A Novel Approach to Minimise Risk During Death Spiral like UST & LUNA

3 min readMay 25, 2022

TL;DR

The Death Spiral of LUNA & UST crashed 98% in price value causing huge collateral damage across the DeFi ecosystem.
Many money market protocols are now insolvent due to the massive bad debts caused by these recent events.
In light of these events, we’re showcasing the choice behind UniLend design principles & how our protocol would have minimized the damage.
UniLend OMNIS introduces Isolated Dual Asset Pools that will ensure a higher level of security where the volatility of one asset doesn’t affect the entire protocol.

UniLend Design Principles

The collapse of a multibillion-dollar cryptocurrency called Terra has sparked a wave of “fear, uncertainty, and doubt” across the crypto sector. In the light of these recent events of Terra collapse and the aftermath of other money market protocols, we would like to showcase the choice of design principles behind UniLend finance and how the UniLend protocol would have minimized the damage.

What is Terra & Luna?

Terra is a blockchain network built using Cosmos SDK. They created a stablecoin UST, which rather than using fiat or over-collateralized crypto as reserves, used LUNA (networks native token) and each UST is convertible into 1 dollar worth of LUNA.

How did the collapse start?

LFG(Luna Foundation Guard) began removing approximately $150 million in UST from the decentralized exchange Curve. Minutes after LFG removed its funds, an unknown address sold $84 million in UST on crypto exchange Binance. Demand for UST became “off-balance” on Curve and Terra’s UST stablecoin lost its peg to the U.S. dollar. The “depeg” seemed to escalate after massive withdrawals from Anchor which led to a ‘death spiral’ of both the tokens and also the entire Terra ecosystem was destroyed.

Collateral damage

As UST and Luna tokens were listed on multiple DEXs across various blockchains, it caused a ripple effect causing collateral damage throughout the market. Immediately affecting the Cosmos ecosystem ( Osmosis DEX), Kava, and multiple other money markets like Kavalend, Blizz Finance on Avax, Venus & Planet Finance on BSC, and Mushroom finance on multiple chains. Other algo stables like DEI protocol were also impacted which made Scream Finance on Fantom insolvent. Malt v2 on Polygon lost its peg as well.

Most of the above money markets are compound forks. They provided borrowing against Luna as collateral. Luna dipped below 0.01$ but the chainlink oracles price feed for Luna was pegged to 0.1$. This caused a massive bad debt to the protocols as the collateral was way lower compared to the borrowed amount and the protocols are now insolvent.

How UniLend Finance is better than other protocols in mitigating such black swan events?

Dual Asset Pool

UniLend v2 introduces pools for dual assets. Permissionless listing of UniLend’s lending and borrowing is powered by the Dual Asset Pool model where any user can create any ERC20/ERC20 pool to begin lending and borrowing for those assets. This kind of isolated model ensures a higher level of security where the volatility of one asset doesn’t affect the entire protocol (unlike Aave, Compound, or other money markets which have a cross-pool mechanism) and is limited to a single (or few) pool. Dual asset pools prevent the tokens in a specific pool to be immune to price and liquidity fluctuations of assets in other pools. The damage done to the pools will be isolated and will not affect other assets or pools.

UniLend Omnis is going to launch soon on Kovan Testnet. Stay Tuned on our social channels for upcoming details.