The Breakdown - Après Terra, le Déluge

Starting point is 00:00:00 Even if you disagree with the full maximalist stance, the idea that everything outside Bitcoin is a valueless, hopeless scam, there is a moment in every cycle where Bitcoiners' unrepentant skepticism is at least partially validated. Even if you remain interested in exploring other projects and ideas outside of Bitcoin, taking that skepticism with you on that journey can be extremely valuable. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, near NFTX, and produced and distributed by CoinDesk.

Starting point is 00:00:43 What's going on, guys? It is Wednesday, May 11th. And today, of course, we are following up on yesterday's story about Meltdown Monday. The Luna UST saga continues. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dig deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit. ly slash breakdown pod. A disclosure as always. In addition to them being a sponsor of the show, I also work with FTX. And finally, if you are not registered yet, I highly suggest you check out CoinDesks Consensus 2020. It's happening June 9th through June 12th and all. Austin, Texas this year. And what makes this event cool is that it is really about the full

Starting point is 00:01:34 breadth of this space, everything from Web 3 to Metaverse to Bitcoin and everything else in between. It's designed for newbies, investors, entrepreneurs, developers, and everyone else as well. If you are interested in attending, you can use Code Breakdown to get 15% off your pass. Go to CoinDesk.com slash Consensus 2020. And again, that's Code Breakdown. for 15% off. So today was supposed to be about the inflation print. We've been tracking closely how the discussion around inflation is shaping attitudes around markets in general. One of the big questions coming into today was, would we see inflation increase, would we come to a peak or local top in inflation, or would we actually see a reduction? The answer to those

Starting point is 00:02:24 questions is going to have a dramatic impact on market confidence and just how market participants are behaving in general. However, that has been forced out of view, at least for today, by the continued saga of UST and Luna. For those of you macroheads, don't worry, we will get into CPI tomorrow. Now, where we were yesterday when I finished the podcast is this. UST is an algorithmic stable coin. That means that instead of using collateral as a basis for holding its $1 peg, it uses a smart contract, market incentives, and arbitragers to keep that dollar value consistent. In the Terra ecosystem, the key elements are UST, which is the dollar pegged stablecoin, Luna, which is the governance token and which acts as the other side of the balancing trade,

Starting point is 00:03:11 and Anchor, which is a staking protocol for UST, which created an incentive for people to hold the stable coin by promising up to 20% yield. This is an ecosystem that many have been skeptical of from an economic perspective. Indeed, there are plenty of voices out there who have for a long time seen algorithmic stable coins not as financial innovation, but as a fundamentally flawed premise. It seems likely that the number of people who count themselves in that camp will increase after this affair. In any case, over the weekend, more than a third of the value in Anchor was withdrawn. We're talking over $5 billion of liquidity removed from that system. The UST pegs started to break, and the value of

Starting point is 00:03:54 UST went down to about 98 cents. That's the point at which Doe Kwan, the brash, hard-driving entrepreneur behind the Terra ecosystem, surfaced on Twitter very triumphantly. On May 7th, he writes, I'm up, amusing morning. Anon, you could listen to the CT influencers about UST-depegging for the 69th time, or you could remember they're all now poor and go for a run instead. What do you do? By the way, if y'all girls are going to fud, try to do it during my waking hours, please. Terra chain is 24-7, but I'm a new father for crying out loud. A day later, he posted a meme of a bear psychologist with the caption, so is this UST-D-Peg in the room with us right now?

Starting point is 00:04:35 No? I prescribed 24 hours of pegging over the next seven days. He followed that up with, Those of you waiting for the Earth to become unstable, I'm afraid you will be waiting until the age of men expires. Cities have returned to the dust. Oceans have gone bone-dry. The maps of continents have been drawn anew,

Starting point is 00:04:50 and dinosaurs once again roam the Earth. Good luck. Big words, especially considering that about 24 hours later, things got even nastier for UST. By a Monday evening, the peg had fallen as far as 61 cents. Luna, the asset on the other side, had fallen from over $80 the week before to between $30 and $40. That's what led up to yesterday's show. And as I finished recording, people were still grappling with what was next, and as I mentioned, it was very much still a live story. Doe had said, close to announcing a recovery plan for UST, hang tight. Now, yesterday evening on Tuesday, there was reporting that the Luna

Starting point is 00:05:28 Foundation Guard was trying to raise another $1 billion, from the block. The group is now looking to raise fresh capital from some of the industry's largest investment firms and market makers according to the sources. The deal, currently being negotiated, offers investors the opportunity to purchase Luna tokens at a 50% discount, although those tokens would be subject to a two-year vesting schedule. It seems that that rumor was not enough to calm markets down, because in the The evening again, the peg started to break down and Luna began to fall. Doe tweeted, getting close. Stay strong, lunatics.

Starting point is 00:06:00 At that time, Luna was down to between $16 and $18. This morning, I woke up to absolute carnage. At 5.30 a.m. Eastern time, Frank Chaparro from the block tweeted, I'm starting to think they're not close to having a plan. When I woke at 7 a.m., Luna was at $3 and continuing to fall. U.S.T. was at 33 cents. before long Luna was trading under $1. Indeed, it was trading at less than U.S.T, the dollar-pegged stable coin, was trading at 24 hours earlier.

Starting point is 00:06:32 Remember, this is an asset that was $119 just a few months ago, and over $80 just a week ago. In the early morning hours as Luna fell, Doe came back to Twitter and wrote, Dear Terra Community, I understand the last 72 hours have been extremely tough on all of you. Know that I am resolved to work with every one of you to weather this crisis, and we will build our way out of this together. First, if you don't understand how Terra's peg stabilization mechanism works, here is a good overview. A review of the current situation, UST is currently trading at 50 cents, a significant deviation

Starting point is 00:07:03 from its intended peg at $1. The price stabilization mechanism is absorbing UST supply, over 10% of total supply. But the cost of absorbing so much stable coins at the same time has stretched out the on-chain swap spread to 40%, and Luna price has diminished dramatically absorbed. absorbing the ARBs. Before anything else, the only path forward will be to absorb the stable coin supply that wants to exit before UST can start to re-peg. There is no way around it. He then goes on to say that they endorse a couple of community proposals and concludes, Naturally, this is at a high cost to UST and Luna holders, but we will continue to explore

Starting point is 00:07:36 various operations to bring in more exogenous capital to the ecosystem and reduce supply overhang on UST. As we begin to rebuild UST, we will adjust its mechanism to be collateralized. The Terra ecosystem is one of the most vibrant in the crypto industry, with hundreds of passionate teams building category-defining applications within. As long as these builders, TFL among them, continue to build, we will come out of this together. Terra's focus has always oriented itself around a long-term time horizon, and another setback this May, similar to last year, will not deter the lunatics. Short-term stumbles will not define what you can accomplish. It's how you respond. Terra's return to form will be a sight to behold. We're here to stay, and we're going to keep making

Starting point is 00:08:15 noise. Now you will notice here that there was no bailout, no plan really of any kind, other than some support for a couple of community proposals and an admission that there was more pain to come. There was, frankly, not much humility or recognition of complicity in this challenge. Certainly there was no apology. Indeed, the implication of all of this, the way that he described UST coming back, was something of an admission that it would not be as an algorithmic stable coin. Looking for ways to step up your crypto game, then go with Nexo. For starters, you get free crypto for each purchase or swap. How about earning guaranteed yields?

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Starting point is 00:10:09 FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show. It's hard to describe the sentiment exactly in crypto right now. Stunned is the best word I can think of. If you had looked away for a moment and came back to the industry, you would barely believe it. The bitcoins are, of course, loud in their we-ficking told you so's. And I would venture to say here that even if you disagree with the full maximalist stance,

Starting point is 00:10:49 the idea that everything outside Bitcoin is a valueless, hopeless scam. There is a moment in every cycle where Bitcoiners' unrepentant skepticism is at least partially validated. Even if you remain interested in exploring other projects and ideas outside of Bitcoin, taking that skepticism with you on that journey can be extremely valuable. The reinvention of money, finance, and the Internet as a whole creates an enormous honeypot. It's a frontier that attracts, yes, of course, true grifters, but also in sometimes more dangerously idealistic icaruses who sometimes fly too close to the sun. Unfortunately, when things go badly, how much pain people experience tends not to care

Starting point is 00:11:32 about how sincere the intentions of the builders were. I would also say, however, to Bitcoiners who are doing a victory lab, especially Bitcoiners in the U.S., that there are real implications here, including for Bitcoin. I'm not talking about any sort of existential survival or price things. Bitcoin is going to be fine. And when it comes to the fundamentals of existence, it is true and remains true that Honey Badger don't care. What I'm talking about is the inevitable regulatory regime that Bitcoin,

Starting point is 00:12:00 which, like it or not, sits for regulators within the larger digital asset category, has to deal with. Since BitConnect, there hasn't been anything that more intensely validates those politicians saying that this space needs to be more regulated for the sake of investor protections. Moon Overlord said this is the single biggest wealth destruction event in crypto history. The Luna subreddit is full of links to national suicide hotline numbers, to stunned disbelief about fortunes and nest eggs gone. Hasu tweeted,

Starting point is 00:12:34 UST is worse than BitConnect. At least BitConnect didn't masquerade as a stable coin. When your Ponzi targets people's savings, not investment portfolio, there is a special place in hell reserved for you. Half of crypto-twitter influencers, VCs, and trading firms are complicit. Now, I should be clear here that the regulatory implications are not a foregone conclusion. One can hope that we've gotten to a level of sophistication, where regulators will take the time to understand the difference between, for example, algorithmic stable coins and collateralized table coins, and also for things like 20% yield games and other, less call it novel uses of crypto assets. However, those sorts of details are going to be a lot

Starting point is 00:13:18 harder to communicate than a chart that someone who has never seen a chart in their life can understand is a picture of an asset going to zero, and the stories of utter wreckage of people who are holding Luna. Forever now, when a previously overzealous regulator says, these things can go to zero. They have a true recent example that saw a tens of billions of dollars worth of value destroyed in a matter of days. That size, as they say, is size. There is another piece of this, of course, which is the potential for financial contagion within the crypto industry. It's really important to note that right now, everything out there is speculation. There are stories of Citadel and BlackRock circulating, and there are some

Starting point is 00:14:04 folks who should know better who are obviously spreading them to fud competing chains, which is pretty gross, if you ask me. Gemini responded, we are aware of a recent story that suggested Gemini made a 100K BTC loan to large institutional counterparties that reportedly resulted in a sell-off in Luna. Gemini made no such loan.

Starting point is 00:14:24 Beyond that, the only real things we know about institutions that might be impacted are that, one, ARCA sent out a letter from CEO, Reyn Steinberg, explaining the situation over the weekend and saying that they had doubled down, convinced that the peg would recover. Two, a handful of funds have said, that they had no exposure, including framework and multi-coin. And three, Genesis tweeted,

Starting point is 00:14:43 Genesis is a liquidity provider to our trading partners. We hedge all our risk, including that link to U.S.T. and Luna. We have no direct exposure to U.S.T. and Luna, and continue to operate and serve our counterparties as usual. That's it. We don't know who is scrambling today to move things around, to figure out where their exposure is. We don't know who's struggling. We don't know who might not be able to come up for air. We don't know, in short, what the downstream ramifications will be on basically any level. We don't know if there will be funds blown out over this. We don't know how many individuals experience some sort of personal financial ruin. We don't know how this will reshape the regulatory discourse. We just know that there will be implications. Now, unbelievably, there have

Starting point is 00:15:24 been other things going on in crypto this week, other things that in a normal week might have caused their own scandal in trouble. I'm thinking specifically of the revelation around popular NFT collection Azuki. The pseudonymous founder of the collection, Zagabond, wrote a blog post, dropped Monday night, the same time that the UST peg was crashing to the 60 cent mark, that went through his history with NFTs, including involvement with Cryptofunks, tendies, and Cryptozunks, all of which apparently were abandoned by their original founding teams. There was an uproar in the NFT world, in a sense that this was an attempt to get out ahead of a doxing based on-chain sleuthing. Since then, the floor price of Azuki's is down

Starting point is 00:15:58 about 50% and there has been massive volume around the project as people exit. This is the latest in a string of revelations about Anon's involved with these NFT and Web 3 projects, were actually people known to the community before with, shall we say, a dubious reputation. Now, the reason that this story warrants mentioned today is that it connects to our main topic of Luna through news broken by CoinDesk that this is not Doe Kwan's first algorithmic stablecoin rodeo. Basis was a stable coin from the 2017 crop that raised $133 million before shutting down in 2018. The founder of that project shut it down, saying that basically they couldn't maintain the peg

Starting point is 00:16:37 without running a foul of unregistered securities concerns. In early 2020, an anonymous group of builders started something called Basis Cash that was based on those earlier designs. As Defy Summer heated up in 2020, two new folks called Rick and Morty got involved. On August 20th, 2020, Rick's telegram account in the Basis Cash Telegram channel said, Yo, Digens, anyone remember what Basis was? It was one of the earliest DeFi algorithmic stable coins with high-em. ambitions, but it was shut down due to SEC-related risks. Today, we're bringing BASIS back from

Starting point is 00:17:07 the grave. Now, the project never got nearly as big as U.S.T. It peaked in about $174 million in total value locked in February 2021, before eventually crashing. Revealed today is that according to former employees, Rick, was actually Doe Kwan. From CoinDesk. Apparently intrigued by the early ideas behind BASIS, Doe directed a select group of TFL employees to resurrect what eventually became Basis Cash. The Korea-based project was envisioned as a way to test out the core concepts of the original basis without falling prey to U.S. regulatory pitfalls. CoinDesk's sources say Kwan deliberately distanced himself from the day-to-day operations of the project, though he proposed most of the core ideas behind Basis Cash and its underlying token model. One has to think, then, that in

Starting point is 00:17:51 addition to this being a bad week for the entire Terra ecosystem, and a bad week for crypto users who wish to see less rather than more onerous regulations. It's also a bad, week for the very idea of anonymity. The ability to be anonymous is one of the core countercultures of crypto. To this day, the identity of the founder of Bitcoin is not known. In a world of growing surveillance, for some, this ability to be anonymous and to interact anonymously is vital. Not to always put on this hat, but think about political dissidents in authoritarian regimes. However, it was always going to be an uphill battle for Anans to be able to stay Anon in the face of growing KYC-AML regimes. That's going to be even more.

Starting point is 00:18:31 More difficult if we keep uncovering folks using the fact of their anonymity in order to engage without having to account for past actions and misdeeds. So to recap, here's where we are. UST's peg is still flailing up at 65 cents right now. Luna is at $1.89 after getting as low as 83 cents. We have no idea really which crypto funds or institutions are caught up in this right now. We have no idea how regulators are thinking about it. But given that Janet Yellen talked about it yesterday, we know that they are thinking about it. And more than anything, a lot of people are hurting. My personal opinion is that this is still the very, very beginning of this story. I don't mean that in a way that I think UST and Luna will recover. I mean that in the sense that I think

Starting point is 00:19:13 the ripple effects of this catastrophic meltdown are now likely to set the tone for both the institutional and regulatory discourse for the foreseeable future. I don't think it's yet the time for silver linings. However, I will say that in these moments, it is almost never as a very much as bad personally as it feels like it might be. If you need someone, call someone. And if you don't have someone, come join us on breakers and we'll do what we can. I want to say thanks again to my sponsors, nexus.io, near and FtX for supporting the show. And thanks to you guys for listening.

Starting point is 00:19:44 Until tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners. Come join CoinDesks Consensus 2020, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web 3, and the Metaverse, and is designed for crypto-newbies, investors, entrepreneurs, developers, and creators. Don't miss speakers like Kathy Wood, SBF, CZ, Punk 6529, and Joe Lubin to name just a few. Use code breakdown to get 15% off your pass

Starting point is 00:20:24 at coindesk.com slash consensus 2022.

The Breakdown - Après Terra, le Déluge

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