Crypto Grizz

UST Luna Collapse And The Cause

UST Luna Collapse And The Cause

This Is A Major Event In Crypto History

What led to the crash? Was it a coordinated attack, or an inevitable collapse? What Red Flags were there ahead of time? What’s the fallout from all of this? What lessons can we learn?

LUNA UST Collapse Explained

UST Luna – The Biggest COLLAPSE in Crypto History

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May 11, 2022

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We’re currently watching one of the the largest events in Crypto history. The sketchy outlook in the markets has triggered a run on the UST stablecoin, which began destabilizing in the last several weeks. As time progressed, the peg worsened, and it eventually rolled over into a complete crash of both the value of UST, and the native asset LUNA. What led to the crash? Was it a coordinated attack, or an inevitable collapse? What Red Flags were there ahead of time? What’s the fallout from all of this? What lessons can we learn? —— 📣 OPOLIS | Sign Up to Get 1000 $WORK and 1000 $BANK https://bankless.cc/Opolis —— 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/ 🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/ —— BANKLESS SPONSOR TOOLS: ⚖️ ARBITRUM | SCALED ETHEREUM https://bankless.cc/Arbitrum ❎ ACROSS | BRIDGE TO LAYER 2 https://bankless.cc/Across 🏦 ALTO IRA | TAX-FREE CRYPTO https://bankless.cc/AltoIRA 👻 AAVE V3 | LEND & BORROW CRYPTO https://bankless.cc/aave ⚡️ MAKER DAO | THE DAI STABLECOIN https://bankless.cc/MakerDAO 🦁 BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave —— Topics Covered: 0:00 Intro 6:30 Explaining the Terra Ecosystem 9:30 Tail Risk and Background 13:50 Bitcoin, Curve, and Monsters 17:54 The Initial Destabilization 20:14 The Panic Begins 24:40 The Charts 27:18 A Total Collapse 32:30 Regulators Get Involved 35:08 Was This An Attack? 37:58 The Collateral Damage 40:00 Do Kwon’s Big Talk 41:52 Rick Sanchez and Basis Cash 44:08 Community Response 46:05 How Do We Move On? 49:14 Don’t Take Shortcuts —— Resources: Anchor Protocol: https://app.anchorprotocol.com/earn Buying Bitcoin: https://twitter.com/LFG_Reserve/statu… Curve Pools: https://dune.com/SebVentures/UST Binance Orderbook: https://twitter.com/hasufl/status/152… External Collateral: https://twitter.com/ThinkingBitmex/st… Deploying More Capital: https://twitter.com/stablekwon/status… Collapse: https://twitter.com/ryanberckmans/sta… Bitconnect: https://twitter.com/TrustlessState/st… Historical: https://twitter.com/nic__carter/statu… Janet Yellen: https://twitter.com/tier10k/status/15… Coordinated Attack: https://twitter.com/TerraBitesPod/sta… Vitalik Clip: https://twitter.com/BanklessHQ/status… Mental Health: https://twitter.com/Shigeo808/status/… —– Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://newsletter.banklesshq.com/p/b…

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FULL VIDEO TRANSCRIPT

bankless nation this is a special episode from us because we are witnessing something historic right now

in crypto we are witnessing the uh largest event i think in crypto history this is the the collapse of an

entire stablecoin david uh where are we going in this

episode yeah so what’s going on is there was about 50 billion dollars of total

capital destruction out of the luna ecosystem the collapse of the largest algorithmic stablecoin ever the largest

collapse of a stablecoin ever uh and so we we are basically watching this unfold

as we speak uh i don’t think there’s ever been a crypto event a bad event this large in crypto history i would say

uh and so we’re going to run through going to speedrun through what happened uh the the timeline of events that have

have unfolded to where we are now as we are currently dealing with this uh for the people new to this channel who don’t

know about the terra luna ecosystem will also explain at a high level how the whole thing works and how it came to a

point where 50 billion dollars was lost between the two tokens a lot of people have lost a lot of money

as a result of this many were using the stablecoin out of the terra ecosystem as a safe haven for assets

going into the bear market ever since january crypto assets have been going down down down so people have been using the stable coin as a flight to safety

and they’ve been getting yield using the stablecoin yields in this application called anchor which holds a very

very prominent role in this whole entire entire story in addition to people using ust the

stable coin out of terra as just a place to get yield there were also a significant amount of funds that were getting gaining leverage getting

leverage yield on this many were overexposed many have lost a significant amount of their net worth some have lost

it all ryan and there are even reports of suicides out of the terror community both in this

terror subreddit and on on the terror twitter so this is a time to reflect as to how

the hell we got here as an industry and that’s what you could tell in our voices we’re not quite uh super chipper

as usual and bullish because this is a serious set of events and i think uh you

know many in the crypto community have predicted that this could happen this would happen i’d refer bankless

listeners to a previous episode that we did not less than six weeks ago on uh

whether tara luna was a ticking time bomb or not it turns out it was a ticking time but the question is

certainly answered and it exploded um and yet for those who have been right

about tara this is certainly not the time to gloat i think this is the time to reflect and so uh that’s the tone

through which dave and i are going to approach this episode we’re going to tell you exactly what happened and we’re

going to reflect on the events and the implications and outcomes of those

events in hopes that we don’t have to repeat this and so if you were someone who is affected by terror you lost a lot

of money uh that’s terrible i’m sorry it’s happened to many people in crypto

before you will recover you will come back i have been smacked down by the markets many times

in in my history in crypto and uh this is not the end of the world this is recoverable i think the crypto community

will come back stronger from this crypto as an asset class will come back stronger for this are some learning lessons that i hope you take with you

and teach to the next generation who are new in this space and want to go down a

path and take risks as the lunatera ecosystem has taken risks yeah

just to add on to that i also got smackdown during my first cycle in the crypto markets and there seems to be a

lot of new people who came into crypto looking for the cool new thing and they found the very loud community of the

terra ecosystem uh and so this is going to be uh the first experience the first like round of pain that a lot of first

cyclers have as they come into the crypto industry usually it’s not this acute usually it’s not or is this trash

or this shark believe how fast it happened david right yeah so uh i mean when i lost all my net worth in 2018 it

was just a slow decline from the top down to the bottom but it was not a collapse like this so this is something

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robbing about at governance.ave.com so as we get into it i think let’s start with an explanation

of tara and ust there’s two tokens in the terra ecosystem there’s the luna token and that’s the native asset of the

layer one blockchain uh ether to ethereum bitcoin is to bitcoin luna is

to luna uh lunatera tara is the chain and luna is the asset of the chain right

and so people stake luna to to process the blockchain but what’s unique about

the the luna terra ecosystem is that it’s a two token model so there’s a native stable coin called ust

uh which is pegged to the dollar that is a part of the consensus protocol of the blockchain because it’s it’s tied to

luna uh and so there it’s an algorithmic stable coin uh which means it’s a stable coin that it’s

maintains it’s pegged to a dollar via incentives but there is no hard collateral backing the actual ust

there’s only redemptions for for terra for luna excuse me so users can swap the luna token for ust and vice versa at a

guaranteed price of one dollar regardless of the market price of either token at any time so there’s the market

price of ust that trades on centralized exchanges like binance or on decentralized exchanges like curve both

of these things become relevant later in the story and that price can fluctuate but as a part of the protocol built into

the protocol you can swap one to one one dollar for one dollar of ust to

to luna the token and this is how it maintains the peg because you can arbitrage the opportunity between the

price and the secondary market with the actual redemption price of ust to luna it maintains its peg now we have this is

called an algorithmic stable coin i also like to call these reflexive stable coins because it requires this peg

mechanism to actually work uh unlike many of the other stable coins that we find out in the ecosystem usdc and and

tether for example are one-to-one redemptions for actual dollars in a bank so they are not prone to these reflexive

moves and then there’s also dye which is more decentralized which has actual hard collateral backing it ust does not have

hard collateral backing it and that is ultimately what came to cause the collapse of the stablecoin we’ve seen

algorithmic stablecoin experiments on ethereum many many times before none of them have worked but this was an

algorithmic stablecoin experiment as a layer one blockchain which is unique and novel and seemed to actually propel it

into success uh up until it finally collapsed um ryan any comments on that yeah doke one is a name that you’ll hear

he was the the founder of the luna and definitely a spokesperson almost operating as kind of uh the jerome

powell of the luna terra ust ecosystem and it’s also this this was news as of

today not his first time doing an algorithmic stable coin we’ll get to more of that later but david i just want

to set the mental model for this a little bit i don’t know if you’ve ever read anything by nasim taleb but he has

this this analogy he uses about tail risk events and this is something that

vitalik said on our last podcast about stable coins that are algorithmic and reflexive in the way that ust

and uh luna was and that’s they can be going along swimmingly somewhat like the

turkey right so imagine a turkey he’s getting fed every day by the pharma wow

by the farmer wow isn’t this a wonderful life someone comes and feeds me every day i don’t have to go hunt for my food

fat and happy hang out with other turkeys life’s good one day life’s good the next day life just keeps getting

better and better and better and this is a chart of the the life of a turkey from

one to one thousand days of course turkey is humming along fine until there is this surprise event the turkey

didn’t realize was actually going to be eaten okay and so all at once his world

collapse collapses around him i know that’s kind of a graphic way to describe what happened but what’s interestingly

what interestingly enough this is how the terra chart looks yeah it’s pretty similar to the life of a turkey in that

it was going very well it kept very stable from you know a dollar price just oscillating by like a few tenths of a of

a cent along that price until bam tail risk event it was hit and got knocked

off its peg in a big way david uh do you want to take us through the timeline of events here yeah so in order to get

started we have to explain uh the anchor protocol because that is the thing that a lot of absorbed a lot of

ust supply so tara has had insane growth over the last six months and people have been using terra to get

ust into anchor protocol to get an astounding 20 yield and that’s where

this whole thing really starts these are the months leading into 2022 and also from january to to where we are up until

about a week ago the the anchor protocol on terra received a bunch of inbound deposits uh and so we just saw a grow in

total value locked from roughly like three to four billion dollars in january uh to up to i think uh at the at the

very peak 14 billion dollars in deposits where it was a week ago and again it

came from a bunch of subsidized yields and so this was tara’s growth strategy this was marketing for terra this was

juicing up the yields to attract deposits uh and so the the uh the actual

yield the true yield coming from the cost of borrowing was something like eight to ten percent which was also pretty good but then that number was

subsidized by just the terra project of just uh juicing up the yields in order to attract growth uh and so people were

depositing ust into the anchor protocol to get these yields and the anchor protocol did amazing things for the for

the adoption of tara um late march uh we was when we see the terra project buy a

bunch of bitcoin to help backstop the ust peg so this is something that like

like nation states participate in this when they put foreign assets on their fed like on their federal bank account

uh when in order to defend the price of their their currency right and so this is a very similar thing the luna

foundation guard which is what the lfg is purchased almost 25 000 bitcoins for

a total balance of 1.1 billion dollars and this happened on march 26th uh and

so this is them starting to shore up their own assets and put ammo into their into their quiver so that if they ever

did have to defend the peg they would have a bunch of ammo to do it you want a hard asset to defend the peg similar to

how a nation state might buy gold and keep gold in their reserves right exactly the this also drew uh criticisms and

qualms from others myself and i think ryan you would join me in that we like our protocols to not need foreign assets

to be self-sustainable uh and so this is in my mind an admission that you know that needs external help to defend the

peg uh for crypto l1 blockchains we like these things to not need external dependencies to operate on so they

started particularly because these were held in a in a multi-sig in a custody it’s just off-chain it’s not even on

chain right um but like that that is just the culture of the terror project that was cool with them uh and so they

grew a balance sheet of over 1.1 billion dollars starting on march 6th and so they were selling ust to buy bitcoin to

add to the lfg the luna foundation guard reserve during the same time this is when the

attack starts uh somebody we don’t really know who there is a bunch of speculation at the same time is uh

borrowed a hundred thousand bitcoins which is a lot of bitcoin so this is a very well capitalized player there’s

there’s speculation all over the place no no not real any clarity here but they borrow a hundred thousand bitcoins and

are selling into the luna foundation guards purchasing of bitcoins to fund what will ultimately become the attack

on terra that brought it down and so some entity borrows a hundred thousand bitcoin sells it into the market uh and

that this begins on march 27th and so uh the somebody some entity has a very well

capitalized war chest which will ultimately come to bring down the whole entire system we don’t know we can’t see this

happening in the moment but we just know that this is true in hindsight and so as a result

and there’s also the story of the the curve pools on ethereum and so the curve pool is where a lot of

stable coins on ethereum get a lot of liquidity and there is a ust on ethereum

cross cross bridged uh from the terra ecosystem to the ethereum ecosystem and

doquan and the terra ecosystem has been promoting this four pool where four different stable coins have liquidity

adding uh terra ust to the mix and so there is there’s the current paradigm of

the three pool and they were about to migrate to the four pool based on curb governance uh this is a topic for

another day but they had to uh people had to withdraw liquidity out of the three pool to put it into the four pool

and during that window of time when when liquidity out of the three pool uh was being pulled that is when the this

attack happened uh they’re calling this an attack uh because the liquidity was uh was removed from the three pool the

peg for ust was was susceptible uh and so the the attacker who had a hundred

thousand almost a billion dollars worth of ust which they amassed from selling bitcoin for ust uh started selling ust

into the curve uh into the curve pools and what what that does is that lowers the price of ust because they’re selling

it and that puts other stable coins into the hands of the buyers uh stable coins like usdc or dye or or fracks or other

stable coins and so this starts to brought offset the peg and this started happening on march

on may 7th and you can see you can see this very early blip of red on march 7th where they start to sell

ust into the to the curveball to start to destabilize the peg this is when the

luna foundation guard has to begin selling the btc that they purchased in order to defend the peg but bitcoin

when they bought bitcoin it was roughly at forty two thousand dollars and then they started to have to sell bitcoin at

roughly thirty four thousand dollars because the market had moved downwards in that time so they the the value of

their of their reserves had gone down and then they’re forced to sell it

yeah this is uh you can see the kind of the wobble and that’s what systems like this you know tend to do uh it’s it

starts with a wobble right so picture a bike going down a hill and it’s going too fast maybe um this was me as a kid

and i had a total wipeout i was on a tiny bmx bike and the first sign that

you’re going too fast you start to wobble right and so your tires are moving back and forth and then it moves

into the wobbling increases more wobble here and then catastrophic failure and complete wipeout what’s

what’s also interesting is what you just described in the attacker it’s it’s also a known attack i mean this has happened

to currencies in the past this is a george soros attack a soros attack yeah george soros in the early 1990s or late

uh 1980s i can’t recall uh used this type of an attack to destabilize the british pound when the central bank were

bankers uh in in the uk were using the the pound and trying to peg it so this

is a very well known attack for these sorts of uh pegged monetary instruments getting back into the attack they the

the attacker who amassed over a billion dollars a billion ust uh which because

if they have a bunch of ust they that means they have a bunch of ust to sell which means somebody needs to absorb

what will ultimately become 1 billion ust token cell pressure and so during this initial the first

phase of this attack they sell 350 million ust into the curve pool uh and

that is what causes the initial destabilization and that this is where a lot of people start to pay attention

here and there are many different participants in the luna terra ecosystem many of them are funds and then many of

them are retail so the funds understand that they are playing a game of chicken because these tara

anchor yields are just not sustainable they know that th this is kind of a game of chicken and it’s really going to be a game of who

can sell when that when the time comes up and so when the the peg goes down to about uh 97 and a half cents during this

first selloff of a 350 million ust this i think is when a lot of fun started to clue in and say hey something’s

happening here so we got to pay extra close attention meanwhile retail don’t they don’t pay attention to stuff like

this they’re not as sophisticated they don’t know how to do the research they don’t know how to look on chain and they’re busy doing their normal day jobs

and so the funds are keeping a very close eye on the peg watching other funds and other market makers and how

much assets they have starting to like you know do the mexican standoff it’s just like all right like who’s selling

who who’s selling what uh and so you gotta shoot first and shoot fast yeah exactly

that’s exactly right uh and so this is when uh at this point in time around may sixth or uh fifth sixth or seventh the

the attacker who has 650 remaining ust tokens which they got from their their

borrowed which some entity let them borrow this again we don’t know the details on this they go to and take that 650 million uh

usc tokens to binance and they start aggressively selling on finance between lots of 300 000 to 3 million ust at a

time uh some people uh some entities are defending the peg while while this

attacker is selling into the peg so somebody is defending the peg at .98 cents preventing the price from going

down but at some point that defender either just capitulates or they or they just pull their liquidity or they ran

out of money and it breaks through the 98 cents this is uh the binance order book is this what happened shortly after

and and so david you and i were actually recording a podcast with raul paul when the wobbles started to intensify in this

thing and we were observing in real time you can actually get raul’s real-time reaction well you when you hopped into

this recording room ust price was at 98 cents being defended uh do you know what

it is right now i said 92 cents yeah

and then later that day the binance order book was actually empty what does

that mean says he’s never seen that before yeah so this was actually a front-end glitch out of binance because they were not

prepared for to place bids below 70 cents it’s unheard of that a stable coin would be sold at 70 cents so this is the

actual binance actually had to enable sub 70 cent bids in order to allow the market to clear uh and so this is this

it was just got so low it got wiped out that there was no bids because the front end wouldn’t allow for it moments after

the screenshot was taken they did open up sub 70 cent uh bids on on ust

and then the price immediately fell below 60 cents but part of this it starts to create the

reflexivity this was not actually the attacker all of the way as soon as the attacker broke down below the person or

the entity that was defending the 0.98 price uh this this is when deposits out

of anchor started to clear so these are the funds saying yo somebody somebody is selling all their ust we also have to

start selling our ust because there’s not enough liquidity to let us all out of the door and so this is what happens where the

attacker starts to sell ust they create and instigate other selling and so it starts to turn into a negative feedback

route loop and that’s where it starts to not just be this attacker who’s intentionally depending the price

but everyone else is is willing to take the two three five cent loss in order

just to have and shore up their their profits that they’ve made from the yield for the last few months and so this this

this feedback loop of reflexivity this is where we are why i call algorithmic stable coins reflexive stable coins

there’s not enough liquidity for everyone so everyone needs to sell first and this creates basically a run on the

bank and that is what just plummeted the ust price down to 70 cents and then even below as once they once

they opened up the the orders um as the u.s tpeg fell down to 60 cents the the

luna foundation guard is having to sell their bitcoins to to buy and maintain

the peg as much as possible to the best of their ability they just don’t have enough ammo in the in the reserves to

keep it up and so they are they had to buy bitcoin at 47 000 to sell it at 34

000 and below just to defend the peg but the problem ryan is that as they are selling bitcoin at 34 000 they’re

pushing the whole entire market down and so the market was already going down anyways because of the the interest rate

hikes from the federal reserve and so people with bitcoin positions were getting liquidated people with ether

positions were getting liquidated this was a global market liquidation event which happens in crypto but it was just made worse by the luna

foundation because they had to sell into the lower price and so they sold they bought bitcoin at the high price of 47

the value of that goes down to 34 when they have to begin selling it and so it causes a global liquidation event for

all of the markets which just causes even more fear in the markets and especially for ust and luna holders and

we haven’t even talked about the luna price yet um but this is basically the problem with external collateral

viscantes tweets out reflexivity speculation and credit three strong but dangerous resources you can harness if

you are willing to pay the price in all three cases it can help you bootstrap by borrowing energy from the future but you

will need to pay it back later with interest especially with an algorithmic stablecoin doesn’t always have the ammo to pay it back and if it doesn’t you

have a reflexivity to the downside do kwan tweets out uh deploying more capital steady lads and

this is why ryan earlier called him the jerome powell of tara because he has to instill confidence in the peg this is a

faith-based peg this is when there’s not enough liquidity for everyone people just have to have faith that not

everyone else is going to sell and so when do kwan tweets out deploy more capital he’s saying hey uh we have

enough capital uh don’t worry about it and so luna goes and empties the last of their bitcoin

reserve while the last 1.4 billion dollars that they have to shore up the peg but again it’s just not enough so

here is the ust price and this is at may 8th when the first

first attack came with a 35 million dollars sold into the curve pool price goes is that one dollar falls down to 97

cents but then gets bought back up because this is just the first wave and there’s plenty of ammo left but then it starts to hover around 99.5 cents and

this is where the funds start to be like yo what’s going on and then as time progresses we’ll go to

we’ll go to the next chart uh you can see the scale here so that red square is what we were looking at previously

and so you can see how much worse it gets when uh when there starts to be this panic as the the uh attacker starts

to sell a bunch of ust price goes all the way down to 0.64 cents where it should be a dollar it goes down to 64

cents but then it gets bought back up by the remaining luna foundation guard reserve ammo uh and then and and so then

again gets back back up to 90 cents but then here again that square the square on the left is what it was that what we

were just looking at and then this is the most recent snapshot that i took just before recording this where things drop all the way down to 34 cents here’s

the price of luna and this is also a contributing factor to the fear going through the whole entire ecosystem where

in on may 4th the price of luna was 87 it starts to also sell off because

people are getting scared and so they want to reduce their exposure to the whole luna ecosystem also there are many

many redemptions for ust for luna and causing and because people want to

get out of ust because it’s losing the peg and so they’re they’re selling ust for luna

luna is getting minted because that’s part of the algorithmic stable coin and then that is getting sold and so that goes from 87 on the fourth down to

something like 65 on the seventh and then on the by the ninth it’s down to

like 52 dollars and then today the 10th it hit a low of one and a half dollars uh and so this is

a total collapse of the value of the luna token which is the the last line of defense for backstopping the value of

ust and this is when the total market cap of usc ryan starts to actually pass

the total market cap of luna which is bad because you don’t like that because this is the terra token is the thing

that ultimately comes to be the final collateral of the ust and when there’s more outstanding liabilities than there

are assets then only some people can make it out alive and so this is how we end up where we are today where luna is

down 99 over a one week period of time and there is billions of dollars of outstanding

ust that have no actual market value yeah so guys what what we just witnessed is a uh a text book downward spiral of

in algorithmic stable coin basically textbook and the surprising thing is how quickly it happened but once it started

happening i mean this is a three day period of time we witnessed the wobble and then we witnessed the total collapse

of both luna and ust there were attempts to defend it there were attempts to try to resurrect it do quan and others tried

to re-inject confidence in the market was unable to uh handle the

the the downward pressure forces and having something like bitcoin on the reserve to try to protect this is not

actually something you want to hold during a downward spiral event because that’s a very correlated asset to the

rest of the crypto market if anything you’d want a completely decorated asset to the market that would hold steady in

this kind of downward pressure spiral so david that is the total collapse in a three day period of time i think all of

crypto was not surprised necessarily that this happened but certainly all in crypto were surprised that it happened

this quickly and uh like this i guess emphatically i mean like i said this is

absolute textbook david do you want to talk about the fallout from this because now we have to deal with the fallout

yeah right and just to recap the numbers luna the luna the l1 asset went from 41

billion dollars down to one billion dollar market cap so it lost 40 billion dollars of capital usc goes from 18.7

billion dollars to 5.2 billion dollars probably lower at the time of recording uh and so like i said there’s over 50

billion dollars almost 50 billion dollars of capital loss for the crypto ogs that have been around since last

cycle we had this uh ponzi scheme this actual ponzi scheme uh where everyone knew it was a ponzi scheme uh other

people were calling tara a ponzi scheme but other people were saying no so it was up for debate and like people kind

of were capitulating and letting the luna ecosystem kind of just like ride without really giving it too much too

much flack now in hindsight now everyone’s calling it a ponzi scheme in hindsight bitconnect was not that big connect was a ponzi scheme through and

through everyone knew it it was 3.5 billion dollars at the top when it fell down to zero this is so much larger than

that and so i took some time and i photoshopped to superimpose the value of the big connect market cap on top of the

uh the value of the luna uh market cap and so you can see just how much larger this is and this in the the blue line

being luna of course does not include the value of ust which also lost you can add on another like 12 billion dollars

on top of that so the massive amount of just capital destruction that has just happened is unfathomable i’ve never seen

it there’s no one has ever seen anything like it in the crypto space billion dollars and this is all targeted

on luna holders primarily it seeped out into other areas of the the crypto ecosystem but it was amazing how

resilient actually bitcoin and ether have been to the prices it certainly seeped out into other alternative layer

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this is the sort of thing that starts to get regulators attention and those in government’s attention uh what does he

say here yeah he saw he says 40 40 billion this is an old tweet it’s now 50. almost totally destroyed in the

space of a month and this year in terms of sheer magnitude is probably the most significant collapse in the history of the crypto space uh and then not even 12

hours later we see janet yellen talking about it on the capitol in the u.s capital about the ust the destruction of

capital and the need for regulation uh and so this has already caught the attention of regulators uh and to start

to pay attention to to the cryptocurrency ecosystem and this is this was what was our this was our fear

our explicit fear on bankless about like if this thing gets too big and it does collapse uh it’s going to bring the arm

of the regulators down for the whole entire crypto ecosystem because they are not educated enough to understand the difference between ust

dye uh tether or other cryptocurrencies they’re just going to lump them all together so this is just a black black

cloud over the ecosystem at the moment terra usd um experienced a run and had

declined in value and um well so it i i

think that simply illustrates that this is a rapidly growing uh product and

um that there there are risks to financial stability and we need a framework when

you’re faced with what we saw just happened basically the show that just happened i mean who’s going to stand up and say no actually there’s

some innovation here it’s it’s it’s hard it’s very difficult to make the case this is why we said a couple of bankless

episodes ago um to to those who were saying hey don’t worry about tara it’s fine don’t be a you know a

decentralization maximalist an ethereum maximalist or whatever it’s just we’re hopeful do kwan don’t screw it up well

this is really screwing it up for a lot of people and i think one of the most significant worries coming out of this

is the regulatory backlash that we might face as an industry yeah that’s exactly right and while a lot of this loss was

contained inside of the luna ecosystem it has definitely spilled out into funds

a lot of funds are going bankrupt at the moment that are based on luna and the funds that are having positions both

inside and outside of luna are going to have to sell bitcoin and ether and other other assets to to account for

their losses and so the losses of the luna ecosystem do spill over into the rest of the space uh there’s there’s a

big question as to like whether or not this was a black swan event or whether or not this was a coordinated attack

the terra ecosystem is definitely leaning into this was a multi-level economic hitman attack

and while it does appear that there was one like well-capitalized entity that that

maneuvered this trade or this attack it really doesn’t matter the it’s a semantics different as a difference as

to whether uh it’s a trade or an attack right it’s an attack if you’re in a victim but it’s really just a trade

because people saw an opportunity to make a billion dollars and so i haven’t said this yet but the the entity that

borrowed a hundred thousand dollars with bitcoin uh sold it into the market uh bought a bunch of ust to it to kill the

peg they made out with roughly 900 million dollars of profit from this and so this was a rational actor who saw an

opportunity in the market to walk away with 900 million dollars while also causing the collapse of the whole entire

ecosystem it’s beside the point as to whether it’s a coordinated attack or a trade all that matters is that if it can

be attacked it will be attacked and luna had this weakness from day one many people called it out many people were

aggressively silenced by the luna ecosystem by the the what we call the lunatics who were silencing discontent

they were swarming our youtube channel they were swarming us on twitter and anyone that expressed any amount of bearishness were just harassed by this

community as being eth maxis or whatever and so there’s definitely some

part of the luna ecosystem that uh probably in the back of their mind saw this weakness but didn’t want to account

for that so they just harassed others who pointed it out uh and so this is this is behavior that we’ve seen in

crypto twitter before i think we’ve seen it in other communities before that have faced a similar outcome uh vitalik even had

words about this when we recorded with him about three or four weeks ago this is a clip from vitalik probably you know

die rye maybe usdc are like the only three stable coins that we really need at the same time like you know i do see

the the value in ongoing innovation um and like the there’s definitely a minor

projects that are getting underrecognized but there’s also these other projects that are just doing kind of insanely risky um you know under

collateralized barely collateralized sort of stuff um and that are trying to market themselves on how optimal they

are um without uh uh really caring about the like how fat their fat tails are the

biggest fallacy that people have uh in terms of like judging stable coins for example is that i feel like the way that

a lot of like especially newbies judge a stable coin is they’re like if a stable coins price stays between 0.99 and 1.01

then it’s good and like that mindset is very wrong right because whether a stable coin like jumps up and down by

two percent or zero point two percent isn’t a function of how good the stable coin is it’s a function of how good the market maker is and anyone can hire a

good market maker for a short period of time um somebody else that saw it coming who i deeply respect in this space as

hazu and hazu says usc is worse than bitconnect at least bitconnect didn’t masquerade as a stablecoin when your ponzi targets

people’s savings not their investment portfolio there is a special place in hell reserved for you half of crypto

twitter influencers vcs and trading firms are complicit he follows up with another tweet saying if you supported

ust in the past you don’t get to look away now and this is this is the dark part of the story uh and so we’re going

to the the luna terra subreddit um where you can see the the national

number for the suicide hotline uh pinned and this was a very common thing in 2018 and then there are other stories where

people have said that they have lost all of their savings some people are reporting stories where their colleague has committed suicide

there’s many many people saying that they’ve lost lost all of their savings their their friend savings their family savings so this they went straight to

the heart of retail who were just not informed enough to be able to gauge

these risks and were of course the last ones holding the bag because the funds who are professional were the first ones

out the door because they’re good at this stuff so this whole thing like 50 billion dollars of capital just

absolutely destroyed people take their lives for that for that amount we saw people take their lives in 2018 and like

we’re doing it all over again that’s the that’s the other thing where regulators begin to take notice is when this starts

to effect and happen to retail regular everyday people right uh when it’s cloistered off to a small experimental

group in crypto a bunch of d5 degens and something blows up as it has previously kind of like who cares we already had

caution tape over that thing retail wasn’t getting involved the insidious thing about this a collapse is that the

terra ecosystem ust was actually targeting retail right put your money in this account like let’s integrate it

with uh top seedify apps right so you could create an app and use anchor as a

protocol to receive 20 so it’s sort of hidden under the covers uh and i i think

that’s going to be a lasting a lasting blemish on the industry as well and get rid and get regulators attention

definitely somebody that has now received a lot of the ire of of the community as dokuan the the leader

behind the terror ecosystem and do kwan people were pointing out how confident and cocky dokwan behaviors

twitter on uh was he was one of the people that i would say was the main culprit behind instigating this very

toxic culture out of the luna ecosystem here he is taking a 200 million dollar

bet about the price of the asset luna in one year’s time i mean sorry but found l1 founders do not do this not not good

ones by any means don’t make bets on twitter about the price of their asset

of course he also has his famous comment by my hand die will die die the stable

coin um because he had he had it out for uh the maker dow community when some of

them started uh talking negatively about basis cash uh which we will later find out dokwan was a part of um

spoiler spoiler yeah and so dokwano famously tweets out by my hand dai will die uh i actually respond my money is on

die simply because maker dao is the most just like trusted and just like well secured stable coin there is in crypto

twitter and i was absolutely just harassed by dokwan himself so do kwan gives this oh really like meme and then

follows up with saying only an eth maxie would bet on something he’s already lost giving the bicycle helmet no brain uh no

brain like this is the this is not the behavior of a responsible founder very

very popular tweets too it’s like this community would swarm and basically overwhelm ratio you on twitter on on

some of these comments so we call this now toxic insecurity where like they know that theirs their ecosystem doesn’t

really have uh all their all their whole all their like weaknesses covered and so they just like make sure that no one

talks negatively about their ecosystem on twitter and so this is actually where we’ve discovered as of today as of the time of

recording do kwan was also behind the earlier failed algo stable coin called basis

cash which also imploded but it imploded much earlier in its life cycle

and caused much less harm in the ecosystem so there was an anonymous founder called rick and morty

and who actually turns out that was do quan and other employees of terraform lab so after basis cash exploded i guess

they just rotated into doing the same thing but as a layer one which is crazy funny story so i didn’t

personally lose anything in the ust luna ecosystem because it had so many red

flags when basis cash started i was introduced to a rick sanchez on telegram

by a vc venture capitalist that i very much respect and rick sanchez in telegram the pseudo

anonymous founder went on to describe what basis cash was tried to get me very excited about it i ended up putting a

little bit of money in like a very small amount because there’s some possibility that an elgo stablecoin uh would be

successful but i knew it’s like fraught with massive amounts of risk and then later the founders of that project

completely abandoned it after it crashed uh i ended up losing the little amount

that that i put in it was a learning lesson at that time again not my first one by the way i’ve seen a few of these

algo stable coins uh try to try to make something but but the the way i think

that do kwan abandon that project right speaks very much to what he intends to do or his intents for

the lunatic ecosystem at least it’s a data point that people should factor in if he was willing to abandon that

project like what are his intents behind luna and tara it cause all of that into question let me ask you a question real

quick does evil exist and if so can one detect and measure it um but we didn’t have that information because we didn’t

know that he was behind basis cash until literally today and so all of this stuff is coming out

um tim copeland tweets uh tweets out uh we’re also watching some people who have previously promoted ust on twitter

delete their tweets um because of obvious reasons uh and so like and the

thing is like we’ve seen this before uh the we’ve seen algo stable coins come and go it should be no surprise that

this algo sable stablecoin blew up once again fiskanti’s tweets uh uh it tweets out some really good advice for those

for those this is a message for those who are who feel lost as a result of this who lost a bunch of money fiscantes

gave out this tweet saying i don’t know who needs to hear this but losing all of your money is not the end of the world

even losing more than you have don’t do anything stupid i’ve never shared this but once i was down negative 150

thousand dollars of net worth because of a very stupid mistake that i made i was uh that was a huge pile of money for me

back then and the day it happened and the subsequent two weeks afterwards were very crushing it was hard for me to do

even basic things like leave my bed and shower i was too proud to even tell my friends about it so i suffered in

silence don’t do this it’s better to let it out and share if you don’t feel like sharing with a friend or or and you

can’t afford it therapy is a good thing to consider as somebody with a background in psychology with my mom as

a therapist therapy is tight like if this is hurting you psychologically and you feel like this is bottled up i

definitely would encourage you to just talk to anyone yeah absolutely feeling for the

community out there and i think simultaneously it’s okay to feel for the community of retail

investors who uh didn’t know any better maybe were kind of duped into this sucked into them this it’s their first

time around listen as we said in the intro all of us have lost money on stupid things in crypto simultaneously

uh to hold that idea in in your head with the idea that hey there were also a lot of vcs and influencers and investors

and even founders who should have known better they should have known better and that is not a good look for this

space so the question is where do we go from here individually where do you go from here if you’ve been wrecked by this

uh our hearts go out to you i think that’s great advice for fiscante from fiscantes on this uh maybe some therapy

take a pause go for a jog spend time with those you love i think for an industry the question is

how do we move on from this uh and here’s somewhat a cynical take i hope

this doesn’t turn out but do you want to read this from mike mcdonald david yeah the sad part is the reason why this

tweet did so well is because we’ve seen this before mike mcdonald gives his take as to what is about to happen he goes

the best part about this whole thing being facetious here doe will disappear he’s probably made life-changing money

you have lost all of yours you will also likely fall for the next grifter who employs the same tricks he will

rebranded something else and his next project will result in him profiting again hopefully off of you again very

cynical take but this is also what we saw out of the the wonderland fiasco uh

and so like xerox sifu who turned out to be the quadringa exchange scammer uh just was just cycled

into the next scam there are just some people out there who are just these serial entrepreneur scammers out there

who just can’t stop doing this stuff and so hopefully if you have been burned by

this this is your last time and you would look towards other alternatives rather than these very very

attractive juicy returns on steroids ecosystems that ultimately collapse

yeah the the message is if this happened to you don’t let it happen to you again and try to warn the next person we’ve

been very critical of ecosystems like danny siesta from wonderland we got attacked from that earlier this year it turned

out not six weeks later that um danny was into some very shady things

and so was his co-founder and that community just kind of disappeared in a puff we saw similar sentiments and there

was a similar feel and similar vibe coming out of the luna ecosystem and terra ecosystem almost put together yeah

we put together a bulkhead spare case podcast gave the bull case a fair shake

gave the bear case a fair shake a very fair podcast i think even even the the

uh attendees thought so and we’re absolutely grilled by the lunatic community for that

podcast that’s their name by the way that’s not our name for them they are self called the lunatics yes yes uh

we’re not calling them lunatics they call themselves lunatics and so the moment where any any critique or any

questioning of an ecosystem or a mechanism is met with uh that’s fud that

you know like you’re just a bunch of shills you’re you’re maximalist you have nothing to contribute here rather than

reasoned responses that’s when you should get worried those are some warning signs well we were absolutely

grilled by the luna ecosystem and also by by the wonderland ecosystem uh i do appreciate like sometimes it’s it it

hurts getting grilled by those people but ultimately there are there are people that come out and say thank you i

hear smart programmers saying i would like to thank myself ryan sasel anthony suzano for educating us about luna and

ust i had my money in that thanks to them i was out without getting wrecked feels bad for the fallen ones

the next tweet is a swagtimist a friend of ours who tweets out where are the luna moonboys now who enjoyed shooting

on the bankless episode when they were when they weren’t going through the existential risks where are you at now

um and then zazzle anthony suzanna says silent just like the frog nation that came before them guys so we’ve taken you

through the the entire life cycle of the terra ust ecosystem and up to date now

things could happen in the future the the ecosystem could repair uh could start to rebuild if they do hopefully

they incorporate a better mechanism design but i also hope this is a learning lesson for everyone in crypto

uh first of all the risks of these things sometimes they are not well understood but a lot of the principles

that we talk about on bankless principles of decentralization uh for instance and and security uh are

important and i think this demonstrates why these fundamentals are important sometimes people who say

stuff like this um they sound like boomers in the space they sound like they’re just old people

uh you know virtue signaling repeating common tropes but i think this

is the reason we say them and we say them so often say them so emphatically is because

we don’t we want to build this industry for the long term we want to build it responsibly we don’t want to take shortcuts and i hope the lesson for

everyone in crypto whether you’re a builder whether you’re investor whether a user of these systems is

don’t take shortcuts let’s build this thing right let’s build this thing from first principles

decentralized all of the way let’s not mix up fintech risk in this let’s not

become another set of bankers let’s not create a system just like the old system that we left we don’t have to the future

is ours what would you say in closing david yeah um some some many many people for both

inside the terra ecosystem and outside of it their net worth is approaching zero as the crypto markets come down

this is normal for first cyclers uh my my net worth basically hit zero in 2018

and then again in 2019 and then again in 2020 uh as we got liquidated in in the

march coveted dump um but like there’s there’s plenty of pass forward the

magnitude of the crypto revolution is still ahead of us and so that’s still the best opportunity

there is in the world um and so it hurts uh emotions are down bad depressed markets create depressed

humans but it’s it’s no time to just like eject and and

abscond from the from the industry and so there’s still plenty of opportunity uh this is a learning lesson that if you

learn this now hopefully you don’t have to learn it later and so there’s there’s still a bright future ahead

so hang in there guys if you enjoyed this episode please make sure you subscribe in youtube as well if you’re

listening this in the podcast make sure you hit subscribe like and review thanks a lot of course i have to end with this

none of this has been financial advice eth is risky bitcoin is risky my god so

is crypto you could lose what you put in but we’re headed west and we’re still headed in that direction this is the

frontier it’s not for everyone but we’re glad you’re with us on the bankless journey thanks a lot hey we hope you

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