by “good collateral” and UST is effectively backed by “speculative” collateral (LUNA). By good collateral we mean a whole mix of USDC, BTC, ETH, BCH and a bunch of coins (all with offsetting short futures positions).

UST also has a tail risk which is: What if the main reason people hold UST is to get the yield on Anchor? Certainly the majority of UST are deployed in Anchor.

If Anchor’s yield reserve runs out and yields go down, do they “redeem” UST and then sell LUNA because after all, they are dollar yield collectors rather than speculative governance token HODLers? These are the questions UST holders have to ask themselves.

As a CoinFLEX user recently pointed out, the LUNA founders also need to build a collateral liquidation engine for their reserves in the backend. This could be as a CeFi or DeFi model.

The foundation has recently been selling LUNA for a large BTC position which is a way better diversification but this by in itself may not be sufficient as:

By way of numbers, of the current $18bn of UST, almost $12bn is deployed into Anchor and the actual borrowed UST is about $2bn at a real rate of about 2–3%. The balance of the yield is provided artificially by inflation/ token drops by the protocol. I guess the hope with UST is that adoption/growth across multiple use cases means that once this artificial yield ends, it will have the network effects to still prove useful to hold and this could absolutely be the case.

flexUSD holders mainly just have to ask whether CoinFLEX’s liquidation engine works as intended and CoinFLEX’s insurance fund functions correctly, both of which have had a 4 year track record over some very extreme and aggressive price movements, with huge positions to manage.

For more tradfi folks we think holding flexUSD is perhaps mentally easier / more comfortable than holding UST. However we both also think that experimentation in stablecoins is useful for testing out hypotheses and that from every stablecoin attempt, the market is getting smarter and way more innovative. We’re watching economic experiments play out in real time with billions of dollars and that’s a great thing for humanity. Humanity and financial markets are the winners, regardless of what happens.

Useful links:

https://en.wikipedia.org/wiki/Lombard_Street:_A_Description_of_the_Money_Market

https://coinflex.com/transparency/flexUSD

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Cofounder, CoinFLEX. All opinions my own.

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Sudhu Arumugam

Sudhu Arumugam

Cofounder, CoinFLEX. All opinions my own.

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