Research Summary
The report discusses the impact of on-chain treasury yields on LUSD, the stablecoin of the Liquity protocol. It also covers the recent surge in Bitcoin’s price and the subsequent revival of on-chain activity, particularly in meme coins. The report further explores the potential sustainability of LQTY’s price outperformance amidst a contraction in LUSD supply.
Key Takeaways
Effects of On-Chain Treasury Yields on LUSD
- LUSD Supply Reduction: The report notes that the LUSD supply has decreased by approximately $75 million since July/August, coinciding with the introduction of enhanced DAI Savings Rate by MakerDAO and the launch of sDAI on Spark Protocol. This has led to an increase in stablecoin borrowing costs, creating a positive carry trade and putting pressure on the LUSD peg.
- LUSD Price and Redemption Mechanism: Liquity’s redemption mechanism, which allows arbitrageurs to buy LUSD below peg and redeem it for $1 of collateral, has seen a significant increase in use due to the LUSD price consistently trading below peg. This has led to a reduction in LUSD supply and has driven users with open positions to close them, further diminishing supply.
Impact on LQTY Price and Unstaking
- LQTY Price Outperformance: Despite the contraction in LUSD supply, the report highlights that the ETH fees generated by increased redemptions have led to abundant yields for LQTY stakers, resulting in significant price outperformance. However, the sustainability of this outperformance is uncertain given the severe contraction in LUSD and a recent increase in LQTY unstaking.
- LQTY Unstaking Flows: The report notes a pick up in LQTY unstaking, including some extremely large withdrawals, over the last few days, which could potentially impact the price outperformance of LQTY.
Bitcoin’s Price Surge and On-Chain Activity
- Bitcoin’s Price Surge: The report mentions a 27% increase in Bitcoin’s price from the recent low prior to the fake ETF news, which has led to a scramble among investors to allocate their remaining capital.
- Revival of On-Chain Activity: The surge in Bitcoin’s price has reignited on-chain activity, particularly in meme coins. The report notes that a few meme coins that were previously valued around the $2m mark have now reached valuations of 10, 20, and $30m within a week.
Actionable Insights
- Monitor LUSD and LQTY Dynamics: Given the significant changes in LUSD supply and LQTY price, it would be prudent to closely monitor these dynamics for potential impacts on the Liquity protocol and the broader DeFi market.
- Assess Bitcoin’s Price Movements: The recent surge in Bitcoin’s price has had a significant impact on on-chain activity. Keeping a close eye on Bitcoin’s price movements could provide insights into potential shifts in on-chain activity and market sentiment.
- Track Meme Coin Performance: The report highlights a resurgence in meme coin activity, with some coins experiencing significant increases in valuation. Tracking the performance of these coins could provide insights into emerging trends and shifts in investor behavior.
