Bankless - UST: New Paradigm or Ticking Time Bomb? | Terra Bear vs. Bull

Starting point is 00:00:06 Hey, Bankless Nation, we are super excited to host this live debate. This is a debate on Tara, Luna, UST, the stable coin, the bull versus bear case. I asked this question on Twitter, David, and I think this is the question for our debaters today. Is Tara, the UST, the future of crypto money, or is it a ticking time bomb waiting to explode? Got a lot of responses on crypto Twitter as a result of that question. And then two debaters. stepped up to the plate, and we're also nominated by the community to take one of two respective sides. One is the bull case for UST and the Luna ecosystem, the Terra ecosystem. The other is the bear case. And so we have two representatives taking that side. And we're going to try to get to, I guess, the truth, or at least hear the arguments from both sides in this conversation. David, who do we have on the show today? And do you have anything to add to that?

Starting point is 00:01:02 Yeah, of course. coming in, in the left side of the ring, on the bull case, we have Jose Mikado from Delphi Digital, and then in the right side of the ring, we have Jordi Alexander, Chief Investment Officer of Salini Capital for the bear case for TerraUSD. And I think really this conversation hinges on the question of do algorithmic stable coins, can they work at all? And if they can work, has TerraUSD, has UST cracked that nut? We've seen many Algo stable coins come and go.

Starting point is 00:01:37 Lots of algorithmic stablecoin experiments on Ethereum, empty set dollar, dynamic set dollar. But we have not tried the experiment as a layer one until Terra came along. And so far, that's been going pretty well with Terra. But there's still a fundamental question as, can an algorithmic stable coin work in the long term? And I think that's going to be the main topic of what we are going to talk about today, along with all these other periphery topics as well, such as how is anchor involved with this,

Starting point is 00:02:06 the 10 billion of Bitcoin Treasury that's being accumulated by the Luna Guard Foundation, and a few other things as well. So, Ryan, these are the focus of today's show. And here's why this is important, guys. Like, Luna is valued at something like $30 billion, you know, plus or minus. I'm not sure at the time of recording. UST is now $16 billion. It's definitely making its way into all corners of,

Starting point is 00:02:30 of define. So this is a substantial market cap for these assets. So we want to poke and see what's the viability look like for these assets. What do the growth prospects look like? Guys, before we get in a quick announcement for you, I want to tell you a little bit about a fantastic NFT drop opportunity. And I think this is an opportunity for maybe first time NFT buyers or early buyers who want to support a good cause. So it is National Youth, HIV and AIDS Awareness Day on April 10th and the consensus NFT team and also Mac that's MAC the makeup company have partnered together to launch a set of NFTs from the iconic Keith Herring okay art by Keith Herring there are three different levels you can get in on this NFT the first starts at $25 so all of the proceeds from

Starting point is 00:03:24 this here's the cool part all of the proceeds 100% go to HIV AIDS issues involving youth to support youth who are affected by HIV and AIDS. So really cool cause. And not only 100% of the sales, but also all of the resale values. So remember, the cool thing about NFTs, every time you sell an NFT, royalty can be collected. In this case, it's 2.5%. That also, on an ongoing basis, forever, goes to the same cause.

Starting point is 00:03:51 So super cool opportunity. We will include a link in the show notes. But if you want to memorize this, it's bankless.c-c-c-c-mac. It's all capital, MAC, and you can check this out. The next step is really just sign up, get on their list, so that when these NFTs come out, you will be first to know. David, with that, man, I'm really excited about this panel because I feel like I haven't fully explored the Terra and Luna and UST ecosystem

Starting point is 00:04:21 in the way I've wanted to you, and I've been looking for an opportunity to sort of get both sides of the argument. So I'm excited to learn along with the guests. I probably have some preconceived notions coming into this, and I want to check those and see if they're true or not. But this is a very important conversation, probably one of the most important conversations happening in crypto right now. So I'm super excited about this.

Starting point is 00:04:45 You have anything else to add? Yeah, it's extremely relevant. It's the talk of the town. The Terra community is full of energy at the moment. And so I think, Ryan, if we can do this show right, it will both be a zero to 60 in understanding the Luna ecosystem, while also. having a good back and forth debate as to the merits of the of the system as well as the risks of the system as well Well, there's your hype guys. We will be right back with our two debaters our two panelists

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Starting point is 00:07:43 and learn from the oldest and most resilient Dow in existence. All right, ladies and gentlemen of the Bankless Nation, here are our two panelists. Again, in the left side of your screen, we have Jose Macedo coming in from Delphi Digital. He is going to be arguing the bull. case for for terra Luna and then on the right side of the ring we have Jordy Alexander from Selene Capital arguing for the bear case for the Terra ecosystem and for UST Jose and Jordy welcome to

Starting point is 00:08:15 bankless. Thanks very much for having me big fan of the show. Hey guys, happy to be here. Cheers. Thank you guys for volunteering to do this. I think this is going to be pretty fun and like I said going into this I think this will be an opportunity to go to teach a lot of the bankless listeners, the bankless community who haven't completely doven in to the Luna ecosystem all about Luna while also providing the pros and cons, the benefits and the cost, the bull and the bear case for Terra. And so I'd actually kind of like to start at that high level of just kind of defining what we're actually talking about. And so, Jose, I'd like to start with you. Can you simply just explain the fundamental properties of Luna and UST? Like what is the design philosophy and what are its

Starting point is 00:08:57 goals and how does it achieve those goals? for sure yeah i know it's an educated audience probably more steeped in sort of ethereum projects than than terra so i'll try and use some metaphors there so i think the easiest way to understand terra is actually through its product which is usts right so usts is a decentralized stable coin you can think of it as something similar to dye but unlike die which is built on top of ethereum um usts exists on its own layer one which is which is terra which is a tenderman proof of stake uh app chain so So for the ETH maxis, or for people who understand ETH, you can say like, it's as if Maker, MKR token didn't exist, right?

Starting point is 00:09:39 So it's like, just ETH and die. And you have no MKR in the middle. So all the value would accrue to ETH. And you'd have like die sort of built into the layer one level into the, into the ETH layer one. And then, so how does UST itself work? So in terms of mechanism design, it's actually different from Maker. So Maker is a debt-based stable coin. UST is more similar to an algorithmic stable coin that has existed on Ethereum before.

Starting point is 00:10:05 You mentioned some of them, ESD, DSD, etc. Where basically the way you mint UST is by burning Luna, and the way you burn UST is by minting Luna. And so this gives Luna a really interesting role in the Terra ecosystem, right, where it's both the staking token like it would be for a proof of stake chain. but it's also the share token and the governance token for this for this decentralized stable coin right and so in a sense it secures both the systems like technical sort of consensus risk but also the stable coins financial and and economic risk this also gives luna like unrivaled value capture i would say at layer one right because unlike most layer ones which just capture value from from transaction fees Luna actually captures value in the growth of its main stable coin And since stable coins are crypto's killer app on pretty much every chain, Luna, like, basically verticalizes.

Starting point is 00:11:02 It's like vertically integrated. And it also captures the value from its main and, like, most successful application. So, and then in terms of contextual data, that might be useful to your users, to your listener, sorry, UST is the biggest decentralized stable coin by market cap. It's at roughly 16 bill right now. It's also probably about to be the most liquid with the four pool, maybe maybe controversial. but yeah, probably about to be the most liquid. I would also argue, and I'll argue later, that it's the most decentralized in a certain sense.

Starting point is 00:11:32 And then Luna has its own layer one ecosystem, which itself is thriving in the sense that it has around 30 billion in TVL. It's the second largest L1 by TVL. It has core primitives for a lot of the stuff that you'd see on Ethereum, savings, credit, exchange, perps, also an NFT, like a bunch of NFT marketplaces, a bunch of dope NFTs. So, yeah, that's, I'd say like, a high level intro to Tara.

Starting point is 00:11:57 So Jose, I'm going to ask Jordy to add to that, but just to kind of summarize the taking from maybe the Ethereum paradigm, right? So it's as if a layer one like Ethereum, that's what Terra essentially is, had an algorithmic stable coin almost baked in, tightly coupled to its core protocol. And the value of that algorithmic stable coin was somewhat sort of linked to in an algorithmic way, ETH the asset, so the L1 asset itself. It's like if the senior age accrued to eat, right? Like the growth in, imagine if the growth in diet all accrued to eat or in the centralized

Starting point is 00:12:37 tables all accrued to eat. Right. And that is not the only, USC, of course, is not the only application on Terra. Terra also has, you know, general purpose, smart contract layer where it has other sort of defy applications as well. But it does have this special status almost like, um, almost protocol native. I don't know if that's too strong a term. Would I say, would you say protocol native or do you still consider UST a separate app that is distinct from the protocol?

Starting point is 00:13:05 No, it's a native. It's protocol native for sure. So it's minted and burnt at the protocol level. And Luna and UST are both the two protocol native tokens. So that is helpful because we can't really talk about UST without talking about Luna. So I think for listeners listening to this, When we say Luna and UST, you know, sometimes we'll use them somewhat interchangeably. But of course, USD is sort of the stable coin pegged aspect. But it is almost a product of Luna. And these two things might be used somewhat interchangeably in this episode. Jordy, what would you add to this?

Starting point is 00:13:41 Is there anything you would add to Hosta's description or anything you might disagree with? I mean, in terms of the analogy to Maker and some of the stable coins, that people might be familiar with, like dye, for example, that are over collateralized. The difference is that in a way, UST is collateralized by the value of the underlying chain itself by the L1. But instead of a model where you are necessarily changing your UST for Luna, instead it is adding inflation to the system.

Starting point is 00:14:16 So imagine if somebody wanted to get rid of their dye, instead of getting Ethereum from somebody, the system would literally just print new Ethereums and just bestow those Ethereums onto the person that has dye. So in a way, like the die is an extension of Ethereum where you could just get more Ethereum created from that system. Of course, the problem we know with inflation

Starting point is 00:14:38 is that it reduces the price. And that's kind of why historically, these things have always failed because as you create inflation, you reduce the price, you get into a death spiral where the underlying price is going down and then, you know, people want to redeem more and then there's like a rush for the exit. And if you find that there is not enough exit for everybody, some people are kind of left holding the bag and usually things go to zero in that case. That's kind of what we've seen historically,

Starting point is 00:15:07 at least. So I think to bolster this conversation, and Jordi, you just touched on it a little bit, and Jose also touched on it, but I want to make this a little bit more formal. There's a relationship between the value capture of the Terra ecosystem and then the Luna token and then also the UST token. And I want to kind of go back through this again. Jose, when the Terra ecosystem captures value, how does it manifest in the supply of UST versus the unit price of Luna, as in like the market cap of Luna versus the total supply of outstanding UST?

Starting point is 00:15:42 When the Terra ecosystem grows and captures value, how does it get balanced between these two tokens. How does that happen? Yeah. So when there's demand for, like excess demand for UST, UST will trade above a dollar, right? And at that point, there's an incentive for someone to go and burn some Luna in order to mint UST and then sell it on the market and collect the, the arbitrage, right? With Luna providing kind of that layer one oracle price that sets how you can mint and burn UST. And so as

Starting point is 00:16:15 the supply of UST grows, there's more demand for, for Luna to burn it to mint to capture these arbitrage opportunities. And then obviously, Luna also captures a staking yield, which comes from from the fees generated on the network, the swap fees, and the actual just transaction fees on the on the on the network. There's actually been a stake in yield just pretty high. It's is it's not inflation based at all. It all comes from from from network fees. And then Jordy with this mechanism, what are like the strengths and weaknesses in this particular mechanism that stand out to you or just any comment on that mechanism and its sustainability?

Starting point is 00:16:49 The problem with, so you don't really see there's a problem until there's like a huge problem. That's, that's one big issue where there's going to be a straw that's going to break the camel's back at some point where, you know, you can keep backing, you keep backing, keep backing, and then there's a point where he's just like suddenly like nose dives. So it's not like, you know, you get to slowly notice that something's wrong and you get to adjust and fix it. So that's one of the issues that these things are circular. have like it looks everything's okay and then suddenly it goes bad and um the problem is if you have a

Starting point is 00:17:22 lot of retail users and you have a few big whales we'll get into this later but yeah if there's a rush yeah like if there's a rush for the exit and you have a few very sophisticated players that own most of the coins and they get out first then um it's kind of bad luck for the people holding well we're so we're going to get into you the only thing i the only thing i would add to that just on the historical metaphor that I think is important to note is while I do think historical is important, the comparison and like the idea that it was all okay at a certain point with like ESD or DSD or whatever is just like it's not true, right? But for anyone that was in those games, that thing traded at every price except a dollar.

Starting point is 00:18:03 Like it was it, it was $10 at some point or like $5 and then it was and then obviously it went straight down all the way to whatever it is now like fractions of a fraction of a cent. So I don't think there's been any really algorithmic stable coin that has anywhere near the track record of success of what UST has had, right? And like it's the comparison in a sense is a little bit disingenuous because like Titan, ESD, DSD, they really never maintain stability for more than for more than even a few weeks. And so whereas UST has maintained stability for for over like a year in face some pretty serious and testing market conditions. So I think the metaphor is, while they're important and the design is similar, like the magnitude of success is just on a completely different scale where it's almost like incomparable. I feel like we're already like diving into some of the debate topics that we definitely want to, want to reach. But while we're talking still about the intro and the summary to make sure the audience understands UST and Luna is the last important piece if you're coming from an Ethereum world that's different.

Starting point is 00:19:05 I understand things, Jordy and Jose, that Luna does not have a fixed supply the same way. It does not have a monetary schedule in the way that Bitcoin is $21 million and Ethereum is sort of, you know, basically based on parameter controls and validated and that sort of things. Luna will actually inflate its supply in order to like stabilize or respond to UST as a stable coin, the demand for UST as a stable coin. So that is one big distinction from the Ethereum ecosystem, the Lunate ecosystem, the Terra ecosystem. So I see you nodding your head.

Starting point is 00:19:43 Yes. So I think that's the case. Okay, so let's just high level, before we get into some of these individual topics, I'm going to hear your high level summary from each of you on Jose, why you are bullish, and then Jordi, why you are bearish. And I think you've both hinted at some of these things.

Starting point is 00:20:02 but like just put it into kind of the the elevator pitch for us. We'll start with you, Jose. Why are you bullish on this design? Yeah. So I actually think Jordy and I probably are closer in views on this than most other, than I would be with most, most other bears. But I want to do just a few disclaimers before doing the, on the bullishness. So I'm very bullish, Luna, in that most of my net worth is in Luna and Luna Alt.

Starting point is 00:20:32 So that should tell you something about sort of my bullishness on Luna. However, that doesn't mean I think it's riskless. I've consistently sort of outlined what I think are the risks with it and also the mitigants to those risks. It also doesn't mean I'm a maxi, right? I'm really like as Delphi Ventures, we've invested like most of our investments and most of our nav is held in non-luna ecosystem stuff. We've invested in other layer ones.

Starting point is 00:21:00 We're interested in other stable coins like fracks and. and Faye specifically or a design that I'm interested in. So by no means a maxi. And then, okay, so in terms of the high level thesis for Luna, so maybe I'll do the high level and just go through step by step afterwards as well, if that's cool. I mean, maybe cut me off if not. So high level, stable coins are crypto's killer app.

Starting point is 00:21:24 I think this is hard to deny. Centralized stable coins are in my mind a temporary stopgap that will be regulated away into a relevance. The end game is necessarily decentralized stable coins, which I think is arguably the biggest marketing crypto. I think it's a multi-trillion dollar opportunity. UST is the largest decentralized stable coin by market cap, and it's also growing the fastest. The second die is actually not growing. It's declining.

Starting point is 00:21:53 And although decentralization is hard to quantify, as I said, I'll also argue that it's the most decentralized because it's the only one that doesn't rely on centralized, sensible, like USC and Tether. So that's sort of the high level, the high level thesis. I can go in, like,

Starting point is 00:22:11 on step by step into, like, each of those points and add a bit more color to them, if you want now, or I can let Jory do his elevator thesis. Yeah, yeah, I think that's perfect for now.

Starting point is 00:22:21 That's the perfect level of, level of expression of the bull case that we need for now. Jordy, what's your bear case? Yeah, I'll do like a very quick disclaimer as well. I don't want Luna to fail. I'm not like betting against Luna. I'm not short Luna, but I do see a lot of, you know, potential issues in the road.

Starting point is 00:22:41 And, you know, compared to the current euphoria around the Luna price that we've seen, I think there's a lot of things that people may need to understand and make. And Jordy, are you a Luna holder? I'm not a Luna holder. Oh, sorry. I have no Luna long or short. So I am in Anchor right now. I think it's, we'll get into Anchor later.

Starting point is 00:23:08 You know, presenting the beer case while being an anchor are not two distinct things. I'll explain that I think Anchor is like a huge marketing span right now that is a safe thing for investors potentially to just say thank you and take some 20% yield while there's a lot of reserves. and we'll get into that later. But in terms of the bear case, there are huge amount of assumptions between here and the end game that Jose talks about. And I understand the end game,

Starting point is 00:23:36 and I'm sympathetic to the end game. The end game is basically, you know, we want something decentralized as opposed to USDC, USCT, where the government can intervene. The problem with something over collateralized is that it is very capital inefficient and cannot grow very fast

Starting point is 00:23:53 while UST, as we have been talking about, has been growing extremely rapidly, that also presents risks with it because you can get over your skis grow too fast and being in an imbalance situation. But the main bear case is how far we are from here into execution are many, many steps removed than people realize. There's a lot of things that have to go right. And there's a lot of assumptions that we don't know. And there's two main ones. One is, will this peg hold in the meantime through volatility? And volatility can come either through a bear market or it can come through a reduction in demand once, you know, the yield on anchor, which I believe is extremely crucial to the growth of Terra right now, reduces. And actually,

Starting point is 00:24:37 the reality is nobody knows what the effect of that is going to be. And another assumption is, even if it doesn't be peg, that's not the only bare case. It is entirely possible that, as we have seen with UniSwap, as we have seen with other successful protocols, and defy like Ave, if something works, people will try to make a better mouse trap and you might see other L-1s issue stable coins against them and add some little tweak on it on top and they can offer a higher yield. This is kind of what we've seen with sushi swap. And that will be bearish for Luna price without necessarily depegging the coin. Okay, guys, thank you for those initial statements. And I think we're going to be touching on basically every single element that was

Starting point is 00:25:25 discussed by each of you. And for this first one, to really start off the detailed side of this of this show, I want to go back to Jose. Jose, you talked a lot about how these other Algo stable coins just have not performed in the same way that UST has. And UST is in a league of its own simply by performance, right? We had empty set dollar come and not really work. Dynamic set dollar come and not really work. For what reasons do you ascribe the success of UST in the face of all the other Algo stable coins that haven't worked? Like what are the properties, what are the features of of Tara and UST that has made UST hold its peg and be so successful? And what are those elements? What would you say is the rationale behind that? Yeah, I'd say the main, uh, the main thing

Starting point is 00:26:15 is just that most people treated Algo Stables as a mechanism problem design where actually it's, it's a utility and demand problem. Right. So like everyone sees the, the, the, the, these things is just you design a mechanism, you design a coupon system, a bond, whatever it be, then you just alter that over time and hopefully it can maintain the peg. But actually the main thing that backs a stable coin is demand for it, right? That's the main backer. And stable coin, uh, take this sort of build it and they will come approach or like peg it and will come approach, right? As long as we keep the system safe and peg, people will use this. And what we've seen is that that just hasn't really worked, right?

Starting point is 00:27:04 And the approach that UST took, sorry, it says my connection is stable. Can you hear me all right? Yeah, we can kind of hear you. You're breaking up here and there. It actually might be beneficial if we actually just started from the beginning. Can you just start over? Yeah. Sorry about that.

Starting point is 00:27:20 So I think the big difference is that most, so Algo Stables and Stable coins generally treat stable coins as a mechanism design problem, where in reality it's a demand problem, right? So you can construct the most elegant mechanism you want, but the main thing that backs a stable coin is demand for it. And so where everyone else kind of focused on their coupon mechanism or building an economy and around it. And so it's a lot, for example, the maker approach, which is sort of build it and they will come or peg it and they'll come.

Starting point is 00:27:56 And we've seen the struggles of that. Whereas UST, the approach was, let's not just build a stable coin with a clever mechanism. Let's build an entire economy of use cases around this centered around UST, which which creates that demand around it. And obviously that the first one was mirror, which was allowed people to get exposed to synthetic assets. And I mean, at a high level, I would split sort of, because UST is money, right? And money, you want to use it for two main things, either spending or deferred spending, right?

Starting point is 00:28:27 Which would be like investment. So the third spending is sort of all of defy and TFI, like all these tools. So mirror, which gives you exposure to traditional assets, synthetic assets. You have anchor, which gives you a savings rate. You have Astroport where you can exchange it for different assets. You have, you know, Mars Protocol is a credit protocol. You have Prism where you can split your yield, all these primitives that make this investment ecosystem really compelling, and that's only going to keep growing.

Starting point is 00:28:52 And then you have the spending use case, which is how can I actually spend my UST in the real world, right? Because I don't want to have this savings account that's separate from my, for my spending account. And there you have all these neobanks come online like Cato, like cash, like Alice, that are building all over the world and sort of doing the work on the front lines, on the regulatory front lines to make UST spendable everywhere. And the ultimate vision is to sort of close the loop, right, where you never have to leave this ecosystem. You have a really well-developed financial system with TFI. And then you also have a really well-developed spending economy. where you can spend this stuff all over the world and sort of make that really seamless. And I think that vision is the big difference between UST and all the other stable coins. And we're seeing some of them understand this.

Starting point is 00:29:39 So for instance, the Fay and Rari merger, I think, is an admission of this, right? That it's difficult to have just a stable coin. You need to build, you need to like verticalize and have your use cases on top of it. And so you've seen Faye like join up with Rari and build these use cases on top. You've seen FRAX with FRAX lending. And I think the most successful ones, are the ones that are able to do that. But I don't think, like, with the lead that U.S.T. has in terms of the system and just the community and everything,

Starting point is 00:30:07 I think it's much better position than most of the others. I want to throw this to Jordy in a second, but one quick follow-up, Jose, on this. I think your argument, to summarize it, is that the vanilla algorithmic stablecoin model, I think you are in agreement that that, like, without utility, Algo Stablecoin, don't work. You can't just have an algosable coin, just to have this algosable coin. You need to actually imbue it with utility for it actually to be sustainable. But my question to you is, are we just adding like a utility layer around an unstable foundation? Like if we know that algosable coins are inherently unstable, can you really solve that by adding just a utility

Starting point is 00:30:48 layer around it? Or, because in my mind, I think an argument could be made about how you're just obfuscating the instability and the instability will rear it. its head at one day, you've just obfuscated with utility between now and then. And what would you say to that? I would say that it's not that alga stables are inherently unstable. It's just that most of them focused on Ponzi incentives, right, versus utility. And what that does is it, is it, it's really good at bootstrapping the supply of this alga stable, which, so, right, with ESD and the, in the expansions, you were getting, like, massive growth in ESD supply. But actually, like, there's no real demand sustaining that. And the, that, when, when the market turns,

Starting point is 00:31:27 the outstanding stable coins are actually a liability of the share token, right? The share token has to honor that and get minted in order to satisfy that. And so you have this situation where you've created loads of stable coins through Ponzi demand and yield. And when that goes, everyone wants to redeem at the same time, right? Which is why it's really important for an Algo stable. You have to build demand at the same time as you build this holder base because you need it. You need it to be that when sort of markets turn and people aren't, you know, collecting

Starting point is 00:31:55 their like 10% you know seniorage a day or whatever on ESD there needs to be people that are actually using ESD and so they're not redeeming it because they actually see utility in it and they're using it to do all this stuff and so it's not they're inherently unstable it's just that they got ahead of their skis because they use punsy incentives to grow supply loads without having the utility to actually like back that up in the contraction phase awesome that that's a fantastic illustration jordy what would you say to that what are the thoughts that have risen to your mind um you know first of all in terms of like the Ponziomics, I would say that giving an unsustainable yield like Anchor is doing

Starting point is 00:32:32 is a little bit like that. I understand why it is and it's sort of, it's a marketing spend where you say, okay, if it's $15 billion and we're paying 10% above market, we're spending a billion and a half dollars, but if we're creating so much market cap, then it's sort of okay and it's a worthwhile investment. And there's a lot of assumptions baked into that. I think- Jordie, can you take a minute just to explain what you're talking about? talking about with anchor. So this is some way to elicit demand for UST, as I understand it, through yield, which is maybe goes back to like what is what is a Ponzi incentive, but you're

Starting point is 00:33:08 saying it exists an anchor. Could you explain that for the listeners? Yeah, I think like, let's take a quick step back and tell the listeners what is on Terra because it's been around a while. It's not it's not like it's just got created now, even though the price has been going up recently. You know, there was some fundamental building blocks that the Terra team built into the system. One was Chai, which was a payment system. The idea was if you integrate the stable coins into real world spending, that will be

Starting point is 00:33:40 a link towards long-term sustainability because there's people actually spending it. It was a great idea. There's been a lot of issues with that. And I think the Chai experiment was fantastic. regulation and other things in Korea. I don't think that, you know, UST is being spent for purchases. So let's call that kind of like a good idea that didn't necessarily follow through. Then we had Mirror Protocol, which was a synthetics competitor in terms of synthetic assets, stocks, bonds, creating these like financial instruments on chain to give access to people around the

Starting point is 00:34:15 world. Also, not something that's been extremely successful. We, we, at Salina Capital have been in mirror for a very long time. And we like the protocol, but the reality is both on the regulatory side, as we saw with the SEC kind of complaints about it. And even on the stability side now, it was doing very well and it's been doing less well. And the assets there are not necessarily very stable right now. So another very good idea that has had problems executing.

Starting point is 00:34:45 So what is the killer app? It is Anchor. Anchor is your savings bank. instead of getting 0.1% at Wells Fargo, you get 20%. That is something simple enough and desirable enough that it has created this huge, huge surge in UST. And it is especially a case now that we're out of Defi summer. We're out of the initial defy explosion where 20% yield was nothing, right? Like you had very easy 80, 100% yields.

Starting point is 00:35:15 Like nobody cared about it and nobody was looking at Anchor. But since then, we've had a huge contraction in yields. As, you know, the new protocols have figured out that maybe you shouldn't necessarily just give out all your tokens in the first week to predatory people who are just going to take them and leave. So that's reduced the risk-free yield in Defi in general. And if you call it 10% now, the anchor is actually higher now. And they haven't reduced it because they realize what's going on. Like suddenly, like everybody, like, everybody. wants to come to anchor now because it's 20, so we should not reduce it.

Starting point is 00:35:51 Jordan, what do you mean by like they haven't reduced it? Who's in charge of reducing it or increasing it? And also, where does the 20% yield in anchor actually come from? Just to, yeah, I'm sorry, Jerry, free to answer that. Actually, it's just I think maybe it would be useful to, because I'm happy to talk about anchor, but I think it would be useful to have like the context of kind of the death spiral risk and like all of that and like that argument first because so I don't know how I want to do it because we'll get there.

Starting point is 00:36:25 I think Jose, I think we'll get there for sure. What I do want to hear from Jordy though is like this, you said something, Jose, which is that it's based on utility, like utility value is the big differentiator with USC. And I'm wondering if Jordy is getting to a point where he's saying, well, actually anchor is similar to some of the Ponzi game type economics that we've seen an empty set dollar. I don't know if that's the point you're making, Jordy, but I'd like to hear your kind of your full expression of what you're saying with Anchor. So where's the 20% coming from?

Starting point is 00:36:58 So the 20, I can't say what those at Kyle Somani, but the 20% is coming. That was a South Park joke, by the way. So the 20% is coming from the Luna Foundation Guard. It's coming from ultimately the powers that be that control Terra that have money to spend on marketing. A way to look at it is they're saying, you know, we've made, we have this money in the treasury. We will keep topping up as long as we feel like we're getting a worthwhile return on adoption. and we will keep topping up this 20% yield above what, you know, maybe 10% is like a normal value for the yield, given, you know, some of the natural rewards rates where you're getting the yield from the assets that are being staked. So it's a very expensive marketing spend.

Starting point is 00:38:01 The problem I have with it is twofold. One is the civil resistance is always impossible to solve. all for. So, yeah, if you can actually give 20% to retail real people, you know, Alice and Joe, and they actually have a savings account with $20,000, they want to get 20%. And you think it's worthwhile to give them this extra $500 a year because you want to bring them into the ecosystem. That makes a lot of sense. But what you end up happening is D-Gen Box, for example, which is like a way to wrap MIM and UST together and kind of mass. magnify the yield and kind of keep farming this like extra yield. That's kind of more the type of people that have taken advantage of the offer. So I don't think it's necessarily being super

Starting point is 00:38:50 effective in terms of bringing in retail people. And it's so hard to do. Like this is the problem with crypto in general and with blockchain in general. It's like how do you just direct the rewards that you want to direct to real human beings instead of just a huge corporation or, you know, some Dejan Box thing, taking all of the incentives. So, Jordi, back to kind of David's root question here, which is, I think Jose was saying, hey, this is different than other Algo Stablecoin experiments in the past. It's not empty set dollar. It's not basis cash.

Starting point is 00:39:22 This is fundamentally different. And so won't end up with the same fate. I mean, we have like a field of gravestones, as David said at pre the show, of other Algo Stablecoins. Do you think that UST is destined to join those? Do you think it will ultimately fall in the same ways? Or do you think this time it is different with UST? I think some people I talk to are completely convinced. I'm not convinced.

Starting point is 00:39:50 I think it's sort of 50-50. It hangs in the balance. We have a much better team executing on Luna. Like Doquan has an amazing execution spirit to him. you have jump, you have like some strong players that are backing that are not going to just let this thing die. I think, you know, last May, May 2021, where we had a big drop in the entire market and UST started to depag. There were some powerful friends that came in and saved the day and it didn't depag. And, you know, one year later, those guys are kind of reaping the rewards.

Starting point is 00:40:29 So it's much stronger than like some of these prior experiments. And I'm not sure it's going to the PEG. But there are risks. There's two risks. One is Luna price goes down because the entire market is going down. People start worrying that there is not enough collateral in Luna to absorb all the UST. So if the entire market goes down 50, 60 percent in a bear market, including Bitcoin, which is kind of the collateral that is now being accumulated, which we'll get it, we haven't touched upon. But, you know, God forbid, the entire crypto market goes into like a really bad bear market. there's going to be a loss of trust in UST because people are worried that there is not enough collateral to back it in terms of actual dollars. The collateralization percentage goes down and there's a rush for the doors.

Starting point is 00:41:14 That's the one risk. And then the second risk comes from the other side. It comes from the dollar side where if the 20% on anchor gets reduced to 10% and then people no longer care about it, then you will see a, like we talked about before, they will burn UST. That will mint more Luna. It will create inflation in Ler. Luna, and that's kind of a potential risk that starts to create the basis of a death spiral where, you know, if Luna market cap is 30 billion and somebody burns 5 billion of UST,

Starting point is 00:41:49 it's not just that Luna is going to go down by $5 billion to $25 billion. There is a multiplier effect. So it'll be like times three to times eight or kind of like the estimates historically on, on like, you know, the effect of market cap. Like we've seen now in Bitcoin, Bitcoin has gone up 10% based on, you know, a few billion of buying. It's not proportional to the market cap. So that's kind of like the hammer that falls down.

Starting point is 00:42:14 And five billion of Luna sales just wipes out the entire thing. Right. Jose, I'm about to throw this to you. But just I think to recap that is, Jordi, I think what you're saying is that if you compare the outstanding supply of UST to the market cap of Luna, you're saying that there's no way that the Luna has enough like ammo. that doesn't have enough capital to fully prevent a desk bile.

Starting point is 00:42:37 Jose, you were about to kind of illustrate, I think, the case for a desk bile. And can you also just illustrate how anchor you think fits into that role? Does the utility that Anchor providing to UST, is that helping UST maintain its peg? Or do you also see a risk with Anchor? And can you just illustrate some of your thoughts here on this? Yeah, so the first thing is like anchor the 20% rate right now is unsustainable, right? The yield reserve is depleting. But simulations that have been done, and we can link to a few in the show notes,

Starting point is 00:43:12 show that a sustainable rate would be anywhere from 7 to 12%, right, which is still much higher than anything else available in defy. So the question is like, how much do you need to pay for people to accept the perceived peg risk of UST? right and the number that the ecosystem landed on to start with was this 20% which which is a really strong meme it's it's and and it's like the number where people are like and even jordy right who's who's who's who's a who's a bear is uh is sort of what the yield is high enough to compensate for him having some some us t in there so so the question is at what point and now a proposal is passed to to make the rate more dynamic so it's going to it's going to adjust every month and so the the yield is going to lower and so the question is like what is the the rate at which people start saying, you know, this isn't, this isn't worth the risk anymore. And for me, that would be like below 10%. That's my sort of estimate there, because I think Anchor is still going to be the highest rate in D5 for the foreseeable future. And I think with its model, probably forever in terms of the combination of stability and high yield, I think

Starting point is 00:44:16 anchor will continue to be that. And then the other thing to say is it's unsustainable. Just like PayPal, giving away 20 bucks to everyone that used PayPal initially was. unsustainable, right? It's like Jordy said, it's marketing spend. And I, I totally disagree with the idea that it's, that it's been not that successful, that the goal was to attract retail. In my mind, it's been massively successful because it's grown UST supply to $16 billion. It's increased U.S.T liquidity. And I don't, I don't necessarily buy this thing that we need to attract retail or like, this is sort of a separate argument. I think like, Jordy is the user. Like now Jordy's using U.S.T. And so are a bunch of other big funds.

Starting point is 00:44:56 in this space, they have exposure to UST. And you have this magic thing that happens where when the capital went into Anchor, that's when people saw UST is most risky because it was completely uncollateralized. And so they needed that 20%. But now there's a Bitcoin reserve, right? And what if by the time, and Doe can fund this yield reserve for a long time. And so what if by the time the yield reserve is, is the yield comes down, the UST is like 80% backed by reserves, right?

Starting point is 00:45:21 Then suddenly you have this magic trick where people came in because they wanted the high yield, they really high yield, and they needed that high yield to compensate them for the risk. But now there's a magic trick that happens and you're like, well, I kind of trust this thing now. You know, it's been around for a while. The four pool is the most liquid pool in DFI. This thing has all the trading pairs. There's exchanges on layer two like zigzag that are using this. Actually, I want to keep my UST.

Starting point is 00:45:41 And so it's achieved exactly what it's set out to do. And for me, it's the most no-brainer marketing spend ever. Like if you can spend $500 million to top up a reserve and get $16, you know, or like $10 billion in an additional UST and get everyone using it and talking about it. And then you can collateralize it in the meanwhile and increase the trust in it. I just think it's like just a genius move in my mind. And so those are sort of my thoughts on the anchor sustainability piece. On the, you indicated something like a 10% real rate, real yield coming from people that are actually paying into anchor.

Starting point is 00:46:16 And then it goes up to 20% when you add in like the rewards, right? It's basically like a yield farming incentive program. not not exactly like that but yeah it's just that um basically the the rate that could be sustained because the the anchor rate is sort of a liability for the anchor platform right because they have to generate enough borrowing in order to be able to pay that rate to depositors because the depositors right so and so the the simulations that have been done is given current borrowing activity how much uh how much yield could actually anchor actually pay out and so anchor is maintaining the 20 percent rate not through any it's not like a yield farm it's just it's just

Starting point is 00:46:51 literally, you know, LFG sending some money to the yield reserve, which allows it to keep depleting and paying out that liability of the platform. Right. And you said that if the fund stopped paying, stopped incentivizing the yields, it would come down to something like 7 to 12 percent, I think you said. Yeah. That is so high above the rest of the industry. I think like USC is 2 to 3 percent. Where does so much demand to borrow out of Anchor come from? Yeah.

Starting point is 00:47:21 I mean, it's, it is the best place to borrow most proof of stake layer one assets, right? The model is that you give up your proof of stake yield on your layer one asset. And in exchange, you borrow very cheaply and you have the anchor incentives on top. So there is some, like this model is like any model of stuff like this has its flows. For instance, it obviously has to assume an anchor price and the incentives that are being paid out to borrowers and stuff like that. and there's some reflexivity all the way through. But yeah, that's how it does it. I think we're going to talk about maybe the probability of DPEG risk in just a minute

Starting point is 00:48:00 because I think, Jose, you sort of underweight that a little bit. You think it's overstated maybe. And I'm guessing, Jordy, you probably believe the opposite. But I do want to just zone in on this question because you brought it up, Jose, is the fact that LFG, which is a fund associated with Luna, in kind of that ecosystem and helping to like prop up the the value of that economy and specifically UST. There's been recently in crypto news, Doquan purchasing up to $10 billion worth of Luna.

Starting point is 00:48:33 And just before this call, I saw a LFG fund purchase, which is kind of an acting org for Doquan, the terror ecosystem purchasing, I know, 200 million or something, Bitcoin, like they're doing this. This is one thing I don't understand personally, which is the fact that they're having to buy a foreign asset. This is kind of to me like a bank reserve or a central bank reserve, maybe going and buying a foreign asset, an off-chain asset to Luna. The fact that they're buying Bitcoin, is that not an admission that the model isn't sustainable and doesn't work? Tell me about that, Jose. How would you respond? Yeah, I just don't really get that.

Starting point is 00:49:17 argument like for instance like ethereum is is where is the fact that if there's moving uh to eith 2.0 proof of stake sharding an admission that ethereum as it currently stands doesn't work no if theorem as it currently stands works it's just eph 2.0 is is way better right um it's it's a better design and so like luna as it existed for for for its history as as a pure algorithmic stable worked there's it's it's hard to deny that it worked it's survived uh contractions it grew like exponentially it created a lot of use cases around it. But as it gets into this next stage of adoption and trust, that Bitcoin reserve backing is super important in order to bootstrap that trust and increase that trust and allow it to scale further.

Starting point is 00:50:00 Jordi, do you want to comment on this before we move to systemic risks and the DPEG risk specifically? I think it was universally agreed even by the bears that using Bitcoin as collateral and not only Luna is the right decision. It was a very smart move. It makes, even if you say it's fairly highly correlated to Luna, it's not going to be one-to-one correlated. So it is adding potentially some diversification and stability to the system versus having just Luna. It just adds Bitcoin risk.

Starting point is 00:50:38 And people will always be looking at, you know, what the big, like if Bitcoin goes down, they'll be saying, well, you know, Luna took a $1 billion. dollar loss today because they have $8 billion in Bitcoin and it went down 10% and that could create some fud that you're kind of opening up to. But I think that move in itself was not a bad move. And Jordy, that Bitcoin itself, that's custody, is it not? Like, where does that Bitcoin live? So this is like when I talked at the very beginning that we are so far from like the vision, which I like the vision, but look, we are so far from the vision. There are so many things to figure out, even for these like super smart people that are trying to figure it out, they're extremely

Starting point is 00:51:17 complex. Like you have Bitcoin. Bitcoin's on the Bitcoin network. You want to have Bitcoin on the Luna network so that it automatically in a decentralized fashion will be able to be redeemed at 98% of a UST. And we can explain why it's 98% and not one to one. But, you know, there is, we've seen all the hacks with bridges. We're going to see what solution ends up being found.

Starting point is 00:51:41 that if it's RenBTC or what version of wrapped Bitcoin they end up using. But this is an execution risk that in my mind is far from being solved and is not without risks. We've always like on bankless. I would agree with that. Yeah. I'm curious your thoughts. Because like always on bankless, we've always been.

Starting point is 00:52:01 I mean, this show is called bankless, right? But we've, we've always been in the mindsets. The moment the asset starts to have trust assumptions and get custodyed is that, the moment you start to turn into a bank. And I'm wondering maybe, maybe Jose, like your take on this, is what Terra is creating with UST, now it's bringing in foreign asset reserves, basically. How's this different than a bank?

Starting point is 00:52:26 Yeah, so I'm, by the way, I'm a director of LFG, so one of one of seven directors of LFG, just as a kind of disclosure. And yeah, I agree, it's an unsolved problem to Jordy's point, how to bring Bitcoin to, to, the tar in the most trustless way possible. There are solutions out there. There's Axelar.

Starting point is 00:52:45 I think is an interesting solution. It's pretty trustless. There's obviously Thorchain. But none of them are ready for multiple billion dollars of Bitcoin. And so at this stage, the Bitcoin is custodied by the foundation itself, which is not ideal. And then in terms of whether bringing in an asset, like ads makes it a bank, no, I don't think so. because like the there's already an asset there. There's Luna, right?

Starting point is 00:53:13 And that asset is like the native asset of the network. The only thing that it adds is trust assumptions for sure in terms of bringing Bitcoin over to the network. But I don't think trust assumptions make it a bank, right? A bank is literally the bank controls it. It's a centralized legal entity that controls these assets. This like what, depending what solution is chosen, is going to be much more of a decentralized process. and obviously with its own set of additional trust assumptions, that much is like inevitable, I'd say.

Starting point is 00:53:43 I want to ask a similar question just from the perspective of the protocol, though. Ryan said that when you use Bitcoin to help backstop UST, you're kind of admitting that you need external help to make the protocol sustainable. And I think this really goes into one of the design philosophy differences between Ethereum and Terra, where Terra seems to be totally okay. with like tapping into the power and the market cap of Bitcoin to help bolster its ecosystem. But in my mind, that is one protocol, the Terra, the Luna protocol, saying that we need security

Starting point is 00:54:20 from external, we need external help for security for the protocol. And the protocol can't sustain itself. We need to tap into the power of Bitcoin in order to make this thing long-term sustainable. And I don't think, in my mind, you don't really, as a layer one protocol, it's a risk. It's a risk to tap into something that you don't have control over in order to help maintain the functioning of your ecosystem. Like Bitcoin can do things that are outside of the control of Terra because it's outside of the protocol. Jose, do you see these concerns? Not really because like Maker, you know, Dye is backed by Bitcoin and actually a very weak form of Bitcoin, right, with very weak trust assumptions, which is WBCC, which is basically a BitGo multi-sig.

Starting point is 00:55:05 It's also backed by USDC, right? Which is literally like centralized stable coins or an IOU for dollars in a bank account, right? Like if the US government calls circle and obviously it's not, I'm not saying it's going to be a phone call. But like there's processes in which those funds could be frozen. USC's blacklisted addresses before. Like it's very vulnerable. And I would argue a much bigger vulnerability than the Bitcoin one. And I still don't agree with this admission article, argument, sorry, because it's not an admission.

Starting point is 00:55:39 It's sort of a growth of the model. And I don't think Bitcoin's going to be the only asset that backs UST either in the future. I think there's going to be additional layer one assets as they prove themselves that the community might think would make for good reserve assets. So, yeah, I don't see it as an admission. I see it as an evolution of the model in the same way that Ethereum 2.0 isn't an admission that Ethereum doesn't work because clearly Ethereum works. It's the most successful network in crypto. It's just that this is a better model. Does this require, for this to really work, does this kind of require like a trustless bridge ecosystem to be sufficiently built out?

Starting point is 00:56:17 Like we don't really want the long-term Luna system to really just be dependent on like trust, right? We want to have these things baked into smart contracts using trustless bridges. Is that kind of the model for how we would get all these layer one assets also backing UST? Yes. Yeah, we need good trustless bridges. But there are other design opportunities, right? Like, you could create synthetic assets, sort of at the layer one level with an Oracle at the layer one level. There's a design space here, which has different trust assumptions and different tradeoffs. But I don't think that that's the only possible solution. Okay.

Starting point is 00:56:54 Jordy, let's move on to like the depeg risk here because that's something we've seen with other Algo stable coins, you know, death spiral, depegging and eventual kind of like tombstone at the end of it. What are the risks of a depag event in the U.S.T. Terra ecosystem? Yeah, Ryan. I think it's the two that I touched upon. So one is there is a reduction in U.S.T. demand. And I think even Jose said how important that that demand is. And the role that the Luna team has is to sustain that demand because if the demand goes down, that really kind of creates a problem.

Starting point is 00:57:39 So a reduction in demand because of anchor having to reduce its yields and then people finding higher yields somewhere else. Like I said, it's entirely possible that another layer one designs the same mechanism. and gives a slightly higher yield and that can create a relative, I mean, I agree with Jose. Like it can't just be like a totally new layer one that exists out of thin air because people won't trust it.

Starting point is 00:58:05 And we've seen something similar recently with waves, which is not new, but has kind of had some issues with a similar model. But an existing layer one can try to start seeing how successful this design is can just start doing it themselves and increase,

Starting point is 00:58:22 yield a little bit. So there's a lot of ways that the demand for UST can go down. Now, what they're trying to do in the meantime, I don't think it's exactly marketing spent. I think what in effect they're doing is buying time. They're buying time on the lunacy side to say, we will do this for a year. And in that year, we will go all out and integrate as many places that we can in the defy ecosystem. We will get on curve. We will get on the pools. We will try. to have UST perpetuals trading instead of USDT tether perpetuals for trading venues. We will put UST everywhere to the point where we try to, like it's sort of a bet that you can create enough use cases where people will just like, like, you know, we've been living with a tether

Starting point is 00:59:11 risk for years, right? Because we need, we need it. We need it to exist. Trading venues need it. Finance needs it. And it's been, it's kind of been supported by the whole community. In a way, I think the plan is make it similar to that, make it similar to tether. And not in the centralized sense, but in the sense of the community accepts that,

Starting point is 00:59:35 yeah, maybe it's not, we don't know if it's 100% back, but we're just going to go with it. And it's a gamble. And, you know, I'm not saying it's a bad gamble. It's a gamble. I don't know if any of you guys have Korean friends. I have Korean friends. And they love to gamble. and they're, you know, it's fine.

Starting point is 00:59:54 But we should say what's going on. It's funny. One person's fake it till you make it is another person's like, let's just bootstrapping. And so I'm curious, Jose, what your response would be to the depagging and, I guess, death spiral risk in USC. Do you think it's overrated or underrated? Well, the first thing I'd say is it's important to concede that there is a risk, right? And people need to be aware of that risk.

Starting point is 01:00:22 they both use UST and when they use Luna, because there is that risk. It's, it's a design where that's happened in the past, and obviously that's, that's there. But, but what I would say is that, like, first of all, even, even before the Bitcoin reserves, actually, maybe if you go from, from a little bit higher level, when you have a design like Dai, well, even higher level, actually, so all these things have risks, right? Die, as safe as the over cholesterolized design is, nearly blew up on in you know black, Black Friday or whatever, Black Thursday, whatever it was because of congestion on the, at the chain level. Like all these things have risks, even things that you don't think have risks and have

Starting point is 01:01:01 smart contract bugs and things. And so, and then also decentralized tables that use centralized collateral, have a complete other set of risks, right? Which is that actually the collateral they're using could be censored. And if if we go PVP with governments, which is the real PVP rather than the PVP against each other, that that's like a very real risk. So there's there's like a spectrum of risks and it's not it's not that UST is the only risky stable coin. It's that stable coins have different sets of

Starting point is 01:01:29 risks and tradeoffs that they make. Right. And so the tradeoff for me between Dye and UST, which are the only like the two biggest decentralized stable coins is that Dye prioritizes safety and like protection from tail from tail risk over growth and UST prioritizes growth and capital efficiency over downside risk. Right. And so what we've seen with, with dye is it's really hard to grow it because demand for for for for a for die actually doesn't grow the supply of dye it's the demand for leverage that does and so maker ends up competing with other lending platforms for this which is why they've had to add centralized collateral like like usdc right um and so that that's that's a problem in it in in itself right and then u s t obviously

Starting point is 01:02:14 as we've seen can grow much quicker but the trade off is this this downside risk that we're that we're talking about this tail risk that can happen with the reflexivity, that spiral. And just like, Jordi explained it really well, but there's kind of two scenarios, right, with a death spiral. One is like Luna bear market or like crypto bear market, Luna crashes. People are like, oh, shit, I don't know if Luna can, can that's fair in this? It's not just maybe you can bleep it out later. The, yeah, Luna crashes.

Starting point is 01:02:43 Everyone's like, I don't know if Luna can can, can like, honor all its liabilities in UST, they start redeeming their UST. More Luna gets minted. The price crashes further, more people want to redeem UST, et cetera. And the second one is it starts with UST instead, right? There's a large contraction of demand for UST, which mince a lot of Luna. Price goes down. And then the death spiral starts that that way. And so the first thing I would say is that like Luna is backed by every stable coin, but Luna specifically is backed by three things, right? The first and most important one is is demand for itself. Non-speculative demand is really the holy grail of backing for a stable coin. And that's what backed Luna for most of its history, other than in certain contractions where

Starting point is 01:03:28 Luna had to come in. And so the second thing that backs Luna is Luna itself, right? In that it absorbs shifts in demand for UST. When demand goes down, Luna gets minted to absorb that. And now we have this third layer as well, which is this Bitcoin Reserve, which effectively acts as an escape, patch and breaks that reflexivity spiral, right? Because now when people want to redeem UST and there's there's a large contraction, sharp contraction in demand, instead of having to mint Luna, they have this ability to this escape hatch, this escape valve, which is Bitcoin where they can they can redeem it for Bitcoin, right, which reduces the pressure on Luna and breaks that like reflexive death spiral, which is really the problem. Now, so that's all, that's all clear. The valid question to ask about

Starting point is 01:04:16 this is whether $3 billion is enough, right? Like given that UST is now at $16 billion, is $3 billion, actually enough reserves to protect it. And I think the honest answer is that no one knows. It's impossible to model these things. Like reflexivity is really hard to model, right? All these things, you have variables that aren't independent. They all actually are recursive and depend on each other. So it's really hard to model. What I would say is the system survived up until now. now with no reserves. And so I think the psychological impact of this is going to be huge. And then I would also say that what the LFG raise really shows is that people understand, like investors understand the upside of UST, which is the other side of the tradeoff, right, which is that you can

Starting point is 01:05:03 grow faster. Stable coins are a network affects business. There's going to be one or a few big winners on this. There's a bunch of network effects, liquidity, Lindy. And so it's really difficult to, to unseat a stable coin. And what we've seen is that when you start with collateralization, you don't necessarily get demand. But when you start with demand, you can get collateralization. That's what the LFG rays proved, right? And what we're seeing right now, I have good reason to believe there's enough demand on secondary markets to bring Luna above sort of 50 to 75% in Bitcoin reserves just right now, right, through transactions on the secondary market. And so my view is that basically $3 billion, I don't know if it's enough, but if it's

Starting point is 01:05:45 isn't, I think Luna can collateralize itself over time, both through these secondary sales. And collateralize the wrong word. Reserves is really the right word. But it can grow those reserves over time, both on the secondary market and through these, through seniorage. So changing the mechanism so that instead of all the Luna being burnt, part of it's actually used to acquire Bitcoin over time so that the reserves can grow organically over time. That's my view on it. Yeah. I have one quick question. Then we're going to have to pause for break and look guys if you're okay with it we want to go overtime because this has been such an insightful like conversation we still have a few more topics to cover is that cool

Starting point is 01:06:23 absolutely more time after the break okay uh you just one quick follow up on this Jose I mean you mentioned uh Lindy effect right and you also mentioned um you'll maker uh being tested in 2020 part of me wonders about this has UST actually been tested because the real test of, I think, any stable coin design, algorithmic or otherwise, is how does it sustain, not during the good times, but during like the bad times, as Jordy was saying earlier, the tail risk events. And when Maker had that like ETH price drop with, you know, exorbitant gas use and everything in the COVID drop of a black Thursday in March of 2020, that was a huge testing event for Maker. And like people didn't know how it would fare because it never had felt

Starting point is 01:07:13 something like that before, but it made it out, sustained it on the other side. I'm curious whether Luna has actually been tested in your mind. It's one thing for an Algo stable coin to work during a bull run, and Luna's had an absolutely massive secular bull run for the last year or more. That's one thing, but that's easy mode. That's not what a stable coin is meant to be built for. It's meant to be built when there's earthquakes and tornadoes and hurricanes and the entire world. is shaking, you know, around you, has it been tested in that way? And do you think that is an important piece in terms of building the credibility of this system? 100%. I think so our equivalent or the terror community's equivalent of the maker Black

Starting point is 01:08:01 Thursday was May 2021. So May 2021 last year, where Luna dropped from, there was a contraction in UST supply at the same time as there was sort of some coordinated fud around Luna, not to say coordinated in the sense of like that there was anything malicious, just that there was, it all happened at the same time, right? It was a very adverse market conditions. Luna dropped from $20 plus to $3 in that time. There was a contraction in UST supply. But then, you know, buyers came in for Luna and the system, the system survived, right? And there was a lot of lessons learned from that, both in terms of on the mechanism side, increasing on chain liquidity, changing some of the parameters for fermenting and burning.

Starting point is 01:08:39 and also other other lessons that have been learned there. Now, the UST was much smaller when that happened. So I do think there will be other tests. I don't think like the UST or Lunar Journey is going to be up only. So I think there are going to be other tests for it. But certainly it's been battle tested. Like think about how, you know, think about using. Oh, yeah, the other thing that was really actually promising during the May that may drop was that

Starting point is 01:09:08 while Luna was dropping and like and and sort of the death spiral was underway effectively, you actually saw deposits on anchor increase, which means that there were some people that were actually selling Luna for UST fleeing to safety, right? And so what that shows is like a really positive thing, I think, psychologically, is that some people already see UST as their safe haven, you know, when shit hits the fan on chain, they're actually fleeing to UST and going into anchor and saying, I need a break.

Starting point is 01:09:37 You know, I'm going to, I need to go into stable. And so like imagine anyone doing that with like ESD or or DSD, right? Like no one is fleeing to the safety of ESD or DSD. I don't know. I don't know if I don't know. I mean, just interrupt. Like I don't know if you can say that like it's that's proof that like smart people are like, you know, the smart money is doing it. It's within the terror ecosystem, within people who are lunatics.

Starting point is 01:09:58 It makes sense. You know, they're like, should I have the variable one or the stable one? And I'm going to stay within the ecosystem. I'm not going to bridge out. I'm not going to like find a way out. I'm just going to move between the two. I'm not, I mean, I agree with a lot of what you said, but I'm not sure that that necessarily proves something that, you know, smart people are doing that.

Starting point is 01:10:19 No comment on the smart people thing, but it does prove Lindy, right? It proves that for some people, it's a stable coin. It's safety. It proves that there's like a psychological sort of belief in it that some people have, and it's hard to deny whether you would do it or and whether you think it was smart for them to do it. Fair enough. Fair enough. I'm trying to say every community, like a Cardano, you know, if Cardano community,

Starting point is 01:10:42 there was a market crash, they would do the same. Every community that is a community that is a layer one, there will be people within that community within that layer one that seek to do that. But I'd say it's, I'd say it's slightly different. I agree, but I'd say it's slightly different because that one thing is buying Cardano when it drops and you're like, Cardano to the, I'm happy the price dropped. You know, I get to buy more or whatever the Coke stuff, the people say at those point. Another thing is buying the actual stable coin, right? Because that that shows that you trust the system. It's not even that you want, it doesn't, you're not buying it for profit or you're buying the dip. You're actually just like using the system as it's meant to be designed. So like,

Starting point is 01:11:19 I think it's a slightly like different point. I agree with your. It's like different. And I do want to ask you, would you not say that in terms of Lindiness, the upcoming like you said, the yield reduction in Anchor is going to be a whole new different type of. test that we don't know yet what's going to happen with that. Yeah, I would, I would say so. I'm pretty positive on that. I don't think it'll matter that much for the reason I said before, but I agree it's going to be a big, big test.

Starting point is 01:11:48 And the test's face now will be much bigger than the ones faced previously for sure. Awesome, guys. Thank you for going on that back and forth. That was immensely interesting. There are a couple of subjects which we haven't touched on yet, which we definitely need to before we wrap up this show. The pool four is definitely clamoring. being talked about throughout the ecosystem, both on the maker side and on the Terra side,

Starting point is 01:12:13 it seems to be that the word maker just creates a bunch of just very strong emotions, according to the YouTube chat that I've been watching. They do not like that word. So we're going to have to talk about the four pool. There's also, we want to talk about Doe Kwan himself, the level of key man risk that is associated with U.S.T. and Doe Kwan. the guy has a ton of confidence lately, and I want to get your guys' perceptions as to the level of risk. And there's also the conversation of just simply being too big to fail. And is this an actual intentful strategy by the terror ecosystem just becomes so large that it becomes too big to fail? And what does that even mean?

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Starting point is 01:15:43 You know, just fantastic. So we appreciate these two for going over time with us. But we just wanted to make sure we covered all of the topics to best inform you. Here's another topic. Some, I think the bears of the critics of Luna and UST would say that there's a lot of key man risk. Some might even say, like, is this like banker type risk? Doquan is appearing more and more as kind of an Elon Musk type of figure, I would say, in the community. And take that for the kind of the good and the bad side of things, but definitely somebody who makes statements like, by my own hand,

Starting point is 01:16:19 die will die when like talking about the competition between Maker and the die ecosystem and UST. Some have talked about how maybe Doquan is flying a bit close to the sun with some of these statements and maybe some of the regulatory risk that's going on as well. Of course, the SEC is in play. But like when you have a centralized, you would say decentralized, I think, Jose, but when you have a stable coin of this type, you might attract some unwanted attention from regulators as well. And all of this kind of comes down to Doquan and sort of a smaller operating team would be the criticism. I'm curious, first of all, maybe the bare case for all of this from your perspective, Jordi. Do you think that there's some key man risk that the U.S.T. Terra ecosystem is dealing with?

Starting point is 01:17:14 You think there are some centralization vectors. How would you talk about this piece of it? Yeah, I'm glad you said centralization vectors because I think that's the bigger issue. In terms of Doquan, I think he's phenomenally intelligent. He's been making very good decisions, and he's the reason why this has gone as far as it's gone compared to, like, you know, the things that have not even gotten out of the gate. Obviously, there's keyman risk.

Starting point is 01:17:35 If he gets hit by a bus here in Singapore tomorrow, well, everyone's going to sell. Like, that's a problem. I don't have a huge problem with that because we are early stages, and he's building something that eventually is supposed to kind of run itself. I don't think it's a question that right now there is a keyman risk. I don't want to personally focus on that because anything like you could say that about Elon and Tesla like does that mean like Tesla should not exist because, you know, Elon there's human risk. I don't think it's a big deal in itself. I do want to touch on the second point about

Starting point is 01:18:07 centralization. I don't know if Jose wants to answer about DuPont first though. He's obviously worked with him when I haven't. Maybe he can answer about that. Go ahead. I probably agree with your take on it pretty closely. So yeah, go ahead. on the centralization point and then I can answer I can answer both yeah I mean the the bigger issue I have is we're talking about decentralization this decentralized table coin I don't know that there is enough diversity in the ecosystem and the people who are building and supporting the ecosystem yet and I'm not talking about dough I'm talking more kind of like the jump jump capital, jump crypto, whatever they call themselves now.

Starting point is 01:18:50 They are such a huge backer and supporter that I think overshadows, obviously Delphi as well, but I'm sure you're behind the scenes. You kind of know what I'm talking about. It's a bit less organic than some of the other layer ones. And that's going to take a while to change. And I don't know exactly how we get from point A to point B, where, it is a community fully decentralized kind of run thing as opposed to you know you have one brilliant founder and and like a very powerful kind of company that's really how do you get from point A to point B

Starting point is 01:19:31 yep uh do you want me to comment on that now yeah go ahead respond uh Jose cool yeah so the first thing to say is I obviously really believe in decentralization like I wouldn't be in this space if I didn't think that was super important. However, I do think it, I believe in like progressive decentralization, right? And I do think projects need to decentralize over time and in the right way. And I think the way like, especially for a stable coin, because a stable coin requires a lot of like get shit done energy. You know, you need to push integrations. You need to build products around it. You need to do all the stuff that kind of Doe Kwan has been so good at doing. And I think what we see with like when you decentralize too early is sort of what you're seeing in my mind, by the way.

Starting point is 01:20:24 This is just my opinion on the maker governance forums. And I'm a huge fan of maker. It was my first alt coin that I bought after Ethereum. I learned loads on those maker forums back in the days. So like big, big fan of maker. But to me to see their governance at work now is is a huge disappointment, right? It's a massive bureaucratic mess. There's committees for everything.

Starting point is 01:20:44 People aren't well paid. like communities weighing in and commenting on things. They're very focused on risk assessment versus growth. You know, Rune, the founder of Maker, kind of admitted he doesn't understand the curve wars, which are sort of like the flood of liquidity for stable coins in a decentralized world. They seem to have sort of an arrogant attitude towards defy generally, that it's all punsies and the only thing that matters is these real world assets and green bonds and all this.

Starting point is 01:21:09 So like I do think that decentralizing too early is a problem. and for me, the right way to decentralize is actually to do what Tara is doing and onboard like these big organizations with skin in the game that act as like a separate participant and stakeholder in the ecosystem, right? And there's a bunch of those now. Obviously, jump, as Jordy pointed out, is a big one. I would say Delphi Labs, so the part of Delphi that I head up is another big one contributing to projects in the Terra ecosystem.

Starting point is 01:21:37 In the recent round, we had some really good additions with Three Arrows and others. there's someone behind the scenes that are doing a lot of work in the Tara ecosystem. And I do think that's the right way to decentralize, right, with these big organizations that are focused, that have skin in the game. And the other thing to remember is like, we're literally decentralized. Like decentralizing now would be so early because UST market cap is 16 billion. And this is a multi-trillion dollar market, right? And the time to, like, it's much easier to grow fast when you're more centralized than it is

Starting point is 01:22:09 decentralized. And so for me, the plan should be to progressively decentralized over time, grow supply loads, and then once you have that Lindy effect, and once you've grown, decentralized and focus on robustness. And obviously there's a balance, but that's sort of my take. And I do think decentralization in crypto, unfortunately, often gets used as sort of a way for founders that have made it to kind of like semi-retire and become contributors and like pass it off to the community when really the project isn't ready for that and it needs the founder, it needs that founder energy to kind of push things forward. Not that they should be a centralized point of control and Doe isn't, right? The system would work without him, but they need

Starting point is 01:22:50 that energy of contribution and that inspiration, inspirational leadership to push it forward. And then in terms of key man risk, clearly there's key man risk around Doe. He's a machine. Like I've worked with a lot of founders in the space. I'd say Doe is the best one, maybe along with like Stani. He's, he's like a really good mix of sort of a great engineer and like a very, very sharp engineering brain with hustle vision. And then he's obviously like made it several times over, but it's still incredibly motivated. Works harder than me. You know, it takes, takes less holidays than I do. So it's clearly key man on risk around that. Hard, hard to avoid in an early stage project. Pose, with the spectrum of centralization and decentralization,

Starting point is 01:23:31 I'm wondering if you agree with this take, right? So like you've got like a Bitcoin and Ethereum, in, which are maybe on the far left side of the decentralization spectrum, like, veering towards most decentralized, right? And then you have, like, the traditional tradfai system that's called that kind of the right side of the spectrum, right? And then you have, like, crypto banks. You have the FTXs of the world and you have the coinbases of the world that, you know, are a bit left of the traditional finance because they're using decentralized crypto networks to settle things and that sort of thing. Some people have compared the Terra ecosystem to almost like this hybrid mix.

Starting point is 01:24:09 It's sort of like FinTech-ish meets blockchain and placed it kind of somewhere in the middle, this hybrid sort of blend. Do you think that's where you'd place it in the decentralization spectrum? Do you think it's like, or do you think it's more kind of toward the left, more decentralized over time and maybe competing with layer ones like Ethereum and Bitcoin? Yeah. I think even putting decentralization on like a linear spectrum is really tough because there are ways in which Ethereum is extremely decentralized. But then also its main stable coin is entirely centralized.

Starting point is 01:24:47 And actually the biggest stable coins in Ethereum are completely centralized. They're just IOUs for dollars in a bank account. And those are the undercurrent of all of Ethereum defy. And so if those go down, if Ethereum is, it really has like a big centralized attack vector in the centralized stable coins. So like technically and in terms of note count, and all of that, Ethereum is extremely decentralized, but then it has this very centralized attack vector. And I think that's why it's hard to put it on like a spectrum.

Starting point is 01:25:12 In terms of Terra, I would say the system itself, from a technical perspective, is fairly centralized, you know, nowhere near as decentralized as Ethereum in terms of node count and all of that. But it's a tenderment chain, right? So it's a proof of stake, tendermint chain. What I would say is centralized is just like there are organizations in the ecosystem who, who have like a can make a big impact on the success or failure of this like jump um like uh you

Starting point is 01:25:41 uh you know tFL like though if you if you if you agree with that like lfg um but now increasing there there's an increasing number of those to the point where that is becoming a decentralizing force in itself so that's kind of my take on it like i think the system is decentralized but there are some uh there there are some you know centralized entities that are that are a big sort of um part of of its success. Does that make sense? Yeah, it's a good take. David's on mute. All right. Thank you. Yeah, thank you for that, Jose. Jordi, what thoughts have come to mind before we go on and move on to any other subjects?

Starting point is 01:26:16 Anything that's come up to your brain? I mean, in terms of like, you know, you start centralized and you make incremental steps. I fully believe in that. In terms of the ecosystem, the fact that like two main big groups are building a lot of the primitives, I have mixed feelings about it. Like I know one team that's been working hard to try to get like one of the options protocols out on Terra and they just realized that, oh, there is a, there's, they just launched the one that's backed by the founding team. How are we going to compete with them when they're backed by dough and these guys? And we, you know, we wanted to launch the same thing.

Starting point is 01:26:49 So you're going to have a lot of the ecosystem be kind of, you have that a little bit with Solana, but not as much. I think, you know, Solana has quite a diverse group of founders that ultimately are not. necessarily all, you know, FTX related, et cetera, or jump related. But look, at the end of the game, like, does it really matter what ecosystem Terra has if the key thing is the stable coin? Like for me, it might not even matter. It might just matter what they manage to do in terms of going to other chains and getting UST on other chains and making it spread everywhere as opposed to necessarily building all the primitives

Starting point is 01:27:30 on Terra. If they do really good ones, then it could work. It's obviously got the narrative right now. So I don't have a strong opinion, I guess. Well, okay, talking about UST on other chains, I think it's exactly where we want to go next. Recently, Doquan proposed the four pool, a new curve pool between UST,

Starting point is 01:27:52 FRAX, USDC, and USDT. So that's, of course, Terra, USD, the frack stable coin USC and then tether. Most importantly, pushing out die, removing die from the curve pool. And he was claiming that the curve wars are over and that all emissions are going to the four pool, meaning that all the incentives are going to be towards adding liquidity to the four pool rather than the previous pool with die in it. So, Jose, I want to get your perspective on this.

Starting point is 01:28:24 Doquan tweeted out, by my hand, die will die, which is, is a pretty agrope thing to tweet out. Like, what's his deal with Maker? Like, why does he not like Maker so much? And what's the, how does this four pool from Curve kind of fit into the story? I think, though, like, at least this is my interpretation. I don't, I don't, you know, pretend to speak for Doe. It's just that Maker and generally there's a sort of group of people on Twitter that are

Starting point is 01:28:53 constantly making some pretty malformed arguments against UST. and also just calling it like a punsy and referring it and stuff like that. And I think it must be frustrating as a founder who's put their life's work into this and created something pretty incredible, which is an algorithmic stable coin that has worked and is now, you know, and doing everything that he's doing. I think it must be pretty annoying to keep hearing that. And I think Maker has been pretty arrogant about it and sort of dismissive of it. And I think that's that my interpretation is that's rubbed him the wrong way.

Starting point is 01:29:25 I don't know if that's accurate or not. But and then in terms of the four pool, it's a, it's a huge move, right? The three pool is the biggest and like most most liquid pool on, on curve. So it ends up being the bridge pool for a lot of stable coin swaps and then the bridge pool for a lot of swaps generally, especially as curve v2 and the volatile assets becomes bigger. With this, so and frax had it had its own pool, which it was participating in the curve war. So like buying a lot of convex in order to to influence. And then Tara had its own pool that again, it was doing it was doing the same thing. And they've basically teamed up, right?

Starting point is 01:29:59 They've kind of cartelified and they're along with redacted. And there's also, I think a few others joining this coalition in order to put in this four pool, which will be, you know, frax, UST, tether, and USC, and send all incentives towards this pool, which should make it the most liquid pool in stablecoin pool in defy and become the bridge pool so that frax and UST become the reference decentralized stablecoins across. chain. So pretty huge move. I was really taken aback by it. I'll be curious to hear what Jordi thinks about it actually because yeah, it seems like a big thing. Yeah, I mean, we've been talking about the curve wars for a while now and now we've actually seen somebody make a move and try to get,

Starting point is 01:30:44 you know, consortium together and pull something like this off. I think it's interesting. You know, we're very much an experimental phase here and, you know, seeing Olympus join in is you know you're having these like strange betfellows here where you're kind of getting the votes and we're we're an experimental land um i'm interested to see how it all plays out um yeah i'm gonna just eating my popcorn on this one jordy do you think this will like result in the full saturation of ethereum defy with uh... no i don't think it's that straightforward i mean we're there's so many assumptions. Like, first of all, the assumption that centralized stable coins are problematic right now,

Starting point is 01:31:36 I mean, I agree with Jose, like eventually, like, we have to create something for when the day comes and we need to have something decentralized. But I don't think that the vast majority of USDC being used on Ethereum is going to stop being utilized. I'm not sure about Dye's prospects, obviously. that's a different story and I'm not an expert on it. So I can't comment on Dyes prospects. But in terms of like USC being outstripped by UST, I don't think we're at that stage right now.

Starting point is 01:32:09 I don't think we're at that stage either, but I do think centralized, like if you just zoom out to the long term, which is like what the way we work at Delphi is we just try and figure out what's the future of crypto going to be, what should it be? And then we just try and figure it out to invest in it, but also just build towards it.

Starting point is 01:32:24 And for me, it's pretty clear that centralized stable coins will not be the long-term solution for a bunch of reasons, right? Like their bank accounts can get frozen and suddenly they're insolvent. They can get forced to freeze transactions. They have the power to unilaterally like freeze balances, right? And they can get forced to coerced to do that by governments. But then there's even smaller things like they're facilitating, you know, like hundreds of billions of dollars of transactions for clients that they know nothing about. And that's going to be a problem for nation states. Like at some point they're going to be like, hey, who are these people that are transacting?

Starting point is 01:32:59 Like, is there any KYC here and stuff? And you can't do that for Dyer or for UST in the same way. And if those products become KIC, they just become way less relevant, right? And it's not the case that it'll get regulated and all go at once. I don't think that's necessarily going to happen. What's going to happen is, let's say, suddenly they start freezing balances from people who didn't pay their taxes, right? Governments find some links from centralized exchanges to people who didn't declare it on their taxes.

Starting point is 01:33:23 find out they have USC, they contact a circle and get them to freeze their balance. Suddenly, that doesn't just affect people who don't pay their taxes, right? First of all, it affects all the crypto people who don't pay their taxes, who I think is a big amount of people, but it also affects everyone else because suddenly you're like, damn, when I hold these stables, this isn't actually crypto. It becomes very visceral, right? This isn't crypto. And so that will cause the slow move. And then if they do something like KYC, that'll again cause more of a move. And so I think like slowly over time, it'll all move to decentralized stable coins. That's kind of how we're positioning ourselves. And then just one thing I wanted to touch on that Jordi said before

Starting point is 01:34:03 about other layer ones being able to copy the design. I agree that they should do it. I think it's a really good, I think it's a good idea because you literally own your biggest use case, right? You verticalize and own when you're your biggest use cases rather than letting someone else build on top of it and rather than letting it become centralized as well, which is another a big problem. I do think it's going to be really tough for the reasons mentioned before that it's not a mechanism. It is a mechanism, but it's much more than a mechanism. It's actually the economy and the demand that's built around it. So the layer one would end up having the same problem where it has to go through all its applications and ask them to integrate it. So I think you need

Starting point is 01:34:41 both a layer one that's willing to do it and like a visionary or a group of visionaries that can build all these use cases around it and get people to actually use it because otherwise you risk blowing up your layer one as well, right, with something like this as ESD and DSD did. And also you you can fork the mechanism. You can't fork the reserves. You can't fork the Lindy. You can't fork the experience of a year and a half of running this. So I do think that's much tougher than than generally copying a mechanism is. But Jose, one question I have for you is like about the first point about AML KYC and like having a decentralized stable coin being important to stand up against like the USDCs of the world.

Starting point is 01:35:25 Why do you think the same fate won't befall UST? So there are many centralization vectors, the LFG group being one of them. Certainly the jump capitals of the world are highly regulated institutions. Some of this is executed via bridges, which also could be a kind of a centralization vector. I think someone who is very into like the consensus layer of chains might even say sort of of proof of stake validators that are run by, you know, third parties and not by users, you know, from their own homes or another centralization vector. Can you give me the case for why this just doesn't also just happen to US, UST? Yeah, it's a good question. There's an important

Starting point is 01:36:08 distinction, which is in Luna, no one can seize assets or freeze balances, right? There's no one you can subpoena, like you can subpoena jump and be like, hey, you know, I want you to freeze this wallet. This, this dude hasn't paid his taxes. They can't do that, right? Neither can do. Neither can TFL. No one can do that. In USC, there's a clear entity circle, which is actually a U.S. entity. And so like in the U.S. jurisdiction that can freeze balances. And if they receive a subpoena and an order by the U.S. government, they are able to do it. So it's a case of you trusting whether they will or won't, whereas with Tara, you can't. So there are there are centralization vectors you can hit and make things difficult so you could say no one can integrate UST because they're not doing

Starting point is 01:36:53 KIC in the US or something like that, but you can't actually like destroy it in the same way that you could with something like USC or Tether. I do want to get back into and just to wrap up the conversation around the four pool. Jose, can you like measure for us the significance of the adoption of the four pool in lieu of the three pool? Like, how? How do you like, how? How critical of a, how big of a W would that be for UST and how big of an L would that be for Dye? Like, Rune made it, yeah, it would be a massive, when I don't have like stats off the top of my head, but it would be a massive win, right?

Starting point is 01:37:32 Like, Curve is the liquidity hub for stable coins in DFI. And basically, die is, through the three pool is the most liquid decentralized stable coin on curve. This would make it not the case, right? It would make UST and frax the most liquid decentralized stable coins on curve. So it's a huge thing because if you want to bridge from stable coins to other stable coins or just if you want access to the USC ecosystem, everything becomes way easier when you have the most liquidity.

Starting point is 01:38:00 And liquidity is one of the biggest moats with decentralized stable coins. And I also think maker's responses is sort of like classic, which is just they point out that unlike something like this happening to UST, this isn't a threat to the die peg, right? Which is true. Like, but dies design means that it losing a huge amount of utility and demand isn't a threat to its peg. But it is a threat to its stable coin, right? So it is a stable coin.

Starting point is 01:38:28 And like, it's not enough to just be pegged. Like, you have to grow to win in this market. Like stable coins are going to be huge. And if you're not growing, if you're just pegging, that's not enough. Like these aren't risk management products, you know, that that's one side of it. But there's the other side, which is the adoption, the utility, and demand, which I feel like is just not being considered. And the response to me is, like, sort of symptomatic of what I see is the problem with

Starting point is 01:38:51 them. And obviously, people will disagree. And some people are very bullish on the real world asset strategy. Yeah. So just my take. Let's talk about maybe the last thing we haven't talked about all of this, which is what would actually happen during a deep pegging type scenario. I think both of you acknowledge that there is some risk there.

Starting point is 01:39:09 And Jose would rate it far lower than the Jordi. But I think, of course, we're all in defies. We end every bankless podcast with, this is risky. You could lose everything, right? And certainly, Algo stable coins have been risky in the past. And so we just walk through like a nightmare scenario for you, why people are maybe worried about this. Critics are worried about this.

Starting point is 01:39:31 Like if U.S.T fails, like it could drag the entire industry down with us. But let's say there is some big, deepagging event, a massive liquidation, a bunch of investors get liquidated all across, you know, chains. Lots of people lose a lot of money. And the next thing you know, Elizabeth Warren is on CNN saying, hey, I told you guys the shadowy super coders were going to take from retail and here they are again, right? And we have to regulate this industry. We have to clamp down on it.

Starting point is 01:40:02 We have to outlaw it until we understand what's going on. It can't be the Wild West anymore. And it drags the entire crypto space down with it. That is what some people would say is kind of the tail event risk of something like USC growing too big and then suddenly collapsing. I'm curious, Jordi, what you think about this? Do you think this is a possible scenario? Is this something that you worry about?

Starting point is 01:40:30 Or do you think even like bears and critics who say that are getting a bit over their skis and then we'll get Jose to respond? As an aside, I like how I used over the skis thing early, like in the introduction. And since then, I've noticed like everyone's used it in different. Language is memetic, my friend. Look, it's a risk. Like we just said, and I don't think that me and Jose are in huge disagreement about the chance of the risk, maybe a little bit, but not to a huge extent. In terms of the Elizabeth Warren thing, she's been bringing up, you know, Wonderland.

Starting point is 01:41:05 And whatever it's been going on that's negative in crypto, she will bring up. Now, if something happens in the next few months, I don't think it's necessarily a big deal. I mean, it's a big deal, but it's not going to be the end of the world. If it happens in a year where, like, you know, everyone is already assuming that UST is money, it's equal to a dollar. And something for whatever reason happens at that time, yeah, it'll shake the foundation of, a crypto, a lot of people might get hurt. And the thing that I hate about it the most, you see how these things play out. We've seen them recently. We've had Mim Wonderland, so we've seen like the curve pool there. There's a certain amount of liquidity that you can

Starting point is 01:41:51 get out of. And what ends up happening is out of nowhere, you just have like Alameda, one of these like huge whales, just smacks the whole thing for 500 million or whatever, it takes everything out. They'll take a hit, you know, they'll lose, they'll take a $50 million loss because they've they've accepted the slippage that comes along with such a big order, but they will just unilaterally suck all the liquidity out. And that's the signal for everybody else to panic, but it's kind of too late because the money's already gone. There's not much USC, USTC, USAT left in. So in that nightmare scenario, the thing that I hated about the most is that the big players who are the big whales, you know,

Starting point is 01:42:31 we don't need to talk who they are, we'll probably be able to swipe the curve full first. They'll take out the best price. And then the system that Luna has for, you know, until the Bitcoin system comes along, right now they just will use Luna as the collateral. There's a cap every day. This is what we saw back in last May.

Starting point is 01:42:55 There's $20 million cap. Now, even if that's increased $100 million, the reality is that the retail guys, are not going to be able to get any of that 20 million per day. It'll just instantly be taken out every day by the jump of whoever is 20 million, 20 million, or 20 million UST?

Starting point is 01:43:13 We can go check the stats. I don't think the daily cap is 20 million USD, but we can go check that afterwards. Okay, I'm pretty sure back in May that it was only $20 million of UST, but back then the price of Luna was so small that you may be right, maybe it was just, because it wasn't that far from a dollar,

Starting point is 01:43:31 at the time that maybe. The point being, there is some cap, and I don't think it's 20 million Luna. No, it's not 20 million, but I don't know, yeah, but we'll get the exact numbers for listeners, maybe for this. My understanding is it used to be 10 million and then jump push to 20 million,

Starting point is 01:43:48 and there's been discussion about getting it to 100 million. And what we see in times of demand, like recently, is every day it's capped at the max every day, but in the other direction. People are trying to get into Terra because they want to get on anger. So it's capped every day. And someone's making a lot of money on the arbitrage

Starting point is 01:44:06 because they can make 30, 40 bips. You can go to Binance, sell it for 40 bips above the peg, and somebody is getting like all 20 right away and making like 40 bips on it. The reverse is going to happen in the bad scenario where the people who are actually able to get out are going to cap the supply. And those are going to be like the sophisticated whales.

Starting point is 01:44:24 So you'll have the curveful taken out and then you'll have the max supply every day. So that's a nightmare scenario. I hope doesn't happen. but unfortunately, if it does happen, it won't be very equitable. So, Jose, back to you. Jordy is manifesting some 2008 energy where retail is once again left holding the bag for a tail risk event like this.

Starting point is 01:44:48 How do you respond to maybe that moral risk, the moral hazard here, of an experiment like UST getting too big? Yeah, it would definitely be catastrophic. I think right now would be mainly catastrophic for Terra itself. So obviously, like Luna holders, Luna would, you know, death spiral to, you know, some asymptote towards zero, I suppose. UST would do the same. So it would be very catastrophic for Terra itself. There is a lot of UST on Ethereum and liquidity pools, but I don't think, you know, most of the effect would really be on Terra itself.

Starting point is 01:45:23 That actually changes with a four pool, right, where the effect would be more systemic in that case because it would be the reference. currency for defy as a whole. But I don't really agree with the idea that retail would get screwed because retail is just like smaller sizing, right? So it would be much easier for them to get out with lower slippage than it would for some of these big funds, where some of these big funds would literally just not be able to get out in size because of what you say, where the liquidity would just dry up on the curve pool. So I think obviously they'll be faster. Yeah, exactly. It depends who gets out first. Like if they wait too long and somebody all like, I agree. It's a lot easier to go through the door if you're small, but you need to know, you need to know to get through the

Starting point is 01:46:05 door. You need to know. Absolutely. But I think there's also going to be like right now most of liquidity is on curve. I think Astroport's going to be spinning up its own stable coin pool. So there's going to be liquidity on Terra 2. So users will be able to kind of exit that way. So I don't know. I agree that the whales will know first. But they'll also suffer a lot more slippage. And we've also We've also seen a few times where whales exited, suffered slippage for something that wasn't the death spiral they were looking for. So, yeah, I'm sensitive to the moral argument, obviously, but I do think two things. There's a moral argument for UST as well, right? There's a moral argument for decentralized stable coins, like actual decentralized stable coins that can't be stopped by nation states.

Starting point is 01:46:48 So that's the first thing. I think that's really important. And then the second thing is that everything in the space has failure risk. These are all experiments, you know, including something like that, like I mentioned before, almost blew up in, in, on, on, on, on, on, on, on, on, on the space. Obviously, we have the Dow hack from back in the day, which was something that shouldn't have had shouldn't have even been that risky, but was because it had a smart contract bug in it. So I think like, as you say at the end, right, this is the frontier. We, we, we, we, we, we all kind of accept that risk when we, when we, when we, when we play here. But I do think, um, one thing that is important is that every, is that every, we, we, we, we, we, we, we, we, we, we, we, we, we, we, we everyone, and especially if you have a platform and you're bullish Luna, your bullish UST, you should be honest about the risks, right? And that's something that we're very careful to do at Delphi, you know, when we present it, we're always careful to disclaim it and products that we help incubate or contribute to. It's always present in the disclaimers. And so I think

Starting point is 01:47:44 being honest about the risks so that people know them is super important because that's actually what makes me bullish about this. It's not that I think it's riskless. It's that I understand the risks and think but think the upside is, you know, far, far outweighs it. Bull case, bear case. It's time for closing arguments right now. And since we started with Jose, I'm going to flip to you, Jordi, first. You're closing arguments for why you think it makes sense to be bearish on Luna slash USD.

Starting point is 01:48:13 Yeah, I mean, we've used them interchangeably, but I'll just recap that I think they are a little bit different. the bare case for Luna first, assuming that UST is okay, is that the demand gets kind of dwindled down because other chains do something similar because somebody does a better mouse trap. There's ways that Luna price itself suffers without a DPEG. So that's kind of half of the equation. The other half is obviously on UST. So There's a lot of risks. The BTC bridge risk hasn't been figured out.

Starting point is 01:48:53 There's market risk. Unfortunately, BTC might go down and then like a lot of the reserves that have been built up. The narrative will change. BTC could go up and then like Jose said, everything just looks completely different. But we have to be aware of the risks. We have to be aware that there's centralization right now. There's big funds that are going to be able to kind of pull strings and have insight information and know things a lot earlier.

Starting point is 01:49:20 So I'm very happy that Jose gave like a full disclaimer. I think that's the most important thing. There is indeed a moral argument for it succeeding and having something like that succeed. My full bear case is that we are very far away from that endpoint. There's a ton of stuff to figure out. Even with having such a good team working on it, we have no idea what's going to happen even in like in a few months

Starting point is 01:49:44 when anchor yield goes down. There are so many unknowns. So that's the main bear case. Like we can't just consider it a foreground conclusion that we're going to get to this end state. Jose, I'd love to hear your final thoughts. Your final closing statements as to the bowl case for Luna. And the chat is also asking, since they are perceiving this show as to be focusing on the bear case, I just want to give you just a few extra minutes and a few extra time to really just with confidence.

Starting point is 01:50:13 Give us the bull case for Luna. Just make us all Luna Maxis. Yeah, absolutely. All right. So first of all, I think you guys have been pretty good. Thank you very much for the platform and for opening this up to other opinions. I think as one thing to note is as lunatics, we need to be like accepting of other communities and educating them on Luna and on risks because Luna actually relies on like UST relies on being the reference stable coin for defy as a whole, not just for Terra. So it needs to be on Ethereum. It needs to be everywhere. And being antagonistic. and like hating on people and criticizing and stuff is not the is not the lunatic way. I know that though sometimes counters that with some of his Twitter spice, which is, which is, I love his street to spice, but it's always directed at a person, right? It's never directed at a community. And that's really important.

Starting point is 01:51:06 Like, there's no reason why we should, we should hate Ethereum or hate any of the other chains that are, we're all going to make it, basically. And then, so on the, on the Luna Bear argument, uh, bull argument, sorry. So one of the biggest things that makes me bullish is how misunderstood it still is and controversial. And also how bad and like repetitive some of the fud is. So like, I think we, the peg fud and the anchor sustainability fog to me is, is like actually pretty weak. Um, I, I sort of explain my arguments for why I think that's the case. I think there's stronger arguments against UST. I think probably the key man risk and the, just the technical, which we didn't, we didn't cover, but just the,

Starting point is 01:51:43 fact that Tara isn't a particularly scalable layer one, and maybe that's not the end game. I think they're sort of counterarguments to that as well. But yeah, all our best investments have always been controversial and how controversial this is and is one of the things that makes me super bullish. And then in terms of UST itself, so I think people just overindex and focus on this peg risk and just repeat it over and over again without focusing on the upside, right, on what happens if it works. And what happens if it works is you have the, the UST as the biggest decentralized stablecoin, also in my mind, the most decentralized in the biggest market in crypto, which is money, right? Decentralized stable coins are literally going to be a multi-trillion dollar industry.

Starting point is 01:52:26 I think most people that are in crypto can agree with that. And UST currently is the fastest horse in that race. And so if we agree that stable coins are a network effect business, right, You need liquidity, you need Lindy, you need people to trust it. Then you want to bet on the winners and you want to bet on whoever is growing fastest. And UST's model, while more vulnerable to tail risks as we've spoken about, allows it to grow much faster. And that's a big deal, you know, because if you grow fast in a network effects business, you win, which is why the anchor yield reserve subsidy makes so much sense, similar to the PayPal strategy, right, of subsidizing its initial users and why this whole strategy makes so much sense to me. And so for me, it's like you have a stable coin that was already working really well, growing really fast, that's becoming even stronger with a Bitcoin reserve. A Bitcoin reserve that is going to be finding ways to grow over time, but through additional sales for which there's, you know, quite a lot of appetite from from investors still.

Starting point is 01:53:28 And then also from just growing it through seniorage and continuing to buy Bitcoin. And so I think you have a model that can grow super fast and it's also becoming more and more resilient by the day. with the addition of this of this LFG reserve. And then when you combine that with a layer one that's thriving, where I continue to see some of the smartest builders that I've seen anywhere on crypto, building on Terra, and completely new primitives as well that haven't succeeded on Ethereum, like Prism, right, which is a yield splitting primitive.

Starting point is 01:54:00 There's APY and Pendle on Ethereum, but they really haven't succeeded, whereas I think Prism has done a much better job nailing that. There's other things like Perps with Orderbook, You know, 4x perps that are coming with Vertex. There's perps that are coming with Levina. There's a whole ecosystem around gaming and NFTs that does putting a lot of effort into. And so when you combine all of this, I just think there's no faster horse in the decentralized stablecoin race than UST, and we like to bet on winners.

Starting point is 01:54:28 There you go. Bankless listeners, this has been the Bull and Bear case for Luna, UST. Probably the most comprehensive I've ever heard. and I want to give a special thanks to both Jose and Jordi for joining us and having such a civil, informative, well-argued debate. We appreciate you guys. Thanks very much, guys. Really appreciate it.

Starting point is 01:54:50 Thank you. Bankless Nation, we will link to some of the things that Jose in particular referenced in the show notes as soon as we have some links. It's links to long-term anchor yield. I think you've referenced something there. A few other stats we might link to as well. But as always, got to end with this. None of this has been financial advice.

Starting point is 01:55:10 I think our panelists were very clear that there are risks in crypto. There are risk in defy. There's just everywhere. But we want to let you know that you could definitely lose what you put in. We're headed west. This is the frontier. It's not for everyone. But we're glad you're with us on the bankless journey.

Starting point is 01:55:24 Thanks a lot.

Bankless - UST: New Paradigm or Ticking Time Bomb? | Terra Bear vs. Bull

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