Autor Cointelegraph By Elaine Hu

Here’s how traders capitalize on crypto market crashes and liquidations

The first week of the new year saw a vicious pullback across all cryptocurrencies in the market. Ether (ETH) price dropped from its November peak at $4,800 peak to under $3,000 on Jan. 8 and Terra’s LUNA governance token also dropped from $85 on Dec. 31 to $67 on Jan. 8, 2022. These unexpected dramatic moves often cause liquidation cascades in the lending market, but they also create unique buying opportunities in the collateral liquidation markets.Kujira’s Orca protocol is a platform built on the Terra network and it allows investors to bid on bETH (bonded asset of Ether) and bLUNA (bonded asset of LUNA) at a discounted price when the at-risk collateral is liquidated. As a pseudonymous analyst at Kujira pointed out,“Liquidation has for so long been the ‘shady underbelly’ of lending platforms and monopolised by bots so much that the average user barely knows it’s going on, least of all how they could benefit from it”. Kujira allows anyone to participate in the liquidation process by grasping the opportunity to acquire these assets at a discounted price.In the recent crash on Jan. 8, the lowest price one could buy Ether (in its bonded asset bETH form) was $2,833, while the market price of Ether was around $3,000. Similarly, traders could buy bLUNA as low as $58.90 while LUNA’s spot price was around $67.Liquidation stats from Kujira. Source: TwitterLet’s take a closer look at the strategies for acquiring bETH and bLUNA at a discount during a market crash.Market structure provides unique opportunities to buy at a discountIn the Terra ecosystem, participants can borrow Terra USD (UST), the stablecoin of the Terra blockchain, from DeFi protocols such as Anchor to participate in high-yield liquidity pools, IDOs or any other profitable trading activities involving UST. In order to borrow UST, participants need to deposit bonded assets (bETH or bLUNA) as collateral to Anchor. The maximum amount each wallet can borrow is 60% of the collateral value, often referred to by DeFi protocols as the maximum LTV (loan-to-value).In a bull market where Ether and LUNA prices are on the rise, the LTV continues to decrease and no collateral is at risk. When the price of Ether or LUNA goes down, the collateral value decreases and if the LTV exceeds 60%, a liquidation event is triggered. This alerts Anchor to sell the proportion of the collateral that exceeds the maximum LTV at a discounted fire-sale price on Kujira Orca. This is where potential buyers on the other side of the trade can buy the collateral at a discount.How to capitalize on pricing anomalies in ETH and LUNAHere are some simple steps investors can follow if they want to purchase Ether or LUNA at a discount.After connecting the Terra wallet to the platform, an investor chooses the asset they would like to bid (currently only bLUNA and bETH are available), then selects the premium (the percentage of discount from spot) to receive.After clicking “Place My Bid” to submit the bid, the investor will see the “My Bids” window. It takes 10 minutes for the bid to be ready, and afterward, the investor needs to click “Activate” to include the bid in the bidding queue. Once the bid has been filled, the amount will be shown in the “Available for Withdrawal”’ window. The investor then needs to click withdraw and pay a fee to transfer the asset back to their Terra wallet.Kujira Orca home page demo. Source: Kujira LitepaperThere are three important things to remember when placing the bid:1. If the investor is not using KUJI (the native token of Kujira) to pay for the withdrawal fee, they should always place a premium (discount) percentage larger than 1%, as there is a network fee of 2 UST and a 1% commission fee. If using KUJI, the commission is only 0.5%.2. If there are multiple bids at different discounted rates, the investor should activate them all at once to save network fees.3. The bids are filled equally and proportionally between everyone bidding at the same discounted rate. There is no first-come, first-serve advantage or larger bids that get a filled-first advantage. The only sequence in which the bids are filled is based on the discounted rate — i.e., the lower-discount pool gets filled first. The mechanism of evenly distributing liquidation assets among each bidder ensures the fairest allocation to everyone. Ryan Park, co-builder of Anchor Protocol, said in an interview about Orca:“By evenly distributing the proceeds of liquidations amongst a greater majority, collateral isn’t going into a centralised point but back into the hands of other users. The implications are staggering and quite frankly, I don’t think enough attention has been given to just how big this is.”The example below shows that when there is a 100,000 UST liquidation to be executed, the 1% discount pool (61,000 UST in total) is filled first and the pool is fully emptied. The remaining 39,000 UST is subsequently passed onto the 2% discount pool to fill the bids. Each wallet in each pool receives a proportion of the allocated liquidation amount based on the size of their total bidding offer in the pool. It is a completely fair distribution with no priority given to the quickest clicker or the largest bidder.Example of 100,000 UST liquidation in 1% and 2% pools.Identifying the best time to buyFigure1: Number of liquidated borrowers vs. ETH price. Source: Kujira Orca, Flipside CryptoAs shown in Figure 1 and Figure 2, the best time to bid is when there is a dramatic drop in collateral asset price and many borrowers’ LTV goes below the 60% maximum level. This creates an increase in the number of liquidations (blue and purple line in Figure 1) and also the supply of liquidation assets on the platform (blue and purple bar in Figure 2).Figure 2: Liquidated amount in USD vs. LUNA price. Source: Kujira Orca, Flipside CryptoThe worst case scenario — in terms of number of liquidated borrowers — coincides with the time when bLUNA and bETH prices dropped significantly. The liquidation amount also spiked in early December 2021 and early January 2022 when Ether and LUNA prices breached major support levels as shown in Figure 2.These sudden rises in liquidation create unique opportunities for investors to purchase bLUNA and bETH at a great discount. As shown in the chart below (Figure 3), in the December LUNA crash, bidders could purchase bLUNA at a 11% to 12% discount on Kujira Orca at the peak. Figure 3: bLUNA liquidated amount in USD vs. purchase discount. Source: Kujira OrcaSimilarly (shown in Figure 4), when Ether price dropped from the $4,600 level to $4,100 on Nov. 16, bidders were able to purchase bETH at a 11% discount at around $3,700. Figure 4: bETH liquidated amount in USD vs. purchase discount. Source: Kujira OrcaLooking into the average discount bidders received in the past three months, it is very interesting to see most of the liquidations happened in the very high discount group (9 to 10%, or more than 10%) for November and December 2021. In January 2022, the concentration seems to have moved to the 6% to 7% discount bucket. However, January’s data is incomplete and only available until Jan. 10 at the time of writing. This means the concentration in the 6% to 7% bucket is only a reflection of the drop early in the year and could still change for the rest of the month.Discount bucket comparison for the past 3 months — January data is only until Jan.10. Source: Kujira OrcaTraders can earn while they waitThe historical discount data clearly shows that investors can buy bETH and bLUNA at a discount as high as 9% or 10% away from the market price but the bids might take a long time to get filled. Luckily, there will soon be a way to keep earning interest from UST while waiting for the bids.Investors can simply deposit UST to Anchor’s Earn and accrue interests at the current rate of 19% APY; and use the aUST token they receive as the IOU token to bid liquidation assets on Kujira Orca. This way, one keeps accruing interest until the bid is filled on Kujira and the aUST is converted to UST for the liquidation purchase.** Special thanks to Hans from Kujira for providing the data and insights needed to complete the article.The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Every investment and trading move involves risk, you should conduct your own research when making a decision.

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Here’s how Terra traders use arbitrage to profit from LUNA and bLUNA

The end of the year is normally a time to wind down and prepare for the holiday season, but the last few weeks of 2021 saw a crypto market that showed no signs of resting. One of the headline-grabbing stories related to Terra reaching an all-time high in terms of the total value locked (TVL), and the project surpassed Binance Smart Chain (BSC) as the second-largest decentralized finance blockchain after Ethereum. After reaching the $20-billion TVL mark on Dec. 24, Terra’s TVL has come down to around $19.3 billion at the time of writing according to data from Defi Llama, but this is in no way, shape or form a bearish signal.Top 5 total value locked on the top 5 blockchains. Source: Defi LlamaCurrently, Terra has only 14 protocols built on the chain, compared to the 257 protocols on BSC and the 377 that are on the Ethereum network. Terra’s protocols have managed to attract liquidity very successfully, and the recent Astroport protocol launch coincides nicely with the swift rally of Terra’s native governance token, LUNA, to a new all-time high on Dec. 26, 2021. Looking at the TVL in United States dollars versus LUNA, the former has experienced exponential growth since September 2021 while the latter remains quite flat during the same period. It is not hard to see that the contributing factor to the recent increase in the U.S. dollar TVL is the increase in LUNA’s price itself.Terra TVL in USD (left) vs. in LUNA (right). Source: Defi LlamaWhile price increases in the governance token often show investors’ confidence in the chain and the protocols, it seems to also produce more lucrative arbitrage opportunities. Let’s take a closer look at some of the strategies used to arbitrage between LUNA and its bonded asset bLUNA.LUNA price vs. Luna/bLuna premium in %. Source: Flipside CryptoWhy are there spreads across Terra’s markets?LUNA is the governance and staking token of the Terra blockchain, whereas bLUNA is the token that represents the staked LUNA and its corresponding block rewards. Since bLUNA is fungible and transferable just like LUNA, it’s also traded on Terra’s decentralized exchange. Like other currency or token pairs traded on exchanges, the LUNA/bLUNA pair traded on different decentralized exchanges (DEX) such as TerraSwap, Loop Markets or Astroport may have different prices due to price inefficiency across different platforms. Arbitrageurs will profit from buying at a lower price from one protocol and selling at a higher price on another, helping the platforms resolve price inefficiencies and eventually reach a fair price across all exchanges. Besides the common reason for price inefficiency, there are other factors specifically related to the nature of bLUNA that make the LUNA/bLUNA price different across protocols.bLUNA is priced higher than LUNA on Anchor Protocol. This is because bLUNA, once bonded and minted on Anchor, can only be burned and exchanged back to LUNA after 21 days (plus three days processing time) unless it’s an instant burn. Since bLUNA not only represents the value of the staked LUNA but also the block rewards from staking during the 21-day lock-up period, its value is always higher than LUNA. As shown in the graph below, bLUNA’s price per LUNA is slightly below 1 on Anchor most of the time, with three distinct outliers showing bLUNA happened to be more valuable at the rate of 0.97 bLUNA per LUNA.Anchor bLUNA hourly price per LUNA is below 1. Source: Flipside CryptoAnchor bLUNA hourly price per LUNA is always below 1. Source: Flipside CryptoLUNA is priced higher on DEXs than bLUNA most of the time possibly due to: (1) More users selling bLUNA than buying on DEXs (hence bLUNA is worth less) because burning bLUNA on Anchor Protocol takes 21 days if it’s not an instant burn. So, if users want to get LUNA back instantaneously, they need to go to a DEX to sell bLUNA. (For an instant bLUNA burn on Anchor, the rate is the same as TerraSwap.) (2) Users don’t normally want bAssets as much as bLUNA unless they need to use them as collateral on Anchor. Currently, Anchor provides bonding functionality to exchange LUNA for bLUNA at a very close to but slightly lower than 1 ratio — i.e., investors get slightly less than 1 bLUNA for 1 LUNA. Even though the exchange rate on DEXs is better (traders get more than 1 bLUNA for 1 LUNA on DEXs), users tend to seek the most convenient way, which is to use the Anchor Bond, to get their bLUNA so they don’t have to switch between different protocols.How to capitalize on Terra’s arbitrage opportunitiesBased on the price difference explanations presented earlier, there are two main ways to arbitrage LUNA and bLUNA.TerraSwap, Loop Markets and Astroport all provide swaps for LUNA/bLUNA. Small price differences often exist across these DEXs, which create arbitrage opportunities for traders to buy the pair at a lower rate on one DEX and sell at a higher rate on another. LUNA/bLUNA price comparison across DEXs. Source: Flipside CryptoThe chart below shows the LUNA/bLUNA daily average price observed from swaps from different platforms during December 2021. The ratio is the actual amount of bLUNA received (after a deduction of fees and slippage) divided by the amount of LUNA offered for the swap. As explained in the previous section, one LUNA swaps for more than one bLUNA on DEXs due to more demand for LUNA on DEXs.The graph below annualizes the daily arbitrage return between either two of the three DEXs. The best opportunity existed on Dec. 15 between TerraSwap and Loop, with an annual percentage yield (APY) of almost 600%.Arbitrage LUNA/bLUNA pair among different DEXs. Source: Flipside CryptoArbitrage between DEXs and AnchorInvestors could swap LUNA for bLUNA on one of the DEXs that offers the highest bLUNA per LUNA, burn bLUNA on Anchor, and wait 21 days (plus three days) to get more LUNA back. Note that burn on Anchor has to be a normal “slow” burn; instant burns will not work because the exchange rate is the same as TerraSwap.Based on the 24-day (21 + three days processing from the Anchor burn) annualized return, the graph below shows the APY from arbitraging between different DEXs and Anchor. Arbitrage between DEXs and Anchor APY vs. LUNA staking APY. Source: Flipside CryptoLido’s 8% APY from LUNA liquid staking is also added as a risk-free benchmark return comparison. During the month of December, the highest APY reached 80% on Dec. 27 and, since then, has decreased significantly, dropping below the risk-free return in the new year. This could be because the increased popularity of Terra and more participation in different Terra protocols have helped rationalize prices across platforms, reducing price inefficiencies and arbitrage opportunities and consequently creating a fairer price.Savvy investors are always watching for the next opportunityAs shown in the December 2021 historically observed swap data, LUNA/bLUNA arbitrage opportunities exist across different protocols on Terra. Traders can choose the riskier way to arbitrage among different DEX platforms such as TerraSwap, Astroport and Loop Markets, or they can choose the safer way to arbitrage between these DEX platforms and Anchor, given they are willing to hold bLUNA for 24 days. The annualized return from the DEX and Anchor arbitrage strategy consistently performed better than the risk-free Lido liquid staking in December 2021 until only recently when the return almost evaporated on Jan. 1, 2022. This was possibly due to more participation and price rationalization in the Terra protocols. The arbitrage opportunities will likely reappear again in the future due to volatilities in trade volumes and participation or from the launch of new DEX protocols.The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Every investment and trading move involves risk, you should conduct your own research when making a decision.

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