Unchained - Did Someone Deliberately Attack Terra/Luna to Kick off a Death Spiral? - Ep.351

Episode Date: May 13, 2022

Jon Wu, head of growth at Aztec Network, recaps a historically chaotic week in the Terra ecosystem that saw $UST depeg, Anchor depositors flee, and $LUNA fall 99%. Show highlights: how $UST, $LUNA, Luna Foundation Guard (LFG), and Anchor Protocol are supposed to work why Jon compares the Terra blockchain with VISA, LFG with the Fed, and Do Kwon with Jerome Powell how a previous $UST de-peg foreshadowed this week’s dystopian price action how a bitcoin short seemed to have kickstarted $UST’s depeg and why Jon thinks it was a deliberate attack why Luna Foundation Guard originally purchased Bitcoin – and how that plan backfired and made the Terra death spiral even more violent why $UST had such low liquidity this week – making it more susceptible to a bank run what Jon’s predictions are for $UST and $LUNA going forward what were the reasons behind Terra halting why Jon does not think this will be the end of algorithmic stablecoins why Jon thinks this should not affect ETH directly, even though there is a high amount of staked ETH in the Terra ecosystem   Thank you to our sponsors! Crypto.com: https://crypto.onelink.me/J9Lg/unconfirmedcardearnfeb2021      Coinchange: https://coinchange.io      Episode Links   Jon Wu Twitter https://twitter.com/jonwu_   Jon’s Write-Up on the UST Depeg Article: https://www.notboring.co/p/terra-to-the-moon-and-back  Thread: https://twitter.com/jonwu_/status/1523793482850050048?s=20&t=lvB1zdz98wu5TE5emh4fCw    Previous Unchained Coverage of Terra Do Kwon on backing UST with BTC ​​https://unchainedpodcast.com/do-kwon-is-backing-ust-with-bitcoin-and-heres-what-else-he-is-building/ Kevin Zhou on the risk of UST’s death spiral https://unchainedpodcast.com/heres-why-usdn-de-pegged-from-the-dollar-and-why-ust-might-too/    Terra: Terra proposal to accelerate the burn of UST and increase the base pool: https://station.terra.money/proposal/1164  https://www.theblockcrypto.com/post/146254/terraform-labs-ceo-do-kwon-unveils-plan-to-restore-ust-peg Terra halting the network: https://twitter.com/terra_money/status/1524785058296778752?s=20&t=FUJkFuN8PyxRoF9TCPgrGg Terra going live again: https://twitter.com/terra_money/status/1524812171179327488?s=20&t=FUJkFuN8PyxRoF9TCPgrGg Regulatory risks: https://www.theblockcrypto.com/post/146426/the-sec-has-already-sued-terraform-labs-it-has-every-reason-to-investigate-ust-lawyers-say    Other Recaps on Terra:  CoinDesk on how Do Kwon was behind previous algorithmic stablecoin: https://www.coindesk.com/tech/2022/05/11/usts-do-kwon-was-behind-earlier-failed-stablecoin-ex-terra-colleagues-say/  Rekt: https://rekt.news/luna-rekt/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, everyone. Welcome to Unchained. You're a no hype resource for all things Crypto. I'm your host, Laura Shin, author of The Cryptopians. I started covering crypto seven years ago, and as a senior editor of Forbes was the first mainstream media reporter to cover cryptocurrency full-time. This is the May 13th, 2022 episode of Unchained. Point Change is the easiest way to earn passive income using crypto. You can safely deposit cash or cryptocurrencies to earn up to 20% annual yield. There is no lending or market risk, just simple, high-return yield farming. Create an account today at tri-defi.c-c-unc and receive 40 USDC. That's tri-defi.cc-slash unccc. With the crypto.com app, you can buy, earn, and spend crypto in one place. Download and get $25 with the code Laura. Link in the description. Today's guest is John Wu, Head of Growth at Aztec Network. Welcome, John.

Thanks, Laura. Happy to be here. Just a heads up, everyone, that the news we're covering here is so important that this may be longer than the traditional Friday show. One additional note is that if you haven't yet listened to the interview I did with Kevin Joe of Galois Capital, Ontario, which came out April 8th, I would also suggest you do that as background. And for those of you who happen to catch this when it comes out, I would also urge you to check out a live stream that I'm doing on the Unchained YouTube channel at 1130 a.m. Eastern with Nick Carter, Eric Wall, and Eric Voorhees,

and we are going to dive into all things, Tara. I am recording this for next Tuesday show, but obviously because events are happening so quickly, I felt it was best just to live stream it so that it wouldn't be outdated by Tuesday. All right. So now we're going to dive into this interview with John, who is going to give us the deal on everything that happened this week. This has been an extremely dramatic week in the crypto markets,

particularly around the stable coin Terra or UST. And the value of Terra is supposed to stay pegged to the US dollar. Back in April, Luna, which is the token that governs Terra's ecosystem and helps keep UST at $1, had an all-time high of $116. As of Thursday morning Eastern Time, it was trading it around one cent. I actually wasn't able to check it right before we started recording, but I imagine it's even lower. Tara itself, when I wrote this a few hours ago, was about 59 cents, which is higher than it has been at other times this week. Honestly, it's really just looked like the whole Terra ecosystem is on the verge of collapse. things at the moment that we're recording

are just very up in the air in that regard. But John wrote an amazing tweet thread explaining everything that's happened. So before we even just get into how the whole deep pegging incident happened, let's just make sure everyone understands the roles of all the main assets in this ecosystem and all the different entities at play.

And here I'm talking about things like Luna, Terra, UST, etc. So John, why don't you take it away and give us this background for context. Yeah, so I think I'm going to be a little bit of a tradfibro, and I'm going to try to analogize the whole ecosystem to Visa, because that is what Terra was meant to be. Terra is a blockchain, meant to be a stablecoin payments platform. So a replacement for a conventional payments platform like Visa, but decentralized.

And it supported multiple Fiat-backed stablecoins, and it had real-world adoption with partners like Chai, which is essentially Venmo, right? So it's the same way Venmo can work with credit card platforms, UST and Terra is working with CHI. And that's a Korean-based startup, right? Exactly, a Korean-based mobile payment startup. And so, UST, you can think of like Visa coin. It's like a coin that's representative and supposed to be valued at a dollar, and it's the proprietary currency of the Terra ecosystem. So one UST is supposed to be pegged to $1.

Luna, you can kind of think of as like shares in Visa. It can be staked in the ecosystem, and that allows validators to process transactions on the platform. So the same way Visa has payments processors that process the transactions on the network for Visa, Terra and UST also had these validators who have to own shares of Luna, have to own Luna tokens in order to earn processing fees, network transaction fees. Now, there's another wrinkle here, which is that the values of Luna and UST were linked. And the way that that works is essentially, UST can always be redeemed for $1 worth of Luna. So to kind of continue extending the visa analogy, if I had a Visa coin, at any time,

Visa says you can exchange your one Visa coin for $1 worth of Visa shares. And that's kind of how it works. Now, those are kind of like the token primitives that we're talking about and how the network works. but it's worthwhile talking about two more entities here that you might have heard of, Anchor and Luna Foundation Guard. Anchor is a high-yield savings account. And so think if Visa Coin said, hey, you know, if you buy Visa Coin, you can put Visa coin into the high-yield Visa Savings account. And what Anchor did was pay anyone with UST 20% on their UST deposits. So if I have a dollar of UST, I put it into Anchor.

at the end of the year, I'll have $1.20. Luna Foundation Guard, you can think of as some combination of like the Fed and the FDIC in this like extended traditional finance analogy. So some combination of like an insurer and a backstop for Anchor, which is the checking savings account that makes sure that any bank run gets stopped and kind of like a Fed type interest rate policy setter, not only dictating kind of the rate of income. but how many funds were put into anchor to prop it up and to make sure that depositors got their 20%. And also ultimately, kind of a lender or a source of capital of last resort. So in

case something goes wrong with the ecosystem, Luna Foundation Guard, acronym LFG, not a coincidence, would step in and backstop depositors. Okay. So you already described basically kind of like, how it was that Luna would help UST keep its peg. So I'm going to actually just maybe get to what the crux of the issue was here. And I'm going to reference a tweet that you gave or that you wrote, which just a heads up for listeners. It's a little bit vulgar. But you wrote, and just by the way, so the Luna Foundation Guard is the number two in this tweet.

So you wrote, UST is stabilized by, one, contracts, and two, the gigantic gravity well created by the size of Do Kwan's nuts. So why did you describe Luna Foundation Guard that way? Well, Luna Foundation Guard is a small centralized committee of human actors, right? Similarly, like the Fed Board or any other centralized policymaker or the FDIC. And ultimately, it was formed and governed at the discretion of Do Kwan, the founder of Terra. And there was this whole cult of personality, trust, and faith around Doquan, not dissimilar from our, you know, cult of personality, trust, and faith in Fed chairs like Jerome Powell. There's this understanding that when, you know, things hit the fan that the Luna Foundation Garden, Doquan specifically, will do everything it takes, everything that's necessary to raise the funds necessary to make depositors and ecosystem stakeholders whole. And so when I kind of say, you know, the ecosystem was governed by two things. One, there is an algorithmic component that keeps UST pegged to the $1 value.

But in the case, things go horribly, horribly wrong. There is a human committee headed by Doquan, secured by the size of his nut, so to speak, who will step in and ensure that things don't spiral out of control. Now, of course, they did ultimately, and we can talk about how that happened, but that's in theory why the LFG existed. Yeah, so before we actually get there, let's just reference a previous moment in time when something similar to this event actually happened. And you mentioned this in your tweet thread. It involves something called DGEN box. Tell us what happened there.

So this is a whole other stablecoin ecosystem called Abercadabra that was headed by a controversial founder by the name of Danielle Sesta and a talented developer who created, you know, a multi-billion dollar defy ecosystem, Abercadabra was a core component of that ecosystem. And what abracadabra is, is a money market lending protocol that allows you to withdraw stable coin loans backed by essentially interest-bearing assets. And so let's double-click on that.

An interest-bearing asset is like a bond. It's like something that's worth a par value, like a dollar, but you expected to pay you more over time. And so the beauty of this specific, platform was your collateral increases in value over time. Kind of similar, if I were to analogize it again, to some TradFi example, like getting a mortgage on your house. You get a mortgage on your house and you draw a loan that's fixed in value. And the hope is the value of the house goes up over time. And so even though you owe the same amount of money, the value of the

underlying collateral has gone up. Now, what's DGen box? DGN box was a partnership or you could you could argue as a way to take advantage of Anchor's fixed yields. So Anchor was paying everyone 20% per year. Now, the obvious question is, if something's paying you 20% per year and you can borrow money for less than 20% per year, then why can't I borrow money at 5% or 10% and get my 20 and lever up the position, so to speak, and make it pay me something closer to 100%. So that is what DGEN Box was. DGEN box allowed for people to use a token called 8%. AUST. AUST is interest-bearing UST. Remember that UST pays you 20% per year. And so if you have a token that represents your deposit in UST, it will accrue 20% to it every single year. You put that in as collateral

to Abercadabra and you mint Abercadabra's stable coin called MIM. Now you take the MIM, you swap it for Terra's UST, and you repeat the cycle. You deposit the UST. you get a UST, you mintmim, and you trade it for UST. This allowed for something called recursive lending, right? So if you were only able to get 50% leverage on the first trade, you would do it again and then you'd have 75% leverage. Do it again. You'd have 87% leverage, et cetera.

And so that allowed people to recursively create these highly leveraged positions on Anchor Protocol. And that means, of course, the danger with leverage is, let's say you're 10 times levered. You have 10 times more debt and equity in your position. If the asset value falls by 10%, you will be liquidated. And what liquidation means is the money market protocol, avricadabra in this case, is going to take your collateral and sell it on your behalf in order to recover your position and ensure there's no bad debt.

And so this is no different from a foreclosure. What is a foreclosure? You go to the bank and you say, I can't make my payments. And the bank says, well, that's too bad. you owe us a lot of money. Thankfully, I've got all this collateral in the form of your house. So I'm going to go sell your house so that we can recover the bad debt that you took out. So what happened with this recursive lending cycle on abracadabra is someone got spooked, dumped a bunch of UST, U.S.T, depegged.

And because U.S.T. depegged, all the underlying collateral in the DGen box strategy is denominated in U.S.T. Remember that a UST that kind of looks like a UST bond. So once the price of that starts coming down, positions begin getting liquidated. And now the problem with this liquidation loop is when the UST gets liquidated, more UST gets sold. And then the U.S.T price comes down more and it causes even more liquidations. And this is what's called cascading liquidation and it caused a rapid depegging of UST and led to a form of the death spiral that drags Luna down that We'll explore, you know, in this week's case.

All right, so in a moment, we are going to talk about the deep pegging that happened over this past week. But first, a quick word from the sponsors who make this show possible. The scorebed app here with trusted stats and real-time sports news. Yeah, hey, who should I take in the Boston game? Well, statistically speaking. Nah, no more statistically speaking. I want hot takes. I want knee-jerk reactions.

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Back to my conversation with John. So now let's dig into what happens starting last weekend. What happened to kick off this DPEG. So there's been a lot of on-chain analysis. There's this Twitter user named on-chain wizard who had a great summary of it. And this is what the consensus feels like happened, which was an actor who wanted to expose the vulnerability in the terror ecosystem. Now, what makes this all confusing is that they actually did it seemingly through a Bitcoin short. And it's worth explaining why Bitcoin comes into play and why we think UST is dragging down the entire market right now. Just a quick note here that in this next little stretch, we discuss a potential malicious attacker. There are a few assertions here that are not verified, but speculated. First, that there is a malicious attacker.

Second, that this entity opened a Bitcoin short. Third, that it sold Bitcoin to the LFG. And fourth, that it profited from the short. Again, none of this is confirmed. What happened was after this D-Gen box strategy unwound and hurt Luna very badly, Luna, I think intelligently, said, we need to figure out a way that, that there isn't a death spiral. So the death spiral happens when UST de pegs and then people redeem their USD pegs and then the Luna price falls very rapidly. And so they said, what if we actually

traded some of our Luna for hard collateral? So hard collateral meaning something whose value we all recognize. So the Luna Foundation Guard very publicly decided to start buying Bitcoin with their Luna. Now, what the goal of this was is it made it so that a dollar of UST was no longer just backed by $1.1. Luna, it was backed by 20 cents of Bitcoin and 80 cents of Luna. The idea is, instead of selling into Luna and creating a death spiral, the first 20% of depositors would actually sell or redeem into Bitcoin. And they would be much happier getting Bitcoin than Luna, supposedly, and it wouldn't kick off this very, very bad downward. So they bought on the order of $2.6 billion of Bitcoin over a period of time,

over the counter with major market makers. And the goal was to stabilize the ecosystem and give people more confidence that Luna could not depag because it was backed at least partially by hard collateral. So it seems like the trade that this actor made was actually, to short Bitcoin. So they open a gigantic multi-billion dollar short position in Bitcoin. And the genius here is they started opening the short, selling the Bitcoin to Doquan and the LFG. And so the way a short works, of course, is you borrow an asset and then you sell it immediately. And then later, you have to repurchase the asset to repay your loan. So the goal is to sell high first and then buy

low later. So wait, and just to stop you for a second, I just want to make sure. So all of this is verified because the way that I read this, I wasn't completely sure if all of this was verified. Yes. So there is on-chain evidence that this happened. It's not clear that it's a single actor. It could all be disconnected, but there is on-chain evidence that these things were happening. And we can see it all unfolding. That is my understanding. So the short was opened, a multi-billion dollar short was opened, and then it was sold to LFG as they were buying Bitcoin. And so the LFG is accumulating Bitcoin. Meanwhile, this bad actor is selling Bitcoin and accumulating UST. Now, why would you want to accumulate UST? Isn't that supporting the Terra ecosystem?

Well, when you purchase it, when the system is stable, you can kind of buy $1 of UST with $1 USDC. Now, the goal after is to destabilize the system by selling it back in. So to add some more flavor, the LFG, the Luna Foundation Guard, was planning to transition liquidity venues, essentially the place where UST is traded on a platform called Curve. And in order to prepare for a transition from one trading venue to another, they withdrew a bunch of liquidity from the first trading venue. And that's the three pool, three pool UST pool. Now, the liquidity in that pool became a lot lower, meaning there could be much more price

impact for traders trading in that pool. The attacker then took the opportunity to dump a bunch of UST into this curb pool and buy up all the USDC, USDT, and die, which are the other assets. The TLDR of all of that action is to make sure there's no on-chain exit. There's no way for U.S. T holders to get out on an on-chain liquidity venue. Because they did that, U.S.T. D-pegged. And we know when U.S.T. Depegs, things start going poorly. But this is where the Bitcoin comes in. This time when the U.S.T. Depeg, the LFG tried to defend the peg by selling Bitcoin. Now, this is exactly what the attacker would want, because if I'm short Bitcoin, I want everyone else to sell Bitcoin and make the price of Bitcoin go down. Ultimately, what happened

was it caused enough of a panic that people started to swap U.S.T for Luna and dump Luna, depressing both the price of UST and Luna and initiating the death spiral. Meanwhile, the LFG was furiously liquidating their Bitcoin position in order to try to backstop UST, selling Bitcoin and buying UST to try to keep the peg up. And ultimately, obviously the on-chain sluice will have their day trying to figure this out. It looks like the attacker made away with about a billion dollars, but a billion dollars tied to a Bitcoin short, not shorting the Luna ecosystem. And so that's basically how it went down.

Yeah, one other point that you made in your tweet thread was that when the Luna Foundation Guard had been buying their Bitcoin, they'd been dollar cost averaging at a price that's higher than $40,000. And obviously recently, Bitcoin's been more like in the $30,000 range. actually at the moment we're recording and we're in the high 20,000 range. So that meant that when the Luna Foundation Guard was selling its Bitcoin, it was doing so at a loss.

That's correct. So let's just talk about what has happened to the price of UST and Luna this week. Obviously, day-to-day, it was quite the story, but why don't you give a short recap of that for people? Yeah, the long story short was the attack seemed to have happened initiated over the weekend, And it was just enough on Saturday.

And it was enough to spook investors going into Monday. And as recently as over the weekend, you know, Do Kwan, the LFG friendly actors within the Terra ecosystem were still kind of poo-pooing the risk. Because as we've seen before last May and then, you know, this February, there have been many attacks on Luna's Peg. And I think that's why Do Kwan has had such a reputation as a founder because the LFG have successfully defended UST many times before. So it looked like this was just another time to defend UST's peg. Unfortunately, it was bad enough this time. And with that kind of like awful, you know, Bitcoin pressure that UST lost its peg.

And right now it looks like given the panic, wider panic in the market, UST is down to about 50 cents or 60 cents. And Luna's basically at zero dollars. And actually, as of this recording, a couple hours ago, the Luna, the terra chain, the entire blockchain was halted, and they've stopped producing new blocks and processing transactions. So it's been a tough week. Yes, to say the least. Before that, they actually had also published a governance proposal to speed up the rate at which UST was being burned. And then to also increase the pool size to, as they put it, expel the system's bad debt. that what was your take on that proposal?

And then actually just to finish out, the reason that they say they, well, it's not clear. They said that the system was halted. They didn't say who halted it, but they, you know, said that basically the reason they were doing that was because Luna had gotten so cheap

that then it would be very inexpensive to do a governance attack, which, you know, because of this proposal, was an attack vector. So, you know, what's your take? both on the proposal, whether or not that would succeed, and then even now this halting of the blockchain. Yeah, let's talk about both. The first is, I'll use an analogy that I used with Paki McCormick,

who writes Not Boring. I wrote a guest post for him about a cage full of screaming monkeys. So think about this cage being UST. It's a bunch of apes who hold UST, and they're getting 20% per year to hold USDA. Now, all of a sudden, one ape leaves the cage because he's not really confident. He doesn't feel comfortable in the cage.

He leaves. Now, in this analogy, once all the monkeys leave the cage, the system collapses. So let's just hand-wave that part of the analogy. Well, the other monkeys are still feel pretty confident and they're staying in there and getting their 20%. But then a couple more leave. And now panic starts to set in.

The monkeys start to feel like, wait, why are we in here? Maybe we should get out too. Maybe it's not comfortable in here. Maybe I should, maybe 20% is not worth it. And the Luna Foundation had already foreseen this. And they had a policy lever that essentially rate limited the amount of exit. So you can think of this as like a turn style for the cage. Like three monkeys can exit a day.

And once three monkeys exit, the turn style stops. And everyone has to stay in until the next day. Roughly something like that. some kind of gas pedal rate limiter. Well, what happens then? You watch a monkey walk out and you go, hmm, I think I'd like to go out and you go to the turnstile and you push it and it locks in place. And, you know, the Doquan and the LFG say, sorry, those are the only monkeys that can leave. Well, that causes even more panic. That causes even more willingness to leave. Oh my God, I might not be able to get out. And so the cell pressure builds inside the cage, but it can't be released.

That's what we mean by kind of letting out the toxic bad debt. There's lots of monkeys that want to leave. Now the problem is this build pressure has grown inside UST holders. They all want to get out. There's not enough liquidity. There's not enough good collateral to compensate these people. Luna's market cap is now down to $300 million, and it's falling precipitously with every minute

because remember, every U.S.T that's redeemed for Luna pushes the price of Luna down. even further. And so they're in a very difficult situation where the proposal is to say, take away the term style, let as many monkeys out as they as want to get out. But if you do that, Luna for sure just goes to zero dollars immediately because everyone will want to redeem. But if you lock the cage and you keep them in, they scream ever more loudly and even more panic sets in. So it's a nearly impossible situation. And I would say that if I had to predict anything, it feels like the system needs to be reset or rebooted. And Luna holders need to get wiped out to compensate as many UST holders as humanly possible.

And then it might be a full reset. Oh, wow. And then just are you saying that you think that that might actually succeed in helping the system kind of reach some sort of equilibrium, if not like a full? you know, re-pegging back at $1? I have a hard time believing it will reach equilibrium because there is so much asymmetric cell pressure for both assets, UST and Luna right now. And there isn't enough hard collateral. There's zero hard collateral.

It's all gone. Bitcoin has already been sold in a last-ditch attempt to save U.S.T. And so maybe to touch on your point before about the chain stopping, the reason why the chain stops is because the validators have to put, Luna stake in as essentially a collateral or a down payment in order to have the right to operate the system. Now, if they don't operate the system effectively, just like if a visa process or process of fake or fraudulent transaction, their deposit, their stake gets slashed. Now, if the stake is worth close to zero now, it doesn't really matter if I get slashed.

So there's very little disincentive for me not to put in bad or fraudulent transactions. And that's why they had to halt the chain because otherwise anyone could go in, be a validator, put up a marginal amount of dollars to qualify, and then be able to spam the network, put in false transactions, be fraudulent. And so they had to do it for the security of the network. Okay. And so the way that you've been talking, it sounds like you think that this was a deliberate attack. And I just want to verify. So have you seen the on-chain? evidence about the Bitcoin shorts? I am relying on ether scan and people, things that people are quoting. It's not clear whether this is, you know, how deep the level of coordination is. But it looks like there is on-chain evidence of roughly this story, roughly this narrative.

And so one other piece of that is that people have been saying that this was timed to when, there was, I guess, liquidity taken out of, what was it, Luna or Bitcoin or something, in order to kind of seed the four pool that they were creating in order to basically shore up the system? Can you talk a little bit about that? Yes, correct. And so this is something that the Luna Foundation Guard had message to people, hey, we're withdrawing liquidity from our primary liquidity venue in preparation for transatlantic for transitioning.

This was public. It was, you know, widely known that this was going to happen. And so it was, in either case, it would have been known because it was on chain, but it was published widely. And so it might have been a gift to an adversarial actor who said, you know, they had already anticipated this liquidity to be a vulnerability, a weakness as they were transitioning. And executing that timing does not seem. to be a coincidence. Now, the runaway effects, Luna getting pushed close to zero, UST, deeply

depegging, you know, widespread market panic, contagion into the Bitcoin market and the crypto markets as a whole, I'm not certain that an actor could have foreseen how far it could have gone because these recursive runaway effects are hard to predict. But it does seem likely that this was an adversarial actor because of the amount of liquidity and the amount of on action that happened and that had to have happened to destabilize UST to this degree. Okay. Just one comment I do want to add here, which is that I did reach out to Kevin Joe again of Galois Capital.

And I asked him what he thought of that theory. And he did say that, you know, there is a possibility also that it was not a deliberate attack that somebody just noticed that the liquidity was low and panicked and sold. and that that could have also set this off, that it's not necessarily, you know, we can't know, obviously, because we don't know who did this and we don't know what they were thinking. But that was another theory that he had that would be, you know, against kind of what a lot of the speculation, the direction that a lot of speculation is going. For sure.

I think ultimately we can't point fingers at any one entity or even say that it was 100% deliberate. But I think we can say for sure that the system experienced a moment. of fragility that whether intentional or not was exploited. All right. And then the last question I have for you is that now I've seen so much chatter about staked Eath and bonded Eath being in this system. And I don't know. Can you just explain what that is and what the risks are then to, I guess, Ethereum? I don't think that there are any risks to Ethereum. I believe the connection is Lido published something today telling their liquid stakers. So Lido provides a service where recall that,

you know, you could have staked, you could have staked Luna in order to earn staking yields, essentially providing proof of stake to the network to validate the system's integrity. They provide that service to people. So instead of you having a set up the whole infrastructure, you give them Luna, they stake it on your behalf and then they charge you a staking fee and they returned you a liquid staking token. Lido had announced to their users that they should withdraw from the Terra ecosystem because the chain was becoming unsecure, because the price of Luna was falling and they could no longer guarantee the integrity of the network, which was ultimately borne out when the system halted. And so I can't say for certain, but in times of panic, people

make these kind of associations. And they see that Lido is questioning the integrity of Luna, and perhaps people are wondering, should I be questioning the integrity of Lido? And if I'm questioning the integrity of Lido, should I be questioning the integrity of all the staking protocol? Should I be questioning the integrity of liquid-staked Eath? Should I be questioning the integrity of Staked Eith? Should I be, you know, questioning Ethereum itself? Okay, but you don't think that there's any risk? I do not believe there's a direct contagion to the Ether token.

This is very much a defy or I would say kind of app-layer consideration in terms of, of like the pricing that's going on and UST and these curve pools. There's obviously widespread market panic and contagion right now. And as we know, all of these things are highly correlated and interlinked. But I don't believe there is a systemic risk to Ethereum at all. All right. So if I were to kind of force you to place odds on what happens to Tara from here on now, what would you say?

I would say that it makes a lot of sense to me that they try to make as many UST holders whole as possible, given however much Luna is liquidity is left to compensate them. And if I were to guess, that means Luna equity holders, Luna token holders are going to get completely wiped out. And the system can be reconstructed with fresh capital. I mean, the contracts are still the contracts. The system can be rebooted. but perhaps under a new brand, perhaps under a new founder, perhaps with new investors. So if I were to guess, you know, some proportion of USC holders will be made whole,

zero Luna holders will be made whole, and then we'll move on, I guess. Wow. I'm a little bit incredulous that you're not saying this is the end of the algorithmic stable coin. And are you saying that you feel that if they'd been able to carry out their full plan with floor pool and everything else that then it might have worked? Or what's your, what are your, or you're just saying that this is not, this is no, there's no verdict here on algorithmic stable coins or, yeah, what, why are you saying this? I'm really surprised. Yeah, I'll tell you why.

Because the algorithmic stable coin is a holy grail. If you think about what an under collateralized algorithmic stable coin is, it is printing money out of thin air. there will always be capital chasing that dream, in my opinion. We have seen this over and over again with UST, with Iron Titan, with Faye, which launched as an under-collateralized protocol, but is now over-collateralized. And there are over-collateralized stablecoin protocols and one-to-one collateralized centralized stablecoins that just work. USDC, die, they kind of just work. But they're not very exciting.

I'll tell you why they're not very exciting. You know, in order to mint a die, you need to put $2 of collateral in to get $1 of die out. In order to mint a UST as of a couple weeks ago, you needed to put $0.20 of Bitcoin in. So $2 to $0.20. It's 10 times more capital efficient to have U.S.T. Now, if I'm a venture capitalist or any capital provider, I'm looking at this and I'm saying, I can create a monetary system that's 10 times more.

more capital efficient than the alternative. I'm willing to chase that dream over and over and over again. Collectively, I think, as an ecosystem, we've shown that we're willing to chase that dream over and over again and risk systemic toxicity in defy markets. And I totally understand why. Because if you can get to a place where you have an alternative to the U.S. dollar, which is backed by nothing but faith alone, I mean, truly, have you not created something of immense value? by putting very little money in. Wow. Okay.

Okay. I know a lot of regulators listen to my show. So if you're a regulator and you want to opine on what's been said on this show, please reach out to me because I'm really,

really, really curious. But anyway, this has been so incredibly fascinating. And thank you so much for your very clear and detailed explanations. I really appreciate it. It's been wonderful,

having you on Unchained. Of course, Laura. Thanks for having me. Don't forget, next time is the weekly news recap. Stick around for this week in crypto after this short break. Thanks for tuning in to this week's news recap. Bitcoin below 26K after inflation report. In addition to the Luna chaos, crypto was also hit by an unexpectedly high inflation number, causing prices to stumble. On Wednesday, the Bureau of Labor Statistics reported that the Consumer Price Index was up 8.3% in the 12 months ending in April. In the days after the CPI numbers came out, Bitcoin and ETH hit a low of $25,200 and $1,748, respectively, though it is not certain that the inflation report caused the dip.

In addition to Bitcoin and Eith, struggling in the wake of high inflation and the Terra Bank run, Tether, or USDT, the $150 billion stablecoin, was briefly knocked off its peg on Thursday and fell to 98 cents. Bitcoin, Eth, and USDT were certainly not the only crypto assets to be affected by the Terra and CPI numbers. In total, over $440 billion in value was wiped out in terms of market capitalization from the crypto industry, data from coin market cap shows. Furthermore, nearly $4 billion in short and long positions were like, equidated this week, reports coin glass. NFT prices went down heavily as well. The floor price of Borneo Club has gone down 25% over this week, and Cryptopunk's floor price suffered a drawdown

of 15%. Considering that these NFTs are priced in ETH and the ETH price plummeted in relation to USD, the loss is much higher than 25% and 15%. Rao Powell, CEO of Global Macro Investor, says a recession is coming and that crypto is in full panic mode. However, he compared the fear people are feeling now with the sentiment of March 2020, which led to a major bull run. He pointed out that tough times like these are a time to buy. On the other hand, Peter Schiff, the famously anti-crypto economist, unsurprisingly recommends that people sell their Bitcoin. Selling now is not panicking. It's smart to cut and run, he said on Twitter. Instagram introduces NFTs. This week, Instagram launched its NFT pilot, in which select

you as creators and collectors will be able to share NFTs that they have created. created or bought. Disclosure, I write a bulletin newsletter for its parent company, Meta. According to Instagram head Adam Mosseri, enabling NFTs offers new ways for creators to earn money from their content. Through NFTs, artists, musicians, and creators will be able to tokenize their work and verify ownership of it. I want to acknowledge upfront that NFTs and blockchain technologies are all about distributing trust and distributing power, Masseri said in his announcement. But Instagram is fundamentally a centralized platform, so there's a attention there. Instagram NFTs will first support Ethereum and Polygon. Executives hinted that

Flo and Solano will be coming soon. Ryan Watts, CEO of Polygon Studios, said on Twitter that Facebook chose Polygon due to Polygons carbon neutral footprint, its scalability and the developer ecosystem. Meta CEO Mark Zuckerberg commented, meta plans to bring NFTs to apps in our family. Similar functionality is coming to Facebook soon, along with augmented realities of NFTs on Instagram stories via Spark AR so you can place digital art into physical spaces. Micro Strategies Bitcoin-backed loans won't be margin-called anytime soon. Michael Saylor, founder and CEO of Microstrategie, the publicly traded software firm known for its large amount of Bitcoin holdings, shed light on the company's obligations concerning its

Bitcoin-backed loans. He tweeted, Micro Strategy has a $205 million term loan and needs to maintain $410 million as collateral, meaning that the liquidation price of the company, company's Bitcoin loans is $3,562. However, even if BTC reaches that price, Salar assured the space that he is ready to put up other collateral, such as company stock or assets, so that he doesn't have to sell BTC. Micro Strategy holds 129, 128 Bitcoin, which at current prices is valued at more than $3 billion. The firm's average buy price for its Bitcoin holdings is $30,700. even though it is clear that it doesn't plan to sell, considering Bitcoin's current price, the firm has an unrealized loss of roughly $330 million on its investment.

Treasury Secretary Jenna Yellen asked for new stable coin legislation by the end of this year on the same day TerraUSD or USDT started deep hegging. She even referred to the UST stumble in her speech. I think that UST simply illustrates that this is a rapidly growing product and that there are risks to financial stability. Yelan said at a hearing on Tuesday before the Senate banking committee, she also added, we need a coherent federal framework. When asked by Pennsylvania Senator Pat Toomey, if the goal was to get the legislation done during 2022, Ms. Yelan responded that she thinks it would be highly appropriate.

In addition, in her written testimony, Yelan said that she has been working on identifying the risks that digital assets impose on financial stability. However, after being questioned by Representative Jim Himes, in a hearing before the House Financial Services Committee, Yellen recognized that the stable coin market has not yet reached a size big enough to impose a major risk on the financial system. El Salvador bought the dip. On Monday, El Salvador's president, Naim Buckelly, tweeted that his country just bought the dip. According to Buckelly, the country purchased 500 coins at an average USD price of $30,744.

Bloomberg reports the government has purchased 2,300. 101 bitcoins since September, with Monday's acquisition being the largest since it started buying. The cost of all these purchases combined is approximately $103 million. At the current price, the Bitcoin held by El Salvador is now worth $70 million, which translates to a 32% unrealized lost so far. Bucheli has earned himself a lot of attention since he decided to adopt Bitcoin as legal tender in his country last September. Plenty of skeptics think his decision was not wise. For example, the International Monetary Fund has been at Buceli's back to reverse his decision. In January, an IMF report urged authorities to remove Bitcoin status as legal money.

IMF directors stressed that there are large risks associated with the use of Bitcoin on financial stability, financial integrity, and consumer protection, as well as the associated fiscal contingent liabilities. Coinbase's earnings report reveals a new risk disclosure. Coinbase, the largest cryptocurrency exchange in the United States by trading volume, revealed that user crypto assets might remain as the company's property in the event the exchange files for bankruptcy. This disclosure was included in its first quarter earnings report as one of the risk factors of using the platform. Because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankrupt.

proceedings, and such customers could be treated as our general unsecured creditors, the exchange road. However, according to CEO Brian Armstrong, user funds are not at risk at this very moment. The funds are safe at Coinbase, just as they've always been, he tweeted. And he added, we believe our prime and custody customers have strong legal protections in their terms of service that protects their assets even in a Black Swan event like this. At the end of his statement, he reminded people about Coinbase wallet. the usage of which would not run that risk. We offer a self-custodial wallet solution for those who prefer to store their own crypto.

As for the rest of Coinbase's earnings report, it appeared to be a tough Q1. Coinbase reported a loss of $430 million and a 90% drop in monthly users that had a very negative effect on the company's stock, coin. By Thursday, it was trading at around $56, a 50% drawdown in less than a week. Google is going Web 3. According to CNBC, Google is putting together a Web3 team to build services for developers running blockchain applications. It appears that Google intends to not fall behind on the Web3 curve and will try to capitalize on the searching popularity of cryptocurrencies and

blockchain projects. Last Friday, Google Cloud Vice President Amit Zaveri told employees in an email, while the world is still in its early embrace of Web3, it is a market that is already demonstrating tremendous potential with many customers asking us to increase our support for Web3 and crypto-related technologies. Instead of building projects of their own, it seems that Google's strategy to enter the crypto space is to support developers by offering them tools to build their own applications and projects. James Tromons, a former Citigroup executive, who arrived at Google in 2019, will lead the product and engineering group and report to Zavory. Google joins Meta, Twitter, Nike and other corporations in an attempt to capitalize on the Web 3 opportunity.

Time for fun bits. Madonna launches an Ft collection with Beeple. Madonna, in collaboration with digital artist Beeple, announced the release of her first NFT collection. The three video NFT features a CGI Madonna giving birth, which is the reason they called it Mother of Creation. She is giving birth to NFTs. We set out to create something that is absolutely and utterly connected to the idea of creation, said Madonna in a video uploaded on Twitter. I am doing what women have been doing since the beginning of time, she added. The auction for the Mother of Creation Triptych went live on Wednesday and will end on Friday. The proceeds will go to three organizations, National bailout, V-Day, and Voices of Children. The collection

has three videos, which are called Mother of Technology, Mother of Evolution, and Mother of Nature. As of Thursday, they are priced at 14th, or around $26,000, 10th, or $19,000, 15th, or $29,000, respectively. Thanks so much for joining us today to learn more about John and the Tara debacle. Check out the show notes for this episode. Don't forget. If you're interested in hearing more about what happened with Tara this week and where things can go from here, tune in to Unchained podcast on YouTube at 11.30 a.m. Eastern Time on Friday to hear a.m. Eastern Time on Friday to hear a live stream of my interview with Nick Carter, Eric Wall, and Eric Voorhees on UST. Unchained is produced by me, Laura Shin, without from Anthony Yoon, Daniel Ness, Mark Murdoch,

Shishonk, and CLK transcription. Thanks for listening.