Community update

Well that was intense

The last few days have been extremely tough on all of us following the Luna/UST crash. We’d like to provide a recap of key events, and the impact on Alluo and initiate a discussion on the key lessons learned for our community.

Key events:

• Before the UST collapse: Alluo had a total exposure of 3,146,230.74 UST (see details here) — 1.5m UST held as liquidity for the Treasury (which we had brought back from Anchor as they were decommissioning the Ethereum-Terra shuttle bridge) and the remainder 1.6m invested in the UST / 3CRV pool and compounded on Convex.
• Note that in addition to mobile app funds, the majority of our treasury was also invested in the protocol which was following the latest liquidity direction vote that had taken place here. Whilst this may feel risky in hindsight, we always felt it was important for us to show belief in our own protocol and be side by side with our users rather than just be on the sidelines.
• Earlier in the week, the Terra UST stablecoin, which should be worth $1, started to deviate from its peg. We monitored the situation very closely, but it wasn’t clear at that time that we were in the middle of a coordinated attack on UST and the Terra ecosystem as a whole.
• On Tuesday 10th of May: we published an emergency proposal to ask Alluo’s community what they wanted to do (first vote). At that time, UST was fluctuating between 69 and 93 cents. 90% of votes requested to reduce our UST exposure by 50% over a period of a week. Again, at that time, whilst the situation felt serious, it wasn’t immediately clear that Terra would actually go on to collapse by Friday.
• We started selling tokens in the evening after the vote had taken place but liquidity on-chain was remaining sparse which was leading to important slippage.
• On Wednesday 11th, Do Kwon published a tweet providing an overview of the situation and its action plan to reestablish UST peg. UST was oscillating between 30 and 50 cents at that time. That message felt very unconvincing to us — and our belief at that time was that both UST and Luna were headed to 0 — we just didn’t how quickly this would go on to happen.
• Following this announcement, we published a second emergency proposal to ask the community whether they’d like to completely exit our UST position and by 2 pm on Wednesday 11th, we had sold just over 2m UST and remained with 1,117,529 UST as per the vote held at 2:31 pm (see the vote here)
• 100% of votes requested to fully exit our UST position — fearing that UST would crash further to zero. Following the vote, we then went on to sell all our UST tokens.
• In total, the UST crash is a massive loss for the crypto ecosystem — some estimates talk about $44bn loss among LUNA and UST holders. Most investors lost everything.
• Alluo’s losses amount to $1,379,311.49 or 44% of our total UST exposure (assuming 1 UST = 1 USD). This is a significant loss, but not life-threatening to the project.
• None of this loss affects customers’ funds, only our own treasury.
• Different projects took a different approach but we believe trust is something that is built over the long run so we feel it was important for us to do this at this early stage.

Key lessons learned

While extremely painful, we’d like to use these dramatic events as a catalyst for Alluo. They need to serve us in building strong foundations to prevent and react to such crises. Here are some of the key questions we’d like to discuss as a community:

• What’s our internal process to include new stablecoin assets and/or new liquidity pools?
• What should be the max exposure to a single asset/liquidity pool?
• Should we consider hedging mechanisms such as insurance and/or put options?
• Should we install automatic risk systems — e.g. exit positions if a stablecoin depegs more than X%? (this should also be thought about in the context of the temporary usdt depeg, for instance would we have wanted to take that 10% loss on usdt depegging for a few hours?)
  We could fine-tune this so that riskier stables have a more conservative setting (for instance unwind if the peg is below 2% for more than 1 hour), whilst safer stables may have a slightly looser setting to give them time to regain peg (for instance unwind if the the peg is below 5% for more than 12 hours).
• Should we have a specific team of signers that can deal with these issues to ensure that we remain decentralised but can also execute at pace (after Do Kwon’s announcement on the 11th, we were genuinely worried that UST would drop below 10 cents within a matter of hours.)

As we reflect on the above, we will come back with suggestions on how to formalize the following:

• Risk management framework: we will need to update and probably codify how we select and max exposure to a specific asset/liquidity pool, considering potential secondary implications (e.g. some protocols were exploited because they had hardcoded UST as $1 or their oracle for Luna stopped working properly, example here and here, leading to $10m+ losses in both cases)
• Risk management automation: as mentioned above, have specific triggers and conditions by stablecoins that automatically exits positions who are deemed at risk (and what constitutes an at risk position would be determined by asset).
• Treasury management: ie specifically what percentage of the treasury funds should be invested in the protocol (if any) and if not in the protocol, in which strategies if any.
• Crisis runbook: ie codify the sequence of actions we would go through and who would be responsible for what when such an event occurs again, what is the communication to the alluo app customers, alluo token holders, other protocols etc.

Note that whilst this event was related to a loss of peg that resulted in a loss of funds for us, we will want to make sure we encompass potential hacking scenarios as well.

We will hold meetings with members of the community and investors who are looking to provide their help in those situations and leverage their experience dealing with related matters.

Looking ahead

We have plenty of fuel in the tank to keep going and realise our vision. At current costs, if all things stay the same, we currently estimate runway to be well over 2 year without any incremental protocol revenue.

What this loss mainly means for us going forward is that we will have to be careful in our focus and spending. We might have a bit less room for experiments and explorations of new products and will need to continue being rigorous with our product roadmap and feature development.

Life and simplicity… once you get there you can move mountains — Steve Jobs

To help us ensure that we grow even stronger at the back of this event, we are still looking for 4 incremental people:

• Core-Contributor — Product Manager
• Core-Contributor — Operations Manager
• Core-Contributor — Creative Lead
• Core-Contributor — Growth Marketing Manager

In light of this, we will be working on an update of our roadmap and will present it in another blog article in the next few weeks. Some of the key topics that we will be working on will of course include the Key lessons learned mentioned above.

We would also like to reassure partners, contributors, customers and more generally the community that, if anything, this bump in the road has re-enforced our conviction in our mission of making DeFi accessible to everyone and the products needed to realise it.

Clearly, the need for a solution that shields everyday users from the complexity and inherent risks of DeFi yet gives them access to its benefits has never been greater.

The core team and the founders are still very excited to keep building and we have lots of interesting new features coming very soon!