Approximately $45 billion in value disappeared as a result of Terra’s collapse, making it one of the largest losses in crypto’s history. This debacle is a result of unsustainable tokenomics, unfavorable market conditions and perhaps a few entities exploiting these economic vulnerabilities. In this webinar we examine the unprecedented crash of UST and Terra, analyzing the most relevant on-chain data from whales, exchanges and DeFi protocols. We also provide best practices to manage risks not only in circumstances like this, but also in general when using crypto applications.

1. DeFi Risk Management in Light of
Terra’s Collapse
June 2022

2. Agenda
● Terra Mechanics
● The Implosion
● DeFi Risk Management

3. A quick update about ITB

4. Partnerships
● AltcoinBuzz, IXFI

5. Terra Mechanics

6. Terra 1.0
● Smart contract platform
● Algorithmic stablecoin at its core
○ Burn LUNA to mint UST
○ Use UST for gas fees
○ Incentivize UST use-cases
● Payments - Chai app
● “Savings” - Anchor

7. UST Overview
● Incentives meant to preserve $1 peg
● Expansionary and contractionary measures:
○ If UST> $1, burn $1 worth of LUNA to obtain
UST, sell for arbitrage profit
○ If UST < $1, redeem UST for LUNA value
worth $1, make the difference

8. UST Demand, Decreasing LUNA Supply
● Incentivize demand to not depend on LUNA emissions
● 20% APY on Anchor → marketing expense
● Expansionary feedback loop
● “Ponzinomics”
● LUNA 14,000% return in 2021

9. UST Liquidity
● Support peg to $1
● Liquidity on Curve, other DEXs
● Allocations to market makers
● Larger market, higher cost to sustain

10. Risk Management
● Bitcoin holdings - diversify collateral type
● 4pool - strengthen liquidity
● 18% - lower rates on Anchor
● Too late, not large enough

11. Terra’s Implosion

12. LFG Withdraws, Whales Follow

13. LFG Sells Bitcoin Holdings

14. Pool Imbalance

15. Whales Leave Anchor
Source: Jump

16. Luna Supply Goes Parabolic
Source: Jump

17. DeFi Risk Management

18. DeFi is Complex.
● Many UST users did not understand how
it worked
● Working in theory ≠ in practice
● Predatory nature
“If you don’t understand
the source for the yield,
you are the yield.”

19. Best Practices
● Education prior to deployment
● Diversify allocations
● Hedge positions
● Avoid leverage
● Risk of losing principal vs potential of extra yield
● Don’t put in what you cannot afford to lose

20. Understanding Risks Involved
● Internal vs External
● Economic vs Technical

21. Types of Attacks

22. Risk Types
● Technical risks
○ Smart contracts
○ Key management
● Economic risks
○ Supply-side
○ Demand-side
○ Stability
○ Assets

23. DeFi Attacks by Risk Vector
N = 50

24. Technical Risks

25. What can you do about technical risks?
● Check if project is audited
● Auditor track record
● Is it a fork?
● Founders public or anon?
● Bug bounties
● Multi-sig set up
● TVL and test of time
Source: CoinDesk

26. Audited vs Unaudited

27. Auditor Performance

28. Losses by Risk Vector
● Over $50B in losses due to
economic risks
● Monitoring key metrics can prevent
protocol and user losses

29. Economic Risks
● Supply-side
○ Liquidity
○ Concentration
○ Exit fee
● Demand-side
○ Collateral ratio
● Stability
○ Oracles
● Assets
○ Lowest MC, asset liquidity

30. Conclusions
● DeFi is complex
● Risk management is paramount
● Economic and technical risks
● “Too big to fail” doesn’t exist in crypto
● Leverage exacerbates down-falls

31. Thoughts on Path Ahead
● Largest test in crypto’s history
● Unwinding but still under development
● Hodlers accumulate, tourists leave
● Long-term prevails
Source: a16z

33. Thank You! Questions?
Lucas Outumuro
Head of Research at IntoTheBlock
Email: loutumuro@intotheblock.io
Twitter: @LucasOutumuro