Odd Lots - This Is How the Terra Stablecoin Actually Imploded

Episode Date: May 15, 2022

The collapse of the Terra ecosystem, and the tokens Luna and UST, will go down as one of the most painful and devastating chapters in crypto history. Over $60 billion market value has evaporated, and numerous retail investors are nursing major losses. What's particularly bad is that this was a big project, championed by some of the most notable names in crypto. But some people obviously saw it coming, and understood it to be a disaster in the making. On this episode we speak with Kevin Zhou, the founder of the crypto hedge fund Galois Capital. He began warning about Terra publicly earlier this year, and was short Luna starting in early May. He explains the exact mechanics of the coin's implosion. See omnystudio.com/listener for privacy information.

Thanks for listening to OddLots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the podcast, OddLots on Amazon Music. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a very big. It's a lot. It's a firm. It's a few. It's a lot. It's a commitment to your clients. We're talking top grade products across the board of over 80 bond funds, actively managed by a 200-person global squad

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Vanguard Marketing Corporation distributor. If Bellfib TV is now streaming? Is it still TV? Is it still TV if there's no TV box? If I can stream all my favorite channels and pause and record shows, that's TV, right? A new era of 5 TV. It's streaming, but it's still TV. Well, glad that's settled. Bell, connection is everything. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. Tracy Luna. Terra, stable coins, crypto, crashing stuff.

I'm going to throw something else out there. Roman history. Let's talk about classic history. Wait, what's the Roman history part? It's Rome sacking Carthage. Have you not heard about this? Oh, the memes? Yeah. Is that what's going on? Is Carthage being sacked right now? Well, that's actually, yeah. I mean, that's kind of what. we're going to talk about. So we're going to be speaking with someone who has framed himself as Rome in the historic parallel going after Carthage, which would be Tara and Luna, the algorithmic stablecoin slash cryptocurrency. This is such a wild story. I mean, like, I think, you know,

look, crashes, hacks, Ponzi's, rug pulls, they happen all the time in crypto, right? Like, it almost is like boring. And most of the time they're not even worth reporting on. or talking about it because they're like a daily occurrence. But the Terra ecosystem, the U.S.T. stable coin, the Luna token had gotten so big, so valuable, and so many major backers of crypto were invested in it or had invested in it in some way that this is not just like another coin that crashed. I think that's absolutely right. So two things here. One, top 10 coin, right?

It's not every day that you see something like this. happened to a top 10 coin. Secondly, the marketing. So everyone knew it was an unusual experiment, an algorithmic stable coin, and we'll get into exactly how it's supposed to work. But even with that said, it was pitched as a stable coin, as something that is supposed to maintain a peg one to one with the dollar. And people are supposed to be able to use it to get in and out of more volatile cryptocurrencies. And clearly, that's not what's been happening because we've seen the peg has crashed. I think it got to as low as like 0.3, is that right? Yeah. Yeah. No, I mean, that's exactly right. So it's a stable coin. The interesting thing is like

stable coins, there are many different flavors of stable coins. And people have been skeptical about them for a while. Most of the discussion about vulnerable stable coins was focused on tether. Right. But this was a so-called algorithmic stable coin. They had some collateral backing. It's sort of complicated. We're going to get into it. But the point is that, yes, it is sort of this classic example of the thing that blows up is the thing that has to maintain a peg, which is a lesson that in the Tradify world

is understood for a long time, which is often the sorts of big sources of big risk are the things that on the surface appear to have the least volatility. Here's the other thing that makes the story so interesting. It's the people involved. You mentioned some of the big funds like Gallic. C. Novagrats who were invested in Terra slash Luna. Like Novigrats has a Luna tattoo.

Yeah, which I thought was fake when I first saw that photo, but it is in fact real. But the other thing is there are strong personalities attached on both the pro-Luna Terra side and the sort of against or warning about Terra slash Luna side. And that's where that Rome versus Carthage analogy comes in. You had the founder, Doe Kwan. And I don't know if anyone follows him on Twitter, but he is incredibly, I guess, outspoken. Confident. Cocky might be where it?

Yeah. This is putting it all very, very politely. But people would come out with criticisms of the entire algorithmic stable coin idea and people would highlight vulnerabilities in the system. And he would just bat them away. Or he would just say, you're poor. I don't have numbers. Anyway, you're poor. I don't need to talk to you.

So what is going on? We are going to be speaking with a perfect guest when everyone was like, Like, Oddlod's has to do an episode on Luna, obviously. And everyone, my DMs flooded with, this is the guest you have to have on because he's been warning about it for a while. We're going to be speaking with Kevin. So he's the co-founder of Galois Capital, which is a crypto hedge fund that was launched in 2018. So that's old by crypto hedge fund longevity, but actually he's been in the space for about a decade, which is truly extraordinary. He knows it well.

He's been warning. He had been warning about Tara and Luna for a while. So Kevin, thank you so much for coming on Oddlots. Yeah, absolutely. Thanks for having me. Kevin, you started a crypto hedge fund in 2018. Like, you know, now everyone has a crypto hedge fund, obviously. But that's legit, legit, legit veteran in the space.

What's your background? How did you get into it so much earlier than most people? Yeah. So, you know, I think my background, You know, I've been in crypto for a while now, really got started in 2011. Wow. Hadn't joined industry at the time. I was just mostly trading my own PA.

And then in 2013, I joined the industry, joined a small Bitcoin startup. It was an exchange. It was called Buttercoin. It was the second YC company that was dealing with crypto, the first being Coinbase. Things didn't go so well over there. And in the winter of 2013, we shut down. afterwards, I joined Cracken, ran their trading desk for two years, and then afterwards in, you know, in, I guess, early 2017, decided to leave and start Galois Capital when we launched in January of 2018. So, as we mentioned in the intro, there's been a lot of criticism of Tara and Luna, and you're, I think, probably the biggest voice in that space.

what peaked your interest in this particular coin or, you know, system? When did you first start getting interested and start looking into it and why? You know, when I first started looking into it, I'd say it was around mid or late last year. And, you know, at the time, I didn't think too much of it. I thought, oh, you know, this is just one of those Algo stable coins. It probably won't work out. You know, it'll just implode pretty soon. It turned out not to be the case.

It just kept going, you know, lunatic. kept going up. UST kept maintaining stability. It grew bigger and bigger. And then I revisited it in January of this year. And I, at this point, you know, I was kind of surprised at just how big it got. You know, it all of a sudden, you know, it's now like a top 10 coin or something like that. So now I was starting to get worried because I've never seen one of these, you know, Algo stable coins get so big. Usually they just collapsed before that. So, you know, then I thought, well, you know, maybe this is first, one, maybe a great shorting opportunity. And two, maybe this poses some systemic risk to the entire space. And maybe it's time to sound the alarm. You know, not, I mean, obviously for my own benefit,

I would definitely like to make money on this short, but also I think just as a public service to also let everybody else know to. So can you actually back up for listeners? And we hear stable coins. And we sort of mentioned it in the intro, which is that there are various flavors of stable coins. Tether is one model. USDC is a similar model. There's also Maker and Die. But what is an Algo Stablecoin, this project they keep trying and they do have a long history of continuing to blow up? How is an Algo Stablecoin different than other Stablecoins? Yeah, so I think we should first separate out these so-called decentralized stable coins with the centralized ones.

So, you know, first on the centralized side, you have folks like USDT, which is Tether and USDC, which is, you know, circles dollar. And basically what's happening here is there's a dollar in some bank account. And for every dollar there, they issue out one coin. Anytime you return a coin to them, you can redeem out a physical dollar by wire transfer or whatnot. It's very much kind of tethered together between the real world and the virtual world. You know, on the sort of decentralized side, you really have variations of two models. So you have sort of like the collateralized model, which is like make or die.

What that is is basically you can. post some amount of some other type of asset. And in return, you're going to get some stable coin, which is maybe, you know, like if you over collateralize it by, you know, 125%, then you're going to get 100%. So if you put in a dollar 25 worth of value, you get back a dollar. And then at some point, the price of the underlying collateral will fluctuate to the point at which you reach like a point where there's a margin call and then, you know, either your collateral will get seized or you top it up or you return the borrow, right? So it's basically collateralized lending. Right. That's kind of, you know, that sort of model. And then finally, and this is where, you know, we start talking

about Luna and UST, you know, finally there is this pure class of alga stable coins which do not have collateral or severely under collateralized and they have some kind of stabilization mechanism. Long story short, it's basically like a perpetual motion machine. And they all. It's not the first time that exact phrase has been used on this podcast in reference to Terra slash Luna. Yeah, definitely. I would say either perpetual motion machine or giant Rube Goldberg machine, right? So some of these are just really elaborate contraptions. And you don't know where the hand crank is, but someone's turning a hand crank to keep the system going. And it's not actually a perpetual motion machine, which we know is impossible. So that's the analogy. But basically the idea. is that you have some kind of mechanism, which in some way, you know, indirectly or directly

expands the supply of that stable coin when the price is too high in order to push it back down and on the other side contracts the supply of that stable coin through some mechanism when the price is too low, hence pushing the price back up, right? So these are kind of like these, you know, there are these feedback mechanisms, regardless of how you design it, within this class of stable coin, there are all these feedback mechanisms, which eventually cause something like this to happen, which is why in the end, I think they're all pretty much the same, but, you know, just through different methods. I mean, they'll look different, but when you really, like when you start to really break it down, it's all just

about supply contraction and expansion. So two things here. One, could you give us a little bit more detail on that arbitrage mechanism between Tara and Luna? Like, walk us through exactly how it works if the price of Luna goes up or the price of Luna goes down and, you know, vice versa with Terra. And then secondly, you mentioned a hand kind of turning the crank. And my understanding here is that yields on offer from Terra slash Luna were exceptionally high. I think something like 19 or 20%. And this is another question that we ask a lot in the crypto or defy space more broadly. But where do those yields actually come from? Like how does this entire incentivization mechanism work.

Yeah, definitely. And I completely agree with you that I think this component of it, which is the anchor yields on deposits for UST, this 19 and a half percent, which then eventually dropped down 18%. That's exactly the hand crank in this perpetual motion machine that makes it not perpetual. It's a great question always, I think, to ask, where do the yields come from? I think a lot of times, you know, it just seems like there's free money, but it turns out, you're just subsuming all of this kind of indirect or hidden risk that you're not aware of, right? A lot of this kind of like tail risk, which, you know, only manifests once in blue moon,

but when it does, it completely wipes you out, right? So it's just, it's just really kind of like very dangerous kind of invisible risk. What I always like to say is that most of the time, you know, if you can't find where the yield is coming from, then effectively it's coming from future bagholders. Right. So it's like this idea that the sort of true belief and sort of the cultish behavior of true believers will eventually produce some value, which gets extracted from them and is given to you now in the present. So it's extracted in the future and given to you in the present right now. Right. And I think that's basically exactly what's going on with this with this Luna model. I know that's a little bit abstract, but, you know, that's kind of how I see it. And then maybe. just returning to your first question. Yeah. Could you remind me again what the first question was? Oh, yeah.

Can you explain exactly how the arbitrage mechanism between Luna and Terra or UST actually works? Like, walk us through what is happening as the prices of either of these things move? Like, how they balance out. Yeah. So how they're supposed to balance out, I should say. Yeah. So I'll first sort of just describe the simple model. and then I'll add some caveats on some of the intricacies there.

So the simple model is that at any point, you can always redeem one UST for $1 worth of Luna, right? So like if Luna was at $100, then one UST would get you one Luna penny, right? 0.01 Luna, which is equivalent to $1.00. And if Luna is $1, then, you know, one UST is going to give you one Luna, right? But in any case, you're always able to redeem UST for the equivalent amount of dollars worth of Luna. And the amount of Luna you get is based on where the current market value for Luna is. And the opposite is true, too. You can always destroy or burn $1 worth of Luna to create one UST.

So the idea behind this feedback mechanism is that if UST is that if UST is, is trading below $1, what you can do is you can buy that on the open market, right, and then convert that to $1 worth of Luna and then sell that $1 of Luna, right? So that's kind of how that arbitrage mechanism works in order to maintain this peg. So that's basically the simple model. Now it gets a little bit more complicated because there's a lot of dials and knobs that you can adjust and bells and whistles around this. So the first thing is that it's not technically true that you get exactly one dollars worth of Luna for burning one UST.

There is basically something called a automated market maker. This is something that has been popularized by, you know, uniswap, sushi swap, curve, balancer, a lot of these, you know, AMM protocols, these sort of decentralized liquidity pools. And it's really this automated market maker, bonding curve, which governs. sort of the slippage or the costs of converting between Luna and UST. So the first component of this mechanism is that the greater, the size that you do, the worse of the price you're going to get, right? So this is like equivalent to like market slippage. You know, if you want to buy, you know, a million dollars worth of something, you know,

you're going to pay a little above market price. If you want to buy a billion dollars worth of something, you're going to pay one. well above market price. So it just, you know, it kind of depends on liquidity in the market, but really it's governed by this bonding curve and, you know, the greater the size that you do, the more slippage you'll incur. The second part of it, that's a little bit nuanced, is that there is some fee that's collected in the middle, just like all these other bonding curves, all these other AMMs. There is a fee for converting. It's not very high, but, you know, there is still some fee, which adds on to basically the transactional costs, which are the slippage, you know, plus the fee itself.

And then the last part that's really interesting about this mechanism is that, you know, before the full collapse, you know, in the past couple of days, there was basically a gating mechanism on which governed exactly how much UST could be created or destroyed per day. So being destroyed, being, you know, moving back into Luna. And I think that that number was around like $250 million dollars worth per day. So anything beyond that, you're just going to have to wait until the next day. And then, you know, there's also all sorts of, like, you know, much finer details, like pool recovery periods and stuff like that. But, you know, none of that is really that important, I think, to what we're going to be talking about next. So I think just based on that explanation, I think we should be able to describe the phenomenon that we've seen in the past few days. So I want to get, before we get into sort of like what happened over the last few days, because I think you've said some important things,

the fact that there's a limit on how much can be converted in a given day is really important to understand. the action, the fact that there's a fee, obviously, for the more you trade, which if everyone's trading, fees go up. The one other element I'm curious about in understanding its role. Actually, too. I want to understand a little bit further. The Luna Foundation bought a ton of Bitcoin, I think, earlier in the year. And the basic idea was like, okay, you know, just in case, I guess the perpetual motion machine starts to wobble a little bit, we can be. defend the peg with this big Bitcoin reserve, sort of like classic EM style currency peg. I found this move really weird because either you're sort of a fully backed stable coin

with traditional reserves or you're an algorithmic stable coin. Because the whole problem they were trying to solve was that they wanted to get away from the traditional financial system without having to build the reserves. It's sort of like being like a little bit pregnant or something. A little bit a little bit unbacked. Yeah, like we're sort of reserved back, but not really. So what is, what was the role? I want to know what is the role of the Bitcoin Stabilization Fund?

And then also, I know you touched on it, but could you just explain a little bit? And Tracy asked, but I think it's crucial, that 20% yield that was being given to induce people to hold U.S.T, the sort of big reason to hold it a stable coin and actually make money holding a stable. Like, where was that coming from? Like, what was the source of funds specifically other than just sort of theoretical future bagholders? Like, how is that paid out? So basically, you know, when Luna or the Terra ecosystem first got started, there was some funds that were set aside for the company itself, right? And the main company is Terraform Labs, TFL.

And they have this huge stash of Luna, which unlocks over a certain investment. schedule, right? So even for them, you know, slowly it unlocks over time. So what they would do in order to finance their operations and to also finance the anchor yield reserve is they would sell large clips of this to, you know, willing investors at some kind of discount that also has a one-year cliff or some kind of vesting schedule, something like that. And then they would use that for operations and they would also use that to keep basically topping up the anchor protocol on their yield reserve because they were paying more interest. to depositors than they were collecting from borrowers.

And, you know, I think in the end stages of Luna, in its final days, you could see that the, you know, the deposit amount was way, way higher than the borrowed amount. So, you know, they were bleeding. I mean, I think at some point. So everyone buys UST in order to collect that 20%, but that basically has the effect, if you think it through, of sapping those reserves fund faster. they're sort of like set aside to sort of bootstrap the whole thing and incentivize the whole thing. But essentially, if everyone is chasing forward at once, that starts to get depleted or you start to like strain your ability to pay that up.

Yeah, that's exactly right. I think at the at the peak they were burning maybe about $7 million a day, dollars worth a day of their their yield reserve. And, you know, originally I think it was something like 50 mil or 80 mil or something like that. And then they had to do a top up of 450 mil. And then very quickly soon after, that soon was almost depleted. And they were thinking about how much to do another top above. They were thinking about whether to do it or not. Everybody was, you know, lobbying Doe, Doe Kwan to do it. You know, he was running some rumors that, oh, maybe it's going to be over a billion this time, this, this and that.

So, you know, the whole thing was very expensive. Now, I think what they were thinking, because I don't want a straw man. them either. I think what they were thinking is that, you know, they just want to, you know, they think about this as a marketing expense, right? So they just want to get everybody talking about Luna, everybody using UST. You know, they're just bleeding seven million a day, but they're getting a lot of people, you know, talking about Anchor, using Anchor, you know, using their ecosystem, putting their money into it, into this bar lending protocol. So, you know, I personally don't think it was worth it. I think, you know, probably even if they were right, which I don't think

I think they're absolutely wrong. But even if they were right, they probably could have gotten away with a little bit lower than 20% yields. I mean, probably like even like 18, 17 probably would have been fine. Now, it's not going to save them that much more money, but I do think they overpaid for that. If, you know, just a random thought there. And what about, what do you think was the rationale for the Bitcoin reserves? Because I think before this week happened, I think they ended up with something like $3 billion worth of Bitcoin that they accumulated. I think that's right.

Yeah. Yeah. Yeah, that's about right. So, you know, I think this whole purchasing of the Bitcoin was, in my opinion, a great move in some ways and in some ways a really bad move, right? So it was a really good move, I think, in terms of trying to make the system solvent eventually. They probably needed actually about $10 billion worth of collateral. They got to maybe about $3 billion. Only $7 billion more. Only 7 billion more. And it's, I mean, easier said than done, definitely. But, you know, at least it was, I think, a step in the right direction in terms of creating solvency for the system. I think the system was way in the past. It was already insolvent. You know, it's just that nobody realized because they had created such a strong supply sink in anchor for this UST.

You know, if that disappeared overnight or even gradually, the entire system was insolvent. I mean, even at a price, I would say, of over $100 a Luna, this whole thing was. already insolvent. It's just nobody realized it. But anyway, returning back to the Bitcoin, so I think in that sense, it was really good that they bought the Bitcoin. But in some ways, it was a little bit bad because it kind of destroyed the narrative a little bit, right? As Tracy was saying, it sort of, yeah. Now it's just like a kind of half-backed, a little bit half-ass backed, you know, kind of, I don't know if I could say that. It can. It's fine, thing. But, but, you know, but it's, you know, now it's sort of like, it's destroying their own narrative

because, like, they basically said that, oh, we, we finally constructed this perpetual motion machine, you know, behold everybody. We finally did it, you know, and it's working and it's amazing. But actually, you know, just in case it doesn't work, let's get some insurance, you know. So, like, before they were, the narrative was very strong. It was just like they were just saying, oh, yeah, for sure, this thing works. Now, obviously it doesn't. But, you know, they were saying in a lot of people were believing them. But, you know, it's almost like they were capitulating a little it on the narrative and making certain concessions by even buying the Bitcoin in the first place because now it begets the question. Now people are thinking, well, wait a second, if this thing is

just always, it was going to work all along, why do we even need that? Like, you're telling me that, you know, that's not really a vote of confidence there, you know, that you even feel the need to get some insurance there. But, you know, all that being said, still happy that we did. I mean, it would have been even worse if they did. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking

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But a lot of them are talking about this idea of a concerted attack from people like Citadel and even black rock. Which is nonsense. Yeah, I mean, it just sounds crazy to me. But also, here's the thing. Even if it was some sort of concerted attack, a bunch of people shorting all at once, that still seems like a fundamental vulnerability

in this machine that you've designed to be stable. So I guess walk us through what you think happened and what the exact trigger was for the chaos that we've seen this week. Yeah, the depegging. Yeah, you know, I think we're really entering this phase in the market cycle, which I've been calling on Twitter the finger pointing phase. You know, now that this thing is clearly, you know, it's clearly failed, who should take the blame for this, right? Is it a some external party in a foreign world, the Tradfai world, right?

The boomers in the suits that nobody likes in crypto. Yeah, easy scapego, right? Probably was Citadel or BlackRock, right? turned out to be just a post on 4chan. You know, like, I mean, like, they're not, I can't believe we're in historic times that BlackRock and Citadel now have to issue rebuttals to a 4chan post. But this is 2020, yeah. This is absolutely ridiculous. I mean, it just goes to show how quickly memes spread and how quickly narrative spreads.

Whether it's right or wrong, we're in the age of social media and word spread so fast that literally a 4chan post can trigger a response from Citadel BlackRock. I mean, it's absolutely ridiculous. I mean, we're people coming up with these, you know, conspiracies. So is it A, them, right, these outsiders, these boomer trade, tradfai guys, is it B, somebody internal to crypto, you know, some big shorters like, you know, like Galois Capital or like some of the other noted, you know, extractors of Luna. Was it Sam? You know, was it winter mute?

Who knows who could maybe it was one of our own people, right? Or is it C? Is it Doquan's fault, you know, because he built this project? The mechanism was clearly unsound. Maybe he's a grifter. Maybe he was a scammer all along. Maybe it's his fault. Or is it like people's own fault in a way, right?

Is it that they themselves got a bit greedy? They wanted so badly to believe that there was free money raining from the sky that they turned off all their reason and logic because they, you know, they had some hope of changing the circumstance of their life. You know, it's a bit sad to say. But I think, you know, there is some bit of that too. you know so what i would say is uh really hard to say what you know exactly triggered it but i think it would you know if this is any lesson for us and i think you know the crypto space we we've always been um kind of like we want to be a self regulatory you know a regulating industry we don't really need regulators to step in you know protect the little guy protect the retail from themselves

right uh we can handle things on our own and if that is the case then every time something like this happens, we have to take some very good lessons about it. We have to, you know, take a hard look at ourselves on why this happened, you know, why, how did people get so greedy? And not just, not just retail themselves too, right? I think it is good for them to reflect on themselves too, but also, you know, how did the VCs, how did the investors get so greedy about this stuff? How did the founders get so greedy about this stuff? You know, the exchanges, I mean, to some extent, I mean, they definitely benefit from all the trading volume, right? So, you know, Maybe it's not that, you know, they're particularly greedy, but maybe they look the other way because they didn't really care as long as you could trade a coin back and forth and, you know, collect the fees. Maybe it was still good for them, right? So, you know, I think it is important for us to reflect on ourselves before we just start pointing fingers. Now, that being said, if we want to talk about how, how, you know, it actually went down. Yeah. There's been, you know, a lot of speculation. And, you know, some people have woven these very intricate narratives about, okay, on this time, this thing happened, this time that thing happened. What I would say,

is that mostly at speculation, there are some things that are, I think, factual. So maybe we can just start with that, which is that when Luna first started to unwind, this was during a period, when the first depegging happened, there's a couple days ago. Just before you came moving, we're recording this Thursday, May 12th. And so it was really, I feel like, last Saturday morning. I guess that was maybe the seventh or something. I just wanted to sort of like set that when people like people have been talking about for a while, but that was sort of when it suddenly started to deviate. I think it was about roughly five or six days ago. But anyway, sorry, keep going. I just want to make sure listeners sort of understand the time frame here. Yeah, exactly. So it was around that time

and it was during a time when there was a migration of assets from the three pool on curve to the new four pool, right? So maybe I just, I'll explain that a little. Yeah, there. That would be great. So I guess starting with curve, curve is basically, it's a little bit like Uniswap. It's a bonding curve, AMM. It's a bit flatter in terms of the bonding curve, meaning that you can trade greater size near, quote, unquote, the peg. You know, and this is like, this is mostly for stable points, right? So, you know, for three pool, it's like, you know, you have USDC, USDT, die.

And those are the three coins in three pool. And they're all stable coins. They should all be pegged roughly to a dollar. So around a dollar, you can trade huge amounts of size, which is not quite doable in, you know, a rounder bonding curve like, you know, most things on uniswap, at least uniswob. So it's an AMM, it's a, it's a, it's a, it's a, it's a, it's a, it's a, it's a, but it's particularly well optimized for trading stables between each other. Yes. I mean, there's some caveats there, but, you know, I think the details don't, don't matter too much. So it is particularly optimized for trading stables for the most part. So that's three pool. Three pool is, you know, circles dollar, tether and dye, which is maker's coin. And then four pool would have been, would have been two of the coins from three pool being tether and circle dollar. But instead of having die, they were

going to have UST and they were going to have Fraxes dollar. So, you know, the whole idea there is that they kind of wanted to kill die and they wanted to have more of their own native liquidity. They didn't want to just have a metapool, which is, you know, for example, UST, against three curve, right? So it's a pool between two assets, but one of the assets is pool itself, right? So they didn't want to just be attached as like a sidecar to three pool. They wanted to be, you know, have their own native pool. So these great plans for, you know, four pool and whatnot. So, you know, during this time of the deep pegging, returning to that point in the story, you know, they were basically the Luna guys, TFL, they were doing a migration from three pool

to the four pool. So they're pulling all the liquidity from three pool, putting it into four pool. And this is basically when somebody just took up all the liquidity left on UST by basically just in the UST pools, just by dumping all their UST and taking out all the other assets. And this basically was what caused the first panic. Now, was that one person? Was that multiple people? I think really hard to say. I think you'd have to take a look at the chain. Right now, the narrative is that it was just one attacker.

But, I mean, I think this is kind of like a like a boogeyman. I think we should actually take a look at the actual transatlantic. actions that had happened on Curve at that time and see if it came from multiple addresses or came from a single address. I mean, to be fair, I mean, even if it comes from multiple addresses, it could still be the same party. Maybe they just split up their wallets, you know, but at least we should we should verify, right, before making these kinds of speculations.

But in any case, basically all the UST was dumped. All the other assets were drained from these pools. And then that basically caused a little bit of a panic. Other people pulled money out of anchor. people try to find ways of getting rid of their UST, LUNA started tanking. The entire markets were already tanking. It was kind of like an alignment of the stars. Equity markets were tanking.

The crypto is really correlated with the equity markets these days. So everything was dropping. And on top of that, the migration was happening. So it was a cacophony of the perfect sequence of events and, you know, coincidences there. So the system was already very unstable. And this was something that, you know, you right? recognized in other people, but you recognized going back to last year. It was inherently flawed, but then we get the sort of perfect storm because we have this big risk asset sell-off. You know,

stock market has obviously been tanking. Bitcoin, which on some level had, of course, been a contributor to UST stability. Bitcoin has obviously been tanking. So to the extent that that's a backstop, that's dissolve or diminishing by the day. And then you have this migration, and It was about to be a switch and someone dumps a lot and drains the liquidity from the existing pool. You mentioned, and I've seen a lot of people talk about this move from the three pool to the four pool. Was there something inherent about that migration that made it vulnerable? Was that inherently going to be a less liquid moment for UST? Yeah, I mean, it would definitely be a less liquid moment.

But I don't want to just say that definitively someone was trying to attack the program. at that time. You know, because what it really could be is that somebody was just looking at the liquidity and didn't even know that the migration was happening that day, right? And then just saw all the liquidity evaporate, panicked themselves, right? And then just dumped all their UST draining the rest of liquidity, right? Or it might not have been one person. It could have been multiple people who all, you know, were sitting at their computers one day, not having read that they were doing the migration, everybody feeling the same panic, everybody dumping, right? So speaking of opportunistic, moments, I guess, or triggers for these types of moves. You mentioned that you were short.

And I know you probably can't necessarily go into detail of exactly what that position looked like. But I imagine, given the degree of criticism against Tara slash Luna, that there were a number of people who would have liked to or maybe have bet against this over time. And I'm wondering, you know, how did those trades theoretically work? And then is it possible that there were frictions within the Luna Terra ecosystem that made shorting it kind of difficult? Because this is a classic thing in markets, right?

You can identify the bubble or you can identify the Ponzi and then get killed as it goes up another thousand percent. So I guess I'm wondering how painful it would have been to short this for a substantial amount of time. Yeah, it definitely would. be very painful. And this is why we didn't start shorting this thing until actually pretty recently.

I want to say, I don't want to say exactly when, but it was sometime this month. And it wasn't actually earlier than that that we were short. And, you know, I think that with something like this, being early is almost as bad as being wrong. Right. And, you know, partly one of the reasons that this thing was so difficult to short was because the funding rate on putting on shorts was extremely high. And that's because the opportunity cost was getting yield on anchor at 20%. Right. So basically, you're paying maybe a little bit less than that, but it's about that. But it's about that. It'll be about that. Right. Like that yield was higher, it'd be even harder to short. That yield was lower, it'd be easier to short. Right. But basically, that's the opportunity cost of not shorting. Right. So that's why,

you know, that's why this trade, I think, was particularly difficult to put on just from mechanically from that standpoint, but also, I think on top of that, this whole system and this whole design is so reflexive on both the up and the downside. Yeah, it seems like. So like we saw this thing go negative 99.9% down, right, right? Just in a couple of days, right? But, you know, on the upside, it's also very violent, right? So, you know, you could be right, but, you know, the market could still liquidate you,

you know, for some reason, you know, the equity markets rally, everything rallies, Bitcoin rallies, you know, Luna having beta to Bitcoin, it also rallies. And then on top of that, they make some kind of crazy announcement, whether it's true or not, you know, and then, and that, you know, you could completely get blown out. So, you know, I think that's why, you know, this thing was just particularly difficult to short, you know, just structurally, it's just very difficult. But we did get it in. And I think it was just roughly about the right timing. So I'm very happy about that. Yeah, I bet. Um, it, I mean, it feels, to me, like one of the difficulties or one of the reasons this week has been so extreme is because

there's no natural circuit breaker on, well, either on the upside. And this is why you saw, you know, some phenomenal valuations, but also on the downside. Yeah, you know, I think my opinion there is a little bit, you know, different than yours, Tracy. Because, you know, I think that the circuit breakers could have slowed things down, but couldn't have stopped them. And in some ways, by doing the circuit breakers, you know, like let's say the exchanges just, you know, limit up or down. They just hit the circuit breakers. Well, there's still the defy markets, right? And then there's still like all these other sources of true price discovery.

And as long as there's some kind of outlet for it, you're basically just building up pressure on the CFI exchange once the circuit breaker is released, right? So now, like, instead of it just like, you know, exponentially crashing down, now it might just be straight of vertical line. you hit the limit and then the moment the market reopens another straight vertical line down to the next limit and then just like staggered lines down, right, instead of like more of a curved line, almost vertical down. So, you know, I think at the end of the day, you can't really go against the market. If it wants to go down, it's just going to go down. I mean, you know, any kind, and especially for something so reflexive. Um, yeah. Most people are not trading, you know, people are trading emotionally, but there's like, there's, what I'm saying is that there's,

there's more that's coming, right? It's not that, oh, you know, after a while, people just want to go buy the dip, right? This asset is the complete opposite of the dip buying asset, right? Some assets, they're more mean reverting. When it goes down, maybe you buy something that looks cheap when it's when it pops up, you know, maybe you sell down a little bit because it looks expensive. This is the complete opposite. The further it goes down, the easier it is to short, right? Because then first of all, like everybody else is unwinding. You know that's happening. And then second of all, the entire value. of everything backing UST, which is circularly Luna itself and Bitcoin are both losing value, right? So then at some point, you know, if you think the collateralization ratio was bad yesterday, and today it's even worse. And the next day, it's going to be even worse. And you can see that trend deterministically playing out. Then at that point, you might as well just dump it today, right? So this thing is a purely reflexive asset. It's the purest of momentum assets. So what you say makes total sense. But, you know, I'm trying to understand actually how different fundamentally, Luna Terra is from a lot of other crypto defy assets. And of course, we recently did

an episode with Sam Bankman-Fried and he was asked to describe yield farming and he's like, oh, it's a box. And you put money in and then, you know, you get some governance tokens to incentivize more money in the box and then more money goes into the box and then you make a lot of money if you're early in the box. You talk about the reflexivity of the Luna Terra box. And when it's going down, there's literally no reason. There's no cash flow. There's no book value or anything that inherently stabilizes the price. This is what I meant by a natural circuit breaker, by the way. So then, how different is it from a lot of other crypto things in terms of this reflexivity? And is this a, I mean, is it really different from the rest of the space? Because I don't see,

like, it feels like a lot of crypto assets have the same reflexivity. Yeah, so I want to separate out the reflexivity from the garbageness of it, right? So like, I think on the reflexivity part, this is uniquely bad. Like Tara Luna is uniquely bad in its reflexivity. It's extremely, extremely high reflexivity. I think that's not the case for a lot of these other yield farming boxes. Now, that being said, on the other side, there are some similarities in the sense that there was a box also for Luna and it was called Anchor. and you put money in that box and seemingly you got money out of it.

Now, what it turned out to be is that, you know, and I want to maybe just go off of Sam's metaphor here, which I found hilarious, which is that, you know, in a lot of these cases, right, you put money in the box and then money comes out of it, especially, you know, if you're early. I would say that in this case, you put money in the box, seemingly money comes out of it, but really, really the true transfer of value here is that you put your money in the box, that money somehow through many, you know, different pipes goes to investors and founders of the project. And then your money disappears and you have nothing. So it's, it's more like that, I would say. But how is that different? Sorry. Yeah, because I would say that

certain boxes are a little bit more honest in the sense that, you know, it's kind of like a, like a chicken game, right? So it's like users competing with users. And, And the earlier you are, the better that you do, right? I know it sounds really bad. It is really bad. But what I'm saying is that this is even worse than that. Because it's not really just users compete against users. It's more like users thinking they're competing against other users,

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been questions swirling around what those reserves actually are, what they look like. We've also seen some stable coins. I can't remember exactly what it was, but like stuff like USDC and and B-U-S-D and things like that, that seem to have done relatively better. So those are holding up. So I guess my question is, is this now a shakeout in the stable coin space? Or what happens now? Do people go to stuff that they perceive to be safe? Or does the safe stuff get liquidated because a bunch of hedge funds have Luna Terra exposure

and need to raise money? Like, what exactly happens? Yeah, you know, I think a lot of those things. So let's first talk about the general sort of financial contagion, right? So like a lot of these guys who are just like these funds and other types of investors who are just really long, like let's say Luna or UST, or sometimes even doubling down on the position, you know, they basically, you know, as the price moves against them, they're facing margin calls. So I think what a lot of them did is that they sold their other hard assets, right?

So other coins, Bitcoin, Ethereum, whatever they had to meet these margin calls. and then eventually, like some of them even got wiped out on the entire fund. So I think that's probably why you're seeing all of this contagion. I mean, some of it is just correlated to equities. But I think for the most part, there's also some psychological contagion. And, you know, people just all of a sudden, you know, they see this huge, you know, top 10 coin implode. They start to feel a little bit less safe about all their other investments in general. And then some of it is this like to meet margin calls and to finance themselves.

You know, some people have just sold off. actually much better assets than Luna and UST to defend their position in Luna and UST. So I think that that definitely happened. So I forget what the first part of the question is. I guess how does the stable coin market shake out now? Does more money flow into things that are perceived to be higher quality? Or how do people start to differentiate? Yeah, definitely. You know, I think, you know, these days, you're starting to see like some of these coins trade above parity that are, you know, the non-tenth tether stable coins, at least for a little bit, I think a lot of stuff was trading like $1.2, $0.3, that sort of thing. I think generally the consensus right now in the market is that

USDC is the safest and there's a little bit of worry about tether. I think that's fair, but I do think the worries about tether are a little bit overblown. And I want to qualify that statement by saying that although Tether as a company has done some really shady stuff in the past, I actually happen to believe that they're actually more than just fully collateralized. I think they're actually over-collateralized. So, you know, if you think about some of the weird and wacky stuff they did that they shouldn't have done, they actually backed some of the tether with crypto, right, with Bitcoin itself. And this is like during a bull run. So first of all, they really shouldn't do that because that's not the point of what their business. Crypto exposure squared, right?

Yeah, yeah. I mean, they really should just be keeping like really dollar-like instruments or actual dollars. That would be the absolute safest in the bank account. So they shouldn't be speculating with client funds like that. But given that they actually did do that, something that they shouldn't, it actually worked out for them. So they kind of got lucky. And with, you know, I don't know if they kept a lot of the profits themselves or whatnot, but if at least some of that profit still was held in the vaults, then they should actually be over collateralized. And then, you know, the other, you know, crazy stuff that they did, you know, where they loaned money to themselves because, you know, Tether is also owned by Iphinex, which is the parent company at Bitfinance,

They basically loan money to BitFinex because of some bad debt that BitFinex had because they were like short like 800 million or something because of like crypto capital. I don't remember exactly, but it was something like that. So they were basically like doing all these crazy loans between their own companies. And that's, you know, I think definitely something that they shouldn't have done. But technically they, you know, they made it out of that too. They issued the Leo token. They sold it to investors, raised a billion, put it. that money back in, gave that money back to Tether. So, you know, technically it should still be

whole. I mean, they keep doing things that they shouldn't do, but yet they always get lucky and they come out of it. So I actually tend to believe that Tether is pretty safe. But, you know, they really should stop doing crazy shit. So I want to ask about the more the taro fallout in a different direction. So clearly there's the sort of pure financial contagion. You see a top 10 coin crash, et cetera, or you start to wonder about the safety of some of these other yield boxes and so forth. But the other thing that's striking, and I mentioned this in the intro, which is that we're used to hacks and crashes in crypto. They happen all the time, and most of the time they're too boring to even mention. But this one was backed by like legit or people who are respected

leaders in the industry, people who go on TV. And obviously Mike Novigratz, who has the Does Novagrats's tattoo mean nothing? Seriously. So, you know, but it's others too. And if you look at, you know, I saw the press release of the first time, like, you know, when Tara got funded. And it's all of the, like, some of the biggest names in crypto. And so I'm curious, like, how that affects the industry that this is not like some like

BitConnect weird thing where everyone sort of knew it was really terrible. Like a bunch of people really stood by this. Yeah, definitely. I'm, you know, I think historically we've seen stuff like that happened. before, you know, look at like the Dow, for example, you know, when that came out and it got hacked. I mean, that was also backed by a lot of heavy hitters in the industry. And then, you know, there was at some point, there was like the whole Bitcoin cash fork. And I wouldn't, I want to say it was backed by like everybody.

It wasn't the majority. It was still a minority within the industry. But it was a very healthy minority, right? So we've definitely had situations like that in the past. What I would say, and I don't want to cast any aspersions on most of the investors in Luna and Terra, what I would say is that I think it's a combination of three things. I think the first is that people got used to too much easy money in the bull cycles and, you know, before the Fed started hiking up rates, you know, they were used to this kind of

access arbitrage, right? As VCs, they're very well connected. They can get into these very early seed round deals and massive discounts, mark that stuff up, you know, crazy amounts, you know, 10x in a week, you know, 10x in a couple of months, 100 X in a year, even thousand is possible. So I think they just saw that as a continuation of business as usual. Right. And you know, that also like begets some questions. Like why should the returns be so high in the first place? But you know, that's, I think, another philosophical discussion. I mean, but I think, you know, they got kind of used to that. And for

them, they hadn't really switched their mindsets yet to more of a bearish, more of a hawkish kind of fed environment. So I think that's one part. I think the second part. I think the second part is that generally some of them tended to be true believers. And what I mean by that is that they thought that, yeah, maybe most likely this thing fails, like 90% chance this thing fails, but maybe 10% chance the same thing succeeds and it goes up a million X, right? So then that still makes the investment positive EV, right, positive expected value. So I think from that standpoint, they thought that this was still maybe a good bet to make. And it was an honest bet. They thought it was good at the time.

Maybe they don't think so anymore, but maybe some of them even still now made money because they got out in time. And I think the third thing is that probably some of these investors realized that this thing would never work, but they figured that they could make some money in the short term. And being a bit on the more cynical side within that demographic of investors, they figured that they could exit out of this thing before it blew. right? So I think it's a combination of those things, you know, just, you know, true belief and plus EV, cynicism and quick flip, and opium not being adjusted to a new bear market. So before we go, I want to like talk a little bit more about sort of what's happened or where we are now. And again, one of the things that we've seen with Terra and Luna specifically is Terra continues, the stable coin, continues to have these periods where it drifts up back towards the peg of a dollar.

Meanwhile, Luna is just absolutely blown out and every day it's going down by like 95 or 99% in a day. And the total issuance of, I think there was like 100 million, I don't know, and now there's like billions and billions. Can you walk us through like this sort of like weird like, I guess like rigor mortis or something or this sort of like afterlife of the corn right now? The death throws. What is actually this weird phenomenon that we're seeing right now? You know, I totally agree with you. It's actually pretty bizarre. But there's a couple of theories here. So the first theory is that LFG, Luna Foundation Guard, still has some reserves left, right? And they know the timing of it. They decide, okay, at this point, you know, UST is too low. We're just going to exhaust the rest of it. And we're just going to support the price. Either for A, for people on the inside to get out or for B, you know, altruistically to just get.

whoever wants to get out, whatever remaining backholders want to get out of UST, they can with the remainder of these reserves. So that could be the case. Another possibility is that it's the arbors that are closing up this, that are pushing the UST price up because the Luna protocol itself, the underlying virtual AMM will always consider UST as worth one dollar of Luna, right? So as long as Luna has any bid in the market and any market price in the market, you can always generate some kind of hyperinflating value in order to create these dollars.

So the issue is if you're guaranteed to get a dollar for UST, all that happens in let's say a dollar's worth of Luna for UST, and then Luna plunges by 99%, then whatever, then to continue to redeem those, you just have to create billions and billions of fresh Luna to meet that obligation, that pushes it down, then the next wave of Redeemers, that makes even more billions. And so you have this like true hyperinflation to defend the peg. But that's what the AMM is supposed to do. I mean, this is the bot basically working as the code instructed it to. Yes, exactly. And I think this is actually a really great point that you bring up, Joe. And I think there's a lot of interesting nuance here, which is that first of all, this is hyperinflation,

but this is actually worse than hyperinflation. This is high. hyper-inflation because it's hyperinflation, which itself is accelerating, right? So it's like it's hyperinflation of hyperinflation, basically. It's like exponentially bad, right? Because basically as more and more Luna get created, pushing the price further down, exponentially more Luna needs get created, right? So like maybe you like you burn a clip of UST and you have to mint a million Luna. And then the next time you do it, you have to mint a billion Luna. The next time you you have to do it, you have to mint a trillion Luna. Next time you do it, you have to mint a quadrillion Luna, right? So it just like exponentially gets worse, right? So on one hand, yes, this still does

allow the UST holders to get out, but now there's kind of a political consideration, right? Because the holders of Luna and the holders of UST are not aligned, right? The UST holders don't really care about the Luna price. They just want to get back to a deal. Yeah, 0.000, 0.0,000, 0.001. That's fine for them, you know, as long as they have they meant enough that they can get out a dollar's worth or, you know, close to a dollar's worth of UST. Well, the lunar holders, you know, they're not happy that the UST guys are just continuously crushing this price when no end in sight. I mean, we got yards to go, you know, there's no end in sight, right?

So I think there is some political disconnect between the interests of either the holders. And then I would say, finally, you know, how does this actually end? Well, what I think is that in the end, you don't. actually fully redeem out all of this UST at a dollar, you know, even if it takes forever. And even if you hyperinflate Luna to like a Googleplex or whatever, right? Like, I don't think you actually get out this UST because at the end of the day, there is still a tick size constraint on exchanges, right? So like, let's say the tick size on the exchange is one penny, right? Eventually, if Luna, its actual fair value price is below half a penny, which rounds down to zero, and it's technically

below one tick, then there will just be no bids in the order book. It'll just be a one-sided order book with only offers and no bid, right? So at that point, you can't actually complete this arm. You can't actually, you know, sell that no matter how much trillions or Googles of, you know, Luna you have, there's just no market to sell it because it's worth less than a tick, right? So like if once that happens, then basically everything remaining in UST is just bad debt, right? So what is the market saying right now? I think it's being, first of all, a little bit optimistic. I think it's saying that, you know, 38 cents on the dollar.

Basically, they're saying that if everybody takes a haircut of 62 cents, everybody can have 38 cents. First of all, I think this is wrong. But let's say that this was right, right? So if this was right, then maybe that would be the fair thing to do. Everybody just takes a haircut. Everybody gets 38 cents. But what's actually going to happen is not quite that. What's going to happen is that 38% of people are going to get a dollar and 62% of people are going to hold that debt worth zero.

Wow, that's really depressing. Speaking of depressing, so one of the things Joe and I were doing was we were looking at the subreddit, the Terraluna subreddit. And there are some really sad stories out there, you know, people claiming to have lost their life savings, threatening to commit suicide, things like that. And one of the stories that struck me, it was someone who said that they had done all their research. They really believed in the project and this happened to them and they've lost a lot of money. And one of the interesting things about crypto, at least to me, is it is such a polarizing space. On the one hand, there are people saying this is going to be the next big thing, Web 3.0, a new financial system. And on the other side, there are people who are saying that this is an outright Ponzi. So I guess my question is, you know, someone comes and they see the same, they read the same things about Tara and Luna that you do, presumably. And they come to a completely different conclusion. How does crypto as like a wider space try to solve some of that tension and what advice? And what advice is, like, a wider space, how does crypto as like a wider space try to solve some of that tension? And what advice? would you give to people who are trying to evaluate these different projects or boxes?

Yeah, you know, I think I think you bring up a lot of very interesting topics there. Maybe just starting with that, what I would say, and this is a bit more on the brutal side, but I think in crypto, you know, it's literally the Wild West. Everybody needs to be personally responsible for their own decisions and accountable to themselves, do their own research. And that's kind of how a market works. two people can look at the same mechanics, do the same research, and come to different conclusions. And then based on the market mechanism, eventually one side is right and the other side is wrong.

But that is basically the function of the market. The bet making here is exactly what creates the price discovery. So I don't think that there's anything particularly wrong about that. But I do think that people should think very clearly for themselves, whether or not they want to put up their mortgage on a bet that they think is good, but maybe have some doubt, maybe have some skepticism, have a little bit more skepticism, maybe don't put in more than you can lose. And, you know, my sympathies, I think, go out to all of these folks who, you know, lost their home, lost their life savings, that sort of thing. But what I would say is that better that this happened now than later, you know, if UST was 100 billion and eventually there was 95 billion of bad debt or 90 billion of bad debt, I mean, it would be way more devastating, right?

I mean, even more people would have lost their, lost their shirts. I wish it would have unwound earlier. You know, I think we've been great to have this unwinding last year. But, you know, at the end of the day, you know, better now than later at least. Well, so I want to just go back to your history with it because you did, you've, the reason people said you got to have Kevin on the show is because you have been allowed critic slash skeptic publicly on Twitter about the model and about its unsustainability. but also as we discussed, being wrong or being early can be devastatingly wrong when it comes time to place a trade. And with UST in particular, because you have this big, like, tact, or you know, you have to pay that 20% if you're going to short a stable coin or whatever. And the Luna just kept going up even amid the sort of like broader crypto malays of the last year.

So what did you see that you went from being like, okay, this is unstable to, yep, okay, it's falling apart. now. I always thought it was going to fall apart. I just didn't know when. And I actually thought the timing was not bad at all because I thought this thing would have lasted a little bit longer, to be honest. So I think this is one of the more optimistic outcomes. But, you know, what I would say is that, you know, with all these kinds of mechanisms, most of the time, you know, you look at all these kinds of, I call them money games, right? These Algo stable coins, these rebasing games, they've never gotten this big before, right? You know, you look at OM, for example, barely, you know, billion, I forget how much it was, but it was like, it was much, much smaller,

right? Order magnitude smaller, right? You look at like MIM, you look at all, you know, all this stuff. MIM was a collateralized table coin, though, but I mean, there was still some contagion from the time, Wonderland fallout over there. And you're like, ESD, DSD, based, yams, basis cash, who some people think that Doe Kwan was also the founder of. I've also heard that rumor. Coindex reported it yesterday, in fact, May 11th, then. Quan, the creator of Luna, was involved in those other Elgo stable that crashed called Basis Cash. So at least it has been reported that that is the case. Yeah, I've been hearing that rumor for a while, too.

You know, I don't know if it's true or not, but I tend to believe that that is true. But anyway, these experiments have all been tried before, but never to the scale, right? And that's what I thought was particularly alarming. Because even with the collapse of Wonderland Time with the whole seafood drama, I mean, there was already some contagion, but it was still well contained, right? But you could see that like any bigger and there would just be massive wipeouts, you know, it's like at some point, the cancer really is, it's terminal, right? And for that one, we did some chemo. We came out of Wonderland Time. For this one, you know, this is stage four, you know what I mean?

So this one's a lot worse, right? So, you know, so that's what really really got me thinking about this one. particular. And this is also why I've never really called out any projects in the past. You know, if you if you look at my Twitter, I first of all, I rarely tweet. And most of the times, when I do tweet, it's about some new obscure play that I found. I generally share alpha. And, you know, we found FTT. We found Wi-Fi in the very early days. You know, I think, you know, I think you'll find some, you know, interesting alpha, and mostly on the positive side. But I think this one, and maybe just to take a step back, one of the reasons that I don't like calling out projects,

is because in some ways, I don't believe you can stop human nature, right? If people want to gamble, if people want to play these money games, I think if you, even if you can't really suppress it, and even if you did, it would come out in other ways, right? But I think for this one in particular, it was just so bad that I felt I had to say something because, you know, this is just going to be devastating for the space. I mean, regulators are going to use this as an excuse to basically put on more regulation. And this is going to stifle innovation.

You know, it's going to be, it's just going to be a rough ride. What are the chances that someone comes to the rescue here and pours more money into it and gets the machine going again? Well, what I would say is that there probably is going to be some residual value in Luna and UST, but not until all of the bad debt on wines. So I think it's better to wait for the dust to clear out. And then, you know, if you want to, you can just have, you know, you can bid up Luna. you could have some price discovery. But what I would say is that until that bad debt winds down, you're just going to have hyperinflation. You're just going to have massive selling pressure, crushing the price to a tick and then to no ticks. So until that happens, you know, and who knows

what the actual intrinsic value of an L1 without the stable coin really is, you know, it could be actually well higher than like three cents or wherever it's trading two cents right now. It could be well, well higher than that, but we won't know that we can't really have that price discovery until all the bad debt lines out. So, you know, for now, you know, I'm really no bid on Luna. I think UST itself is going to go down. I think 38 cents on the dollars, it's still too expensive, to be honest. And then at some point, bad debt clears out. And then people bid up Luna and then it'll settle at its true fair value. But I do think that they're doing the right things. I do think it'll survive as a chain. Will it ever be top 10 again? Very unlikely. I think something like this is so damaging

to the reputation that I don't think it'll ever happen again. Kevin So of Galois Capital. Fascinating conversation. We could talk with you for three hours. You're so clear. You're such a, so good at explaining things. So glad we had you on odd laws. And yeah, likewise, really glad to be on.

Thanks for inviting me. Absolutely. Thanks, Kevin. That was so good. Yeah, that was great. Thank you, Kevin. Tracy, just in terms of how crypto, defy, these markets work, I think Kevin is the best guest we've had on that.

I think he was really good and really clear. He obviously has a lot of credibility on this one as well, because he was such a big vocal critic of Luna Terra. But at the same time, you know, you can't just say, oh, he's an anti-crypto guy. He doesn't get it. It's all fud. Like, he's actually invested in the space and called this one out as a bad actor. And he's clearly into the space.

Yeah. Because, you know, he's on, he's clearly of the view that, you know, doesn't want like massive regulatory response to this. And also that if crypto is going to avoid big regulatory responses in the future, whichever one in the industry wants to avoid, presumably, there has to be like a greater willingness to call out projects that are unsustainable. I also really like the description of the self-reflexivity of the way Luna Terra works. And, you know, this is something that I know we've spoken about before, but this idea of you know, the ultimate sort of momentum play, but the whole system is predicated that at some

point people will want exposure that starts falling away because people start doubting the way the entire thing is working, then it just feels like there's almost unlimited downside. And you asked the key question, and I still think that like it's, it seems like shades of gray to me, the difference between Teril Luna versus some of these other DFI things. because with the stock, when a stock goes down where you're like, yeah, but the company is still selling a bunch of paint and they're getting a lot of, right? And so there's this cash flow that people want. But with a lot of defy stuff where it's like token trading all the way down, there is not like

some natural other source of cash other than, you know, he put it great. He said, if you're getting a yield, you're often just getting money from future bagholders. Right. But if there's no more future bagholders, and I think that still is the case with many coins, even if they're not quite as convoluted or not quite as blatant about how the box works. Yeah. And I mean, the other thing I would say is this kind of arbitrage mechanism, it is not unknown in the world of traditional finance. And I think a few people have drawn analogies with the way that exchange traded funds work and market making for those.

But the difference is, you know, you're trading a basket of stocks and the stocks kind of have some sort of value. They're tied to some sort of cash flow. For this one, the arbitrage is all about the crypto. And if you don't think the crypto has any value anymore, then it kind of collapses very quickly. Well, we can talk about this a long time, and I'm sure we will. Yeah, our producer is kicking us out of the studio. All right, shall we leave it there? Let's leave it there.

This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthal. You can follow me on Twitter at the stalwart. Follow our guest, Kevin Soe on Twitter. He's at Galois Capital. follow our producer Carmen Rodriguez at Carmen Armin.

Follow the Bloomberg head of podcast Francesca Levy at Francesca Today. And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening.