The Breakdown - What Happened to the Luna Foundation Guard’s Bitcoin Billions?

Starting point is 00:00:04 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 nexus.io, near NFTX, and produced and distributed by CoinDesk. What's going on, guys? It is Monday, May 16th. And today, we are talking about what the hell happened to the Luna Foundation Guard's Bitcoin. Before we get into that, a couple bits of housekeeping. There are two ways to listen to the Breakdown podcast. You can listen on the Coin Desk Crypto Podcast Network feed, which features both the breakdown

Starting point is 00:00:44 alongside other great shows, or you can listen on the Breakdown Only feed. Both shows come out the same day with the CoinDesk feed coming out in the afternoon and the breakdown only feed coming out later in the evening. Wherever you listen, if you are enjoying the show, please give us a rating and a review. It really helps people discover the show. Finally, a disclosure as always. In addition to them being a sponsor of the show, I also work with FTX. So today we are discussing what happened to the Bitcoin purchased by the Luna Foundation Guard. And in some ways transitioning our coverage of this whole Luna episode of the last week.

Starting point is 00:01:23 Now, for just a little bit of context, I'm going to assume most of you have been keeping track of this whole thing. The idea of the Luna Foundation Guard was to backstop and defend the pegs of UST, which was the Terra ecosystem stablecoin in the event that it became depegged. UST was one of the most pure play algorithmic stable coins out there. And in some ways, the LFG and their big Bitcoin purchase was a concession from Doe Kwan and the other people on the team that having a certain collateral backing could be useful in the event of a bank run as well. As everything transpired last week, and the UST depagged and then Luna fell to effectively zero in a massive death spiral, which despite the fact that many had predicted it still

Starting point is 00:02:09 was stunning to watch in its completeness. The tens of thousands of UST that had been purchased by the Luna Foundation Guard were on the move, but to where we didn't exactly know. On May 13th, after a few days of silence, when Doquan resurfaced, he said, we are currently working on documenting the use of the LFG Bitcoin reserves during the depegging event. please be patient with us as our teams are juggling multiple tasks at the same time. Now, this response was in part to an incredible number of people asking exactly that. A few days earlier, Ben Davenport, the co-founder of BitGo, said, is there any evidence that Doquan actually sold any of the Bitcoin he held and used that to support UST?

Starting point is 00:02:52 I think we're going to need some receipts. This was honestly one of the more kind takes on where this Bitcoin went, which devolved into accusations, conspiracy, and recriminations super, super quickly over the weekend. But despite all of the wilder speculation, this was a really important question. Larry Sermak from the block wrote, Really difficult to be in the failed experiment, but at least they tried camp, when there is still no info about hundreds of millions of Bitcoin in the reserve. Twitter accounts look like they have been taken over by lawyers.

Starting point is 00:03:24 Crypto-Twitter really should put more pressure into getting info ASAP. In all the documents Terra used to raise, the reserves were collected specifically for defending the peg, not to serve as a treasury in case the peg failed. Really fucking absurd, it's been days and nothing. That message came yesterday. Now, over the weekend, on-chain sleuths and on-chain analysis agencies did dig into exactly this problem. On May 13th, Elliptic tweeted,

Starting point is 00:03:49 Following the collapse of Terra's UST stablecoin, we traced the $3.5 billion in Bitcoin held in reserve to help prevent exactly such an outcome. Luna Foundation Guard, LFG, a non-profit formed to support the growth of Terra ecosystem, purchased 80,394 Bitcoin between January and May of this year, to act as collateral for UST. The LFG wallets were emptied on the 9th and 10th of May as U.S.T began to collapse, purportedly to use the Bitcoin to support the U.S.T. price. The Bitcoin reserves were quickly moved to two cryptocurrency exchanges, although it is not

Starting point is 00:04:21 clear whether they were sold, moved on to other wallets, or remained there. Binance and Gemini were the two exchanges in question. Finally, this morning there was an actual announcement from the Luna Foundation Guard, and TLDR, they spent almost all of their Bitcoin attempting to protect the peg. From 80,394 Bitcoin in reserves to 313. The thread they posted goes over their attempt to deploy that Bitcoin to protect the peg, first on May 8th, then on May 10th, and then finally on May 12th. At the end of the day, of course, we know it was not successful.

Starting point is 00:04:55 Larry again says, in summary, LFG have gone from having $3.1 billion in their reserves a week ago to now having roughly $87 million, which means they spent roughly $3 billion defending the UST peg and UST still collapsed. So we've got the information now, right? This settles it. People are still super, super skeptical. Remember, this is what the foundation is saying publicly, but they haven't provided evidence, audits, anything like that. Nick Koonkei writes, we have no evidence they spent that $3.1 billion on defending the U.S.T. peg, and the skepticism runs deep. DC investor had said last night, if they can't prove they sold those Bitcoin to protect the

Starting point is 00:05:33 peg with audited records from multiple reputable auditors and don't return those funds to U.S.T. Luna participants, then we can move beyond the this was just an honest mistake to this was an exit scam. And frankly, I think he captures sort of the vibe. Looking for ways to step up your crypto game, then go with NXO. For starters, you get free crypto for each purchase or swap. How about earning guaranteed yields? Up to 17% paid out daily. Ideal for you hardcore hoddlers.

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Starting point is 00:07:11 One of the largest exchanges in the U.S. 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 FTCX app today and use Referral Code Breakdown to support the show. Now, as I mentioned before, there has been some discussion of a Terra ecosystem revival plan. The version Doquan shared last week, had validators resetting the network to 1 billion token supply distributed 40% to Luna holders prior to DPEG, 40% to UST holders pro rata, 10% to to Luna holders at the time of the final chain halt, and 10% to a community pool.

Starting point is 00:07:52 A lot of the discussion that followed was about who got compensated and how, with many accusations that this wouldn't do much for the small lunatics, but would make good for some big whales. Now, there has been another round of updates on this, and there is a clear and intentional attempt to shift the narrative. In his Terra ecosystem revival plan 2, Doe Kwan writes, Terra is more than UST. While UST has been the central narrative of Terra's growth story over the last year, the distribution of UST has led to the development of one of the strongest developer ecosystems in crypto. The Terra ecosystem and its community are worth preserving. Tara's app ecosystem contains hundreds of developers working on everything from DeFi to

Starting point is 00:08:30 fungible labor markets, state-of-the-art infrastructure, and community experience. Terra Station has a large install base with a million-plus users across the world, although distressed, strong brand recognition and a name that almost everyone in the world will have heard about. UST peg failure is Tara's Dowhack moment, a chance to rise up anew from the ashes. Now you'll notice he used the same analogy that Suu had been critiqued for last week, Tara's Dowhack moment. The idea that this was a malicious attack based on some unknown vulnerability, instead of the protocol doing what the protocol was always going to do in a moment of distress. Sue retweeted this new plan from Doe saying, Tara, too soon.

Starting point is 00:09:11 Others do not see it that way. Scott Lewis tweeted an image of a Doe-Quan tweet from July 2020. Doe said then, if you get burned by a textbook Ponzi scheme, you have no one but yourself to blame. Don't FOMO in after crypto influencers, most of them are dumber than you. When someone followed up and asked, so which ones do you think are the Ponzi's? Doe said, beware of protocols with cyclical economic pressures. If they reward richly during up cycles when lots of people buy in, they also likely punish quickly during down cycles when most are looking to exit. To this, Scott Lewis added, Doe Kwan understood exactly what he built would someday collapse, and then misled people into financial ruin. Sir, disrespectfully, I invite you to leave crypto and never come back. Now, there is going to be a lot

Starting point is 00:09:59 of back and forth in the Terra community about what to do, to accept Do's offer, to leave entirely. And of course, this matters to the folks who are still in that community. However, to the extent that this show remains focused on big picture power shifts, this is sort of where I leave that particular piece of the conversation. The fallout that I'm interested remains in terms of institutions, market structure questions, and of course regulations. There is a lot of broader reflection in the community that this has prompted. Arthur from Defiance Capital wrote a long threat that started, as an early DeFi participant and advocate, I always believed that a decentralized money and network needed a decentralized financial stack to support it. From there, however, he goes on

Starting point is 00:10:45 to explain why he had skepticism of Terra, but why his skepticism wasn't enough. He says, This event will no doubt set the space back by a few years, and attract increased and justified scrutiny from authorities and regulators alike. We need to do better now to show this space is worth supporting and advocating for. I think a more comprehensive disclosure framework for Defi should be champion, so instead of a forced KYC-AML nightmare like the Tradfai world, we should push for maximum awareness and education before encouraging the usage and access of Defi. A reputable, independent and well-managed Defi Directory with a comprehensive disclosure framework makes sense and should do a lot to alleviate the knowledge gap. Personally, this has been an incredibly humbling and

Starting point is 00:11:25 difficult event, we generally got the bearish direction right, so have been a lot more cautious, but many of our assumptions are challenged and invalidated. We could have done much more as well to prevent this. We were too liberal and accepting too many unacceptable behaviors and actions towards our portfolio teams, industry associates, important leaders. Going forward, we will only invest in teams and projects where we can morally give them our full support. And like I said, the threat is longer, but that's where I'll close for here. Now, the reason I think it's worth sharing some of that is that I think it reflects a larger sense of shift from bull to bear market that isn't just about price. People have been asking for months and months now whether we're in a

Starting point is 00:12:03 crypto bare market. But there is a distinctly different feel to bull markets and bear markets. And in many ways, what feels like is going on now, especially for people outside the Luna community who aren't just dealing with this crazy fallout in the immediate sense, there's a kind of waking up from a bull-and-due stupor, which races churningly and unscouvering. ceasingly ahead without pause or time for reflection. That's really what bull markets are like. Go, go, go, go, go, go, go, go, until the crash, and sometimes even a little bit after. However, at this point, the collective hand of the industry has been forced, and reflection is here upon us. Reflection is necessary, of course, for forward progress, but can also be quite

Starting point is 00:12:44 painful in the moment. In that context, the regulatory chatter around Luna continues to grow. Hester Perce said, you might say stablecoin and one stable coin might look nothing like another stable coin. I think it's very important to approach all the conversations in crypto with an understanding that there's a lot of variation which makes it difficult to craft a regulatory framework. She also said it's been one area within crypto that's really had quite a moment and there's a lot of stable coin use and therefore people are thinking down the road. If this gets even bigger, do we want to have some kind of regulatory framework? Her hope, she says, is that there is still the ability for things to experiment and fail. We need to allow room, she said, for there to be failure because that obviously is part of trying new things, and our framework really does allow for that kind of trial and error.

Starting point is 00:13:28 I hope that we will use it for that purpose. Now, Hester is about as optimistic and forward-looking a regulator as we have. Others might not see it that way. CMS Holdings says, I would imagine this is likely going to restrict the holdings of stablecoin issuers to more cash-like instruments, so liquidity in the event of a bank run is there. Much the same we saw overhaul of money market fund rules post-08. Eric Golden, a former Fidelity portfolio manager, said, I agree. The SEC will look to apply Rule 2A7, which governs money market funds or something similar to it. My assumption is

Starting point is 00:13:59 this is why Circle did the deal with BlackRock to start learning how to manage money under the SEC regulations. The crypto tax guy reports a somewhat bleaker observation. At a law firm retreat, many of the U.S.'s brightest legal minds now think all stable coins equal terra and all crypto equals Luna. That means two things. One, we're still early, Two, the near future is going to be a regulatory hellscape. Long-term, crypto will be okay. The U.S. might not be. Now, as I mentioned last week, another line of this story is everyone trying to see if there's

Starting point is 00:14:32 another stable coin domino to fall. Nick Carter tweeted, Tether just processed its greatest spade of redemptions ever, shrinking on Ethan Tron chains by $7.3 billion in the last two weeks. USDA also declined $4 billion from peak in March. Algo Stables and Cryptoback Stables have been shredded, down 20 billion. Virtually all in the category are down, not just U.S.T. Stables as a whole down almost $30 billion from peak in April.

Starting point is 00:14:59 J.P. Coning had an interesting take on this, saying, don't forget to thank Tether's critics. Their pressure forced Tether to cough up more data, which fueled more criticism, which pushed Tether to buy more safe Tee bills, which are now being deployed to meet a wave of redemptions. As you heard from Jeremy Aller last week, stablecoins are now in the urgent, CERgent category of regulation. So I'm expecting we get more discussion about this very soon. For now, I want to say thanks again to my sponsors, nexus.io, NEAR and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners, come join CoinDesks Consensus 2022, the festival for the decentralized

Starting point is 00:15:44 world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web3, 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 at coindesk.com slash consensus 2022.

The Breakdown - What Happened to the Luna Foundation Guard’s Bitcoin Billions?

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