UST Luna - The Biggest COLLAPSE in Crypto History

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 fifty billion dollars of total capital destruction out of the Luna ecosystem, the collapse of the largest algorithmic stablecoin ever, the the largest collapse of a stable coin ever. Uh and so we we are qu basically watching this unfold as we speak. Uh I don't think there's ever been a a crypto event uh bad event this large in crypto history, I would say. Uh and so we're going to run through, we're gonna speed run through what happened, uh, the the timeline of events that have h have unfold to where we are now as we are currently dealing with this. Um for the people new to this channel who don't know about the Terra Luna ecosystem, we'll also explain at a high level how the whole thing works and how it came to a point where $50 billion was lost between the two tokens. Um, 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 story. Uh, in addition to people using UST, the stablecoin 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. Uh and there are even reports of suicides out of the Terra community, uh, both in this Terra subreddit and on the on the Terra Twitter. Um, 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 uh 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 Terra Luna was a ticking time bomb or not. It turns out it was a ticking time bomb.

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 David and I are going to approach this episode. We're gonna tell you exactly what happened, and we're going to reflect on the events and uh 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 Terra, you lost a lot of money, uh, it's terrible. I'm sorry. It's happened to many people in crypto before. You will recover. You will come back. I have been uh smacked down by the markets many times 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. There's 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 Luna Terra ecosystem has taken risks.

Yeah, uh just to add on to that, I also got smacked down during my first cycle in the crypto markets, and there seems to be a lot of uh 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 this sharp or this sharp.

Right, yeah. So uh I mean w when I lost all my net worth in twenty eighteen, 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 uh unique to this uh part of the crypto cycle. Um so as as we get into it, I think let's start with an explanation of Terra and 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 Luna Terra.

Yeah.

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 stablecoin called UST, 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. And so the there it's an algorithmic stablecoin, uh, which means it's a stablecoin that it's maintains its peg 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 uh to Luna, the token. Uh, and this is how it maintains the peg because you can arbitrage the opportunity between the price in 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 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 DAI, which is more decentralized, which has actual hard collateral backing it. Uh, UST does not have uh hard collateral backing it, and that is ultimately what came to cause the collapse of the stable coin. Uh, we've seen algorithmic stablecoin experiments on Ethereum many, many times before. None of them have worked, uh, 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, Doquan is a name that you'll hear. He was 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. Uh, I don't know if you've ever read anything by Nassim Taleb, but he has this um 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 farmer. 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's this surprise event. The turkey didn't realize it 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 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 uh absorbed a lot of uh UST supply. So Terra 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 uh leading into 2022 and also from January to to where we are up till 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 uh Terra'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 Terra. Um late March uh we was when we see the Terra project buy a bunch of Bitcoin to help backstop the UST peg. Uh 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 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 uh balance of $1.1 billion. 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. It's the the this also drew uh qu 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's 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 this started

Particularly because these were held in a in a multisig, 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 Terra project. That was cool with them. Uh, and so they they uh grew a balance sheet of over $1.1 billion starting on March 6th. Uh and so they were selling UST to buy Bitcoin to add to the LFG, the Luna Foundation Guard reserve. Um 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. Uh, and so some entity borrows 100,000 bitcoins, sells it into the market, uh, and that this begins on March 27th. And so uh the uh somebody, some entity has a very well capitalized war chest, which will ultimately come to bring down the whole entire system. Uh we don't know, we can't see this happening in the moment, but we just know that this is true in hindsight. Uh and so as a result, uh and there's also the story of the curve pools on Ethereum. Uh, and so the curve pool is where a lot of stable coins on Ethereum get a lot of liquidity, and there is uh UST on Ethereum cross cross bridged uh from the Terra ecosystem to the Ethereum ecosystem. And Do Quan and the Terra ecosystem has been promoting this four pool where four different stable coins have liquidity, adding uh Terra uh UST to the mix. Uh and so

There's the current paradigm of the three pool, and they were about to migrate to the four-pool based on curve governance. 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 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 a hundred thousand almost a billion dollars worth of UST, which they amassed from selling Bitcoin for UST, uh started selling UST into the 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 DAI or or Frax or other stable coins. Uh and so this starts to offset the peg. And this started happening on March uh 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 into the curve pool to start to destabilize the peg. This is when the Luna Foundation Guard has to begin selling the BTC that they purchased uh in order to defend the peg. But Bitcoin, when they bought Bitcoin, it was roughly at $42,000, and then they started to have to sell Bitcoin at roughly $34,000 because the market had moved downwards in that time. So they the value of their of their reserves had gone down.

And then they're forced to sell it.

Yeah, this is uh you you can see the 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 you know 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, a little more wobble here, and then catastrophic failure and complete wipeout. What's what's also interesting is what you just described the attacker, it's it's also uh a known attack. I mean, this has happened to currencies in the past. This is a Doros Ros attack.

Fuck.

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, the attacker who amassed over a billion dollars, a billion UST, which because if they have a bunch of UST, that means they have a bunch of UST to sell, which means somebody needs to absorb what will ultimately become 1 billion UST token sell pressure. And so during this initial, the first phase of this attack, they sell 350 million UST into the curve pool. 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 Terra uh anchor yields are just not sustainable. They know that 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 um 97 and a half cents during this first sell-off of a 350 million UST, this I think is when a lot of funds started to clue in as like, hey, something's happening here. So we got to pay extra close attention. Meanwhile, retail don't they don't pay attention to that stuff 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. Uh 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 it? Who whi which 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 6th or uh 5th, 6th or 7th, the uh the attacker who has 650 remaining UST tokens, which they got from their their borrow, which some entity let them borrow this. Uh again, we don't know the details on this. Uh they go to and take that 650 million uh UST tokens to Binance and they start aggressively selling on Binance 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 0.98 cents, preventing the price from going down. But at some point that defender either just capitulates or they do 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.

Raoul, you when you hopped into this uh recording room, UST price was at ninety eight cents being defended. Uh do you know what it is right now?

It's at ninety-two cents.

Yeah.

Mm-hmm.

And then later that day, the Binance order book was actually empty.

Mm-hmm.

What does that mean? Hasi 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 for at 70 cents. So this is they actually Binance actually had to enable sub-70 cent bids in order to allow the market to clear. And so this is this the 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 uh uh open up sub-70 cent uh bids on on UST and then the price immediately fell below 60 cents. Uh but part of this is starts to create the reflexivity. This was not actually the attacker all of the way. As soon as the attacker broke down uh below the person or the entity that was defending the 0.98 cent price, uh this this is when uh deposits out of anchor started to clear. So these are the funds saying, yo, somebody's somebody is selling all of their UST. We also have to start selling our UST because there's not enough liquidity to let us all out of the door. Uh 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 root loop. And that's where.

It it starts to not just be this attacker who's intentionally depegging the price, but everyone else is willing to take the two, three, five cent loss in order just to have and 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 uh once they opened up the uh the orders. Um as the US T peg fell down to 60 cents, the the uh Luna Foundation Guard is having to sell their Bitcoins 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, uh, 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 uh this is basically the the problem with external uh collateral. Fiscantes 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. Doquan tweets out uh the deploying more capital steady lads. And this is why Ryan earlier called him the Jerome Powell of Terra, because he has to instill confidence in the peg. This is a faith-based peg. Uh, this is that 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 Doquan tweets out deploying 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 wallet, the last $1.4 billion that they have to shore up the peg. But again, it's just not enough. So here is the UST price. Uh, and this is at May 8th when the first uh first attack came with a $35 million sold into the curve pool. Price goes is that $1, falls down to 97 cents, uh, but then gets bought back up because this is just the first wave and there's plenty of ammo left. Uh 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? Uh and then as time progresses, we'll go to the we'll go to the next chart. Uh, you can see the scale here. So that that red square is what we were looking at previously. Uh, 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 uh Luna Foundation Guard reserve ammo. Uh, and then and and so then again gets bought 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 uh 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 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. 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 UST, Ryan, starts to actually pass the total market cap of Luna, which is bad. This 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. Uh and so this is how we end up where we are today, where Luna is down ninety-nine percent 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 textbook downward spiral of an algorithmic stablecoin, 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. Doquan and others tried to re-in-inject confidence in the market, was unable to uh handle the the downward pressure forces. And having something like Bitcoin on the reserve to try to protect this is not actually something you 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 decorrelated asset to the market that would hold steady in this kind of downward pressure uh 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 down to $1 billion market cap. So it lost $40 billion of capital. USC goes from $18.7 billion to $5.2 billion, probably lower at the time of recording. And so, like I said, there's over $50 billion, almost $50 billion of capital loss. For the uh 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 Terra 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. BitConnect was a Ponzi scheme through and through, everyone knew it. Uh it was $3.5 billion 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 BitConnect 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 twelve billion dollars on top of that. So the the massive amount of just capital destruction that has just happened is is unfathomable. I've never seen it there's no one has ever seen anything like it in the crypto space. Uh Nick

$2 billion. And this is all targeted on Luna holders primarily. It seeped out into other areas of 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 ones. 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 says he says forty bit forty billion. This is an old tweet, it's now fifty, uh, almost totally destroyed in the space of a month. In the sheer, 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 US Capitol, 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. Uh 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, DAI, UATher, 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 experienced a run and had declined in value. And 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 happen, basically the shit 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 uh a couple of bankless episodes ago, um, to those who were saying, hey, don't worry about Terra, it's fine. Don't be a, you know, a decentralization maximalist, an Ethereum max, or whatever. It's just, we're hopeful. Do Quan, 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 while a lot of this loss was contained inside of the Luna ecosystem, uh it has definitely spilled out into funds. A lot of funds are 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 account for their losses. And so the losses of the Luna ecosystem do spill over into the rest of the space. 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. It's a semantics different as 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 you people saw an opportunity to make a billion dollars. And so I haven't said this yet, but the uh the the entity that borrowed $100,000 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 of profit from this. And so this was a rational actor who just saw an opportunity in the market to walk away with $900 million 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 uh 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 maxies or whatever. Uh and so there's definitely some part of the Luna ecosystem that uh has probably in the back of their mind saw this weakness but didn't want to account for that. So they just harass others who pointed it out. Uh and so this is this is behavior that we've seen in crypto Twitter before. Uh

I th I think we've seen it in other communities before that have uh 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 uh ongoing innovation. Um, and like the there's definitely projects that are getting under recognized, 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 uh caring about the kind of 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 coin's 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 2% or 0.2% 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. Yeah.

Um, somebody else that saw it coming who I deeply respect in this space is Hazu. And Hazu says UST 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've supported UST in the past, you don't get to look away now. And this is this is the dark part of the story. And so we're going to the the Luna Terra subreddit where you can see the national number for the suicide hotline 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 all of their savings, their friends' savings, their family savings. So this 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 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 affect and happen to retail, regular, everyday people, right? Uh when it's cloistered off to a small experimental group in crypto, a bunch of DeFi DGens, 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 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 C DeFi 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 uh I I think that's going to be a lasting, a lasting blemish on the industry as well and get re and get regulators' attention.

Definitely somebody that has now received a lot of the ire of of the community is Do Quan, the leader behind the terror ecosystem. And Do Quan, people were pointing out how confident and cocky Do Quan 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. Uh here he is taking a mil $200 million 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 good ones by any means, uh, don't make bets on Twitter about the price of their asset. Uh of course, he also has this 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 after when some of them started uh talking negatively about basis cash, uh, which we will later find out Doquan was a part of. Um

Spoiler.

Spoiler, yeah, and so Doquan famously tweets out by my hand die will die. Uh I actually respond my money is on DAI simply because Maker DAO is the most just like trusted and just like well secured stablecoin there is in crypto Twitter. And I was absolutely just harassed by Doquan himself. So Doquan gives this oh really like meme and then follows up with saying only an ETH Maxi would bet on something that 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.

Ver very popular tweets too. It's like this community would swarm and and basically overwhelm, ratio you on Twitter on uh on some of these comments.

And so we we call this now toxic insecurity, where like they know that their their ecosystem doesn't really have uh all their all their holes or all their like weaknesses covered, and so they just like make sure that no one talks negatively about their ecosystem on Twitter. Uh and so this is actually where we've discovered as of today, as of the time of recording, uh Doquan was also behind the earlier failed uh algo stable coin called Basis Cash, which also imploded, but it imploded much earlier in its life cycle uh and caused much less harm in the ecosystem. So there was a an anonymous founder called Rick and Morty, uh and who actually turns out that was Doquan and other employees of Terraform Labs. So after Basis Cash exploded, I guess they just rotated into doing the same thing, but as a layer one, uh, 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 uh Rick Sanchez in Telegram, the pseudonymous 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 algo stable coin 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 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 abandoned that project, right? speaks very much to what he intends to do or his intents for the Luna Terra 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 Terra? It calls all of that into question.

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. Tim Copeland tweets, uh, tweets out uh we're also watching some people who have previously promoted UST on Twitter delete their tweets because uh 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 stablecoin blew up once again. Fiscantis tweets uh uh tweets out some really good advice. For those, for those, this is a message for those who are uh who feel lost as a result of this, who lost a bunch of money. Physcantis 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 $150,000 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 can or in and you can't afford it, therapy is a good thing to consider. Uh as somebody with a background in psych uh psychology, with my mom as a therapist, therapy's tight. Like if if this is hurting you psychologically and you feel like this is bottled up, uh I definitely would encourage you to just talk to anyone.

Yeah, absolutely. Um, feeling for the community out there. And um I think simultaneously it's okay to feel for the community of 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 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 the sad part is the reason why this tweet did so well is because we've seen this before. Uh Mike McDonald's uh gives his take as to what is about to happen. He goes, the best part about this whole thing, being facetious here, Dove 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 rebrand to 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 Wonderland fiasco. Uh and so like Zero X Sifu, who turned out to be the Quadringa uh exchange scammer, uh just was just cycled into the next scam. There are just some people out there who are just these serial entrepreneurslash scammers out there who just can't stop doing this stuff. Uh and so hopefully, if you have been burned by this, this is your last time uh and you would look towards other alternatives rather than these very, very attractive, juicy uh 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 Sies from Wonderland. We got attacked from that earlier this year. It turned out, not six weeks later, uh, 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 bullcase bear case podcast, gave uh 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 for that.

Um

by the way, that's not our name for them. They s are self called the lunatic.

Yes, yes. 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 maximalists, 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. I do appreciate like sometimes it it's it it it hurts getting grilled by those people, but ultimately there are there are people that come out and say thank you. Uh here smart programmers saying I would like to thank myself, Ryan, Sazel, Anthony Susano for educating us about Luna and UST. I had my money in that shit. Thanks to them. I was out without getting wrecked, feels bad for the Fallen Ones. Uh the next tweet is a swagtimist, a friend of ours, who who tweets out where are the Luna Moon Boys now who enjoyed shooting on the bankless episode when they were when they weren't going through the existential risk? Where are you at now? Um and then Sazzle, Anthony Susano says, Silent, just like the frog nation that came before them.

Guys, so we've taken you through the the entire life cycle of uh 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 uh, hope the lesson for everyone in crypto, whether you're a builder, whether you're an investor, whether you're 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?