Staying Peg Confident with Unslashed Finance
Step-by-step tutorial on how to get your UST peg insured
Stablecoin, as its name suggests, is a type of cryptocurrency asset that pegs its value to a certain fiat currency such as the US Dollar. As of July 2021, the total stablecoin market cap stands at around $113B, amounting to 9% of the total cryptocurrency market cap. By design, its value is supposed to stay “stable” at its peg (i.e. 1 USDT = 1 USD), but as we saw with the recent Iron Finance saga and the temporary depegging of UST in May crash, stablecoins are not always guaranteed to stay pegged at 1 USD.
Depeg risk is especially relevant with algorithm stablecoins, such as TerraUSD (UST), Terra ecosystem’s native stablecoin. In May 2021, LUNA took a toll on the cryptocurrency flash crash, causing cascading liquidation and forcing UST to lose its 1 USD peg, pulling the price down to as low as 0.89 USD. Nevertheless, UST pegged back to 1 USD within a few days, successfully passing the “stress-test” and proving robustness of its algorithm. The May crash turned out to be a bullish test for Terra ecosystem, however, this kind of incidents are exactly what we hope to mitigate through insurance protocols such as Unslashed Finance.
In this article, we aim to deliver an easy-to-follow, in-depth tutorial on utilizing Unslashed Finance to protect your UST assets from depeg risk.
Disclaimer: Not investment advice, always DYOR. More details on Unslashed Finance can be found on official Unslashed Finance Documentation page.
If UST is so robust, why do we need depeg insurance?
Well, it’s the same reason why we sign up for life/automobile insurance. We are never hoping for something bad to happen to us, and we understand that the chances of the unfortunate happening is rather low, BUT we are insuring against the worst case scenario just in case. Same applies to depeg insurance. Especially after witnessing UST find its peg after a flash clash, we are more confident than ever that UST will continue to perform as designed. However, there are investors who are willing to pay a premium to prevent the worst of the worst from happening, in this case, completely losing the peg. Unslashed Finance has created a market for those who are willing to pay a premium for depeg coverage, while also incentivizing the counter-party who trusts the robustness of UST algorithm and allowing them to bet on its “stability”. Let’s explore how these two groups of opposing interests can make use of the insurance protocol to their benefit.
I do believe UST will retain its peg, but I want to prepare for the worst of the worst.
Unslashed Finance offers various insurance programs ranging from smart contract integrity, wallet protection, validator slashing protection, and dollar peg stability. The team has recently starting providing dollar peg stability insurance on UST. Let’s assume you have 1,000 UST deposited and earning 20% APY on Anchor Protocol, and you want to get your position insured against a potential depegging incident. This is where Unslashed Finance comes into play. Once you have purchased the depeg coverage, you will get your position fully covered in case UST loses its peg against USD (detailed coverage terms are outlined on UST Peg Policy Document). Sounds too good? Well, you will be paying a premium to get your position covered, but it’s a relatively small portion when compared to the 20% APY you are earning from Anchor Protocol.
At the time of writing, the premium price of the insurance is 1.646%/year. This means that you will be paying 16.46 UST worth of cryptocurrency (you can only pay premium in ETH at the moment) to get your 1,000 UST position on Anchor Protocol covered in case of a depeg incident. With the current 20% APY of Anchor Protocol, this means you are technically getting your position insured “for free” since you will be able to pay off the premium with the deposit reward.
For the purpose of this tutorial, we will assume that you have Metamask wallet set up with enough ETH in it to cover your UST holdings in Anchor Protocol.
How to purchase UST dollar peg stability insurance
First, connect the webapp to your Metamask wallet. WalletConnect will soon be supported as well.
Under “Get Covered”, click on “UST Peg” insurance. You will be directed to the following UI.
There are few important information you should check before purchasing your cover.
- Premium Price - Price of the insurance program denominated in % of the total position covered (i.e 1.646% of 1,000 UST)
- Rollover Date - The date when policy gets rolled over and the coverage of the insurance gets recalculated. (Necessary due to fluctuation in ETH price and premium price) Assume the price of ETH doubled in one rollover cycle, now you will need half the original amount to get your same position covered. This allows investors to rebalance on rollover date (add or remove)
- Insurance Capacity - Maximum available cover, this increases if there are more counter party providing liquidity to the pool (Will be covered in this article)
- Security Deposit - Down payment to get your position covered
Now, calculate how much your position is in ETH. Assuming ETH price of 2,000USD/ETH, we need to purchase 0.5 ETH coverage to insure our 1,000 UST position.
The protocol will calculate the security deposit required to cover your position. Click “Add Cover” and confirm transaction on Metamask. You have successfully purchased a cover. In case things go South and you want to claim your coverage. Click on “Claims” tab and you will be able to file a claim, assuming you have purchased coverage following the steps above.
I am certain TerraUSD will retain its peg, and want to bet on its stability
If you are like us, you trust the Terra ecosystem and its robust algorithm to continue maintaining its pegs even at the most extreme market conditions. You also happen to have some ETH that are lying around and want earn some APY on it. Think of it as providing liquidity on LP pool. You are providing capital to the coverage pool in this case.
Currently, there are two strategies to supply coverage capital.
- Capital Buckets - The Spartan Bucket, curated by Unslashed Finance for diversification and maximum APY%
- Individual Capital Pools - Direct deposit to individual pools
The Spartan Bucket allows investors to diversify their capital in different capital pools that are curated by the team, while individual capital pools are more for those who are certain that a specific coverage will not fail.
How to supply capital to the Capital Buckets
The Spartan Bucket offers 14.62% APY at the time of writing, let’s go ahead and supply capital to the bucket. Keep in mind the steps to supplying capital are the same for both strategies.
Click on “View details” of The Spartan Bucket, you will be directed to the UI below.
You will be able to see the list of pools the Spartan Bucket allocates its capital to. The share of the pool may be subject to change, so make sure to go through and understand the list of pools before supplying capital. Below are some important metrics on the Spartan Bucket UI.
- Total Supplied Capital - How much the pool holds in total (Think of it as TVL on a DeFi platform)
- #Capital Pools - Number of pools the bucket consists of
- APY - Interest rate of the Capital pool. Note that part of the APY is paid in USF the native token of Unslashed Finance
Once you have understood what pools you are supplying capital into, click on “Supply Capital”. You will be directed to the UI shown below.
Enter the amount of ETH you wish to supply, click on “Supply Capital”. then confirm transaction on Metamask. The status will be updated with the amount of capital supplied and the current APY at which your capital is earning.
Terms and conditions
According to the UST Peg Policy Document the claim will be covered if below conditions are met.
The loss is related to UST-US dollar peg, UST trading below $0.87 on CMC, Coingecko or other reputable sources; and the loss on UST-US dollar peg results in a TWAP, based on market data extracted from reputable sources, below $0.87 in a two-week span at least; and the loss occurred during the policy period.
More importantly, there are some exceptions to the coverage that are outlined in the document. So make sure to go through them thoroughly before purchasing a coverage.
We expect Unslashed Finance to vastly improve the user experience in the future by introducing different assets to pay for coverage and to supply capital. It makes more sense to be purchasing coverage in the same cryptocurrency you are paying to insure. We hope to see various cryptocurrency payment options and ultimately integration of Terra Station Wallet on Unslashed Finance in the near future.
Please feel free reach out to us on Four Barbers Twitter with comments or suggestions on the topics you’d like us to explore.
