Unchained - The Chopping Block: Kevin Zhou on Why He Knew Terra Would Crash - Ep.353

Episode Date: May 19, 2022

Welcome to The Chopping Block! Crypto insiders Haseeb Qureshi, Tom Schmidt, and Tarun Chitra chop it up about the latest news in the digital asset industry. On this episode, Kevin Zhou, the CEO of Galois Capital and long-time critic of UST, also joined the conversation. Show topics: the UST depeg and Terra collapse  Kevin on what it was like being one of the earliest naysayers of LUNA why Kevin believes that UST initially depegged and became a “fear cascade” how Galois Capital traded the UST depeg, from shorting LUNA to keeping their UST in Anchor until the last moment why Kevin was disappointed in the lack of transparency in how Luna Foundation Guard attempted to defend the UST peg the implications of UST’s collapse across the crypto and traditional financial markets  whether Terra’s decline will lead to more regulation in the crypto industry why Anchor was the “cancer” of the Terra system  why VCs are reticent to say something bad about protocols they don’t believe in why grifting is so much more prevalent in crypto  what Jump Trading had to do with the Terra collapse the difference between the way trading and VC firms interact with crypto the issues with the Terra 2 proposal without UST which chains are receiving the people leaving the Terra ecosystem  why Haseeb compared the collapse of UST to the collapse of the Soviet Union who Kevin believes should be reimbursed in the aftermath of the UST collapse how political considerations might affect how Terra continues to develop going forward why Terra NFTs were skyrocketing during the Terra meltdown whether crypto is in a bear or bull market Hosts   Haseeb Qureshi, managing partner at Dragonfly Capital https://twitter.com/hosseeb Tom Schmidt, general partner at Dragonfly Capital https://twitter.com/tomhschmidt Tarun Chitra, managing partner at Robot Ventures https://twitter.com/tarunchitra  Robert Leshner, founder of Compound  https://twitter.com/rleshner    Guest Kevin Zhou, CEO of Galois Capital https://www.linkedin.com/in/kevin-zhou-82938324/    Previous Unchained Coverage   Nic Carter, Erik Voorhees, and Eric Wall on the collapse of UST https://unchainedpodcast.com/why-terra-collapsed-and-whether-an-algo-stablecoin-can-ever-succeed/  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-depegged-from-the-dollar-and-why-ust-might-too/  Jon Wu on how Terra got depegged: https://unchainedpodcast.com/did-someone-deliberately-attack-terra-luna-to-kick-off-a-death-spiral/ Do Kwon on The Chopping Block https://www.youtube.com/watch?v=0xl8u7-KVwM    Haseeb’s summary of the Terra collapse: https://medium.com/dragonfly-research/the-reign-of-terra-the-rise-and-fall-of-ust-208dabbc8e6e   Jon Wu’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    Terra Background Info  Twitter: https://twitter.com/terra_money  UST Mechanics: https://angelprotocol.medium.com/how-does-ust-work-ec7b2f6e2c2c UST Bank Run: https://www.wsj.com/articles/crash-of-terrausd-shakes-crypto-there-was-a-run-on-the-bank-11652371839 Speculation of a deliberate attack: https://onchainwizard.substack.com/p/how-to-make-800m-in-crypto-soros?s=r Do Kwon’s Proposed Terra’s Revival: https://www.coindesk.com/tech/2022/05/13/do-kwon-proposes-restart-of-terra-blockchain-as-ust-luna-plummet/ Anchor: https://twitter.com/anchor_protocol  Terra 2.0: https://unchainedpodcast.com/do-kwon-has-a-new-plan-again/  Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, everybody. Welcome to the chopping block. Every couple weeks, the usually four, but currently three of us get together and give the industry insider's perspective on the crypto topics of the day. So quick intros. First up, we got Tom, the DeFi Maven and Master of Memes. Next, we've got Tarun, the Gigabrain, and Grand Puba. There's me, Haseeb. I'm head, Hype Man at Dragonfly, and special guest. Today we have joining us, Kevin Joe, King of the Shorts, and co-founder of Galawa Capital. Welcome, Kevin. Glad to have you. Yeah, glad to be here. And I'm actually pretty happy that you got me a nickname, too. You know, I feel like this is like the crypto version of like the All In podcast or something. You know, everybody got a nickname, you know. It's great. We're aiming for that. We're aiming for the Al-N podcast to be the Normie version of The Chopin'Bel.

That's good. I mean, we don't have the crazy rhymes that have been happening on the All-In podcast. I randomly listen to seriously. And they have these like haikus now for everyone. They went from just like nickname to like these like long haikus. How does Jason come up? with all this stuff. I mean, his staff is hard at work or something, huh? His staff is working hard.

He must just be hiring, like, people from, like, comedy shows. I know what our staff is doing. They should be, they should be writing intros for me. Why aren't you at the all-in summit? Yeah, I thought you were going to be taking notes and catching up with Jason and asking for feedback on the show, but you're missing out. I, I've been too busy with

permissionless, man. I couldn't split my time and attention. Kevin, just as if there's ever a chopping block summit, of course, you know, all guests have. Oh, that's wonderful. I'll definitely be that for sure. I'm speaking on behalf of Haseeb who probably never thought about this concept. Well, obviously, Tarun is going to be organizing it. So I appreciate you being the one to bring it up. So just quick caveat. The four of us, well, the three of us are

early stage investors in crypto. Kevin is not quite as early as we are. He tends to do more of the public market stuff. But I want to caveat that nothing we say here is investment advice or legal advice or even life advice. So holy shit, Kevin, you are now the, the soothsayer of crypto. I saw that your story on Bloomberg, you're covered in odd lots, and your story on Bloomberg, I saw as of this morning,

was the most viewed story on Bloomberg, the man who called the TerraUSD downfall or something like that. Yeah, no, I definitely appreciated the time that they gave me on the podcast, but I mean, you know, those are some big shoes to fill. I mean, it's a bit sensationalist, so maybe we can get into all that. But, you know, it's been good.

Speaking of sensational, yeah. Okay. Well, I think you've managed to do a good job of building these sensationalism yourself. I have a theory that you were featured in all the media because you're the only non-Anon who was like really loud about them. Yeah, I think that's the case. It'd be hard to have like the picture of like some anime picture, you know, just a V-tuber model of Bloomberg, you know, like the, you know, the folks on Wall Street, they're not going to make heads or tails of that. You know, it's going to be too confusing for them. Yeah.

Yeah. So for those who have been asleep at the wheel for the last couple of weeks, we should probably give a recap of what happened. The big news of the week has been the collapse of Terra. Terra, for those who are unaware, it's a layer one blockchain built on Cosmos. And the core asset of Terra is a stable coin called UST. And essentially on, I think it was May 9th over the weekend and kind of going into Monday, the Terra UST stable coins peg broke.

The market was more broadly declining due to some, macro events that were going on, fear about interest rates. And as the price of Terra started declining, price of Luna, which is the kind of core layer one asset that backs UST, started declining in price, the USD peg broke. And one thing led to another, there was basically what we call a death spiral, meaning that as the peg lowered, the confidence in the system lowered even further. There was more and more algorithmic minting of Luna,

and expansion and supply of Luna, which resulted eventually, in Luna hyperinflation. Over the period of that time, Luna ended up expanding its supply by 18,000 times. It basically underwent a Zimbabwe-style hyperinflation event. UST ended up cratering

to something on like 20 cents or less on the peg. I don't know what it's trading at now. And we saw within the course of a week, the first time I've ever seen this in crypto, an asset dropped 100.0% in terms of the unit price on coin market cap. Literally, the price had gotten so low

that from the high of $60 before the unwind, Terra ended up cratering to fractions of a penny such that it had to get delisted from all of the major exchanges. Nobody, none of the major exchanges anymore trade Terra.

Terra is now considering rebooting the blockchain, finding some way to create what they call, it's now being called Terra 2 or some new version of Terra, such that the old version could be called Terra Classic,

and there'll be a new version. and Doquan has claimed that this is going to be a way to revive the community, even if the stable coin itself is no longer viable, the community that's been building on Luna can still be salvaged. So it's been a catastrophic event for crypto. It caused a broader decline in crypto prices and is one of the most catastrophic events that we have seen in a single crypto asset since maybe BitConnect,

which was a Ponzi scheme that unwound in 2018. There's been a lot said already about, this. But obviously, Kevin, part of the reason why we're bringing you on is that you were one of the early folks' warning about the insolvency of UST and that the perception at the time, so just to give people a sense of what was going on at that time, Tara, before going into all this going into its calamitous collapse, before that point, UST was collateralized by Luna. And Luna, the market of Luna was at the height about $30 billion. At the time of the market downturn, it was maybe on the order about $20 billion.

billion. And the total supply of UST was, you know, on the order of about, you know, I think 14 billion, total UST. And so the perception was, and the other thing is that, or so Terraform Labs, spun up a foundation called the Luna Foundation Guard, which was tasked with buying up a bunch of Bitcoin to use it to defend the peg. So there were billions of dollars, about three billion dollars worth of Bitcoin at that time, that was supposed to be earmarked to defend the peg. The perception from the terror community was that this thing was ironclad. And you under your firm's name, Galois Capital,

have been basically the gadfly for crypto Twitter, one of a few gadflies, who are out there saying this thing is already insolvent. This thing, in the moment of a downturn, this thing is going to totally collapse.

So I'd love to hear from you. Give us your perception of this story. Like the preamble, what it was like for you seeing this thing trade down, and your reflections on the whole event. Yeah, definitely. So, you know, I think, you know, when, I guess to start, we first came across Tara in the, like, the very early days when they were just like, you know, raising seed funding and, you know, series A and they were just building the project. And, you know, I thought it was just going to be one of these, you know, staple coins that, you know, probably didn't work, but probably would have a quick death and, you know, peter out at some point. And then, you know, sometime around really late last year, you know, December and then early Jan of this year, you know, just kind of dawn on me that, wait a second.

And like, this thing's like a top 10 coin. Like, why did this thing not already unwind? Right? So then I started looking more heavily into it along with the team here, you know, at Gailwa. And, you know, I thought, you know, maybe there was something that we overlooked. Maybe they made some changes to it. Maybe it actually does work, right? So, you know, we looked into the mechanics.

And it was basically exactly as we thought it was. And, you know, I just didn't think that it was solvent. And I thought that, you know, it's crazy that I'd got to this kind of size because, you know, this was kind of on the back of the collapse of Wonderland. time, right, because of the whole seafood drama. And that already had some minor contagion. I mean, the space generally survived out of it. It wasn't that bad. But, you know, at the end of the day, there was some, you know, contagion over to, like, spell and mim and even a tiny bit of contagion over to, like, anchor UST and Luna, right? And then I looked at this thing and I thought, well,

this thing is like, you know, an ordered magnitude bigger, maybe even bigger than that. And, you know, this could cause some serious damage. So I went on Twitter. I started trying to sound the alarm, met with a lot of negativity, you know, all these lunatics who were in support of it. You know, what's funny, I was trying to help them. I was trying to tell them, you know, beware, and then they're just ragging on me constantly. To be clear, lunatic is the moniker of people in the lunar community.

Yeah, exactly. And I got to give them credit for. I think it's great marketing. Because if you give a name to your army, right, which I think maybe they learned from the K-pop groups, right? So, you know, you got your, you got your BTS army, you got your blinks, right? And now, you know, it's bleeding over into crypto. You get your Link Marines, XRP Army, and the Lunatics.

I think it's really smart for them to have done that. But that being said, you know, they do start to display some kind of mob and cult-like behavior. And I'm basically just getting, you know, just completely yelled at and, you know, flamed on Twitter. But, you know, fortunately for me, I come from a competitive gaming background. So I've literally been called a shithead probably tens of thousands, maybe hundreds of thousands of times. So it doesn't really affect me. So, you know, I just kept sounding the alarm, met with a lot of resistance. But I think, you know, over time, there were a few minds that were changed.

Maybe not too many, but there were a few. And there were also others, you know, on Twitter that were also sounding the alarm. And I think over time, I think our faction grew. And I think everybody, when they really carefully studied the mechanics, I think they came to the same conclusions that we did. And I think you could arrive at that conclusion from many different ways. You can, you know, look at the actual mechanics. You can reason by, you know, deduction, right? You can look at history.

I mean, there's so many ways to kind of arrive at the same. same result. And I think that's kind of what happened. So that finally, when there was this kind of situation where there was, you know, this exogenous shock of the equity markets just tanking and, you know, crypto being correlated with equities, then everybody was kind of trigger ready, I think, to make that move. And, you know, I think some of it, I mean, maybe the trigger itself, you know, this selling of 85 million into three pool UST, maybe that might have even been an accident, right? Maybe it was just that everybody was already kind of skittish. And then somebody didn't know that the liquidity migration was going to happen between

three pool and four pool. So, you know, they saw liquidity evaporate. And they were like, they don't know what's going on. So like, oh, let's just get rid of it. And then that just caused the stampede. You know, I think there's a lot of conspiracy theories out there right now about like Black Rock or Citadel or this was an attack. I mean, I don't know if it's an attack.

It could have just been a mistake or could have been an accident. For whatever reason, there was some initial trigger of fear. And then there was like a fear cascade. and sort of like this, you know, the fear just kind of spread out, and then it just, it was all over for them, basically. Yeah, it's been disappointing to see, I mean, not surprising, but disappointing to see the amount of conspiratorial thinking

that's gone into trying to explain what happened with UST. Right. At the end of the day, we know what happened, which is exactly what you described, which is that people got scared in a reflexive death loop started. And, you know, what is the particular catalyst? I mean, you know, we were talking about this internally,

that like, it doesn't really matter who started. It doesn't matter who shot the first bullet. You know, what matters is that this thing was going to break out into violence. And the responsibility of making sure that that doesn't happen falls to the protocol. And ultimately, whoever it was, and, you know, maybe it was a group of people, maybe it was a fund, maybe it wasn't. It was almost certainly not Black Rock or Citadel. I mean, that's ridiculous. Like, it's never going to be like an obvious villain that you can name and identify.

And the whole point of crypto is it doesn't matter who it was. The whole point of crypto is that we should admire whoever had the insight to realize that this thing was ready to blow and they were the ones who got ahead of it, right? The whole point of making this stuff, open source and easy to understand is that if something is not secure, it's going to be broken. That is the whole point of crypto. That is the argument that we are making of why we're creating a more robust system. And so then turn around and say, oh, it was somebody evil must have done this.

And it was one of these evil trap-fi firms that didn't want us to be having any fun. I just think is against the whole spirit of crypto. Yeah. It's a lot of the same logic people also use when they try to say, oh, we should ban flash loans or something like that. They're used in all these different attacks. I mean, this is literally like the, I think Bloomberg had an article or the journal had an article out this week, talking about how dangerous flash loans are. And it's like, no, they're just a tool that is used to sort of accelerate, you know, the inevitable.

Otherwise, only wealthy people are able to, like, perform these kinds of attacks. It is similar argument for, you know, Tara and sort of what happened here. Well, it's the censorious instinct, right? Like, whenever markets go down, there are calls to ban short selling. You know, it doesn't matter where you are. Even in the U.S. people have banned short selling. Kevin, I mean, part of what you're well known for is having called it out, but I presume also having traded on the downfall of Luna. I don't know how much you're comfortable sharing, but I'd love to know how you played it.

Yeah, so, you know, I think at this point what I can say, because I don't want to give out the exact positions until all of this is over, and we still do have some positions open. But what I will say is that we were short pretty early on, but maybe this was May 6th. I would say. And this is also right after we pulled all of our UST from anchor. So we were basically farming it down to the last day. And then when it, when it depeg to 0.997, we paid up 30 bips,

got out of our UST position, and then just started shorting Luna. Now, that being said, in between, there was a lot of activity. And there were even moments that we were long on local bottoms. And overall,

we actually played that pretty well, though I'd like to joke with the traders, that what's funny is that, because we, you know, we did some of these swing trades, you know, just based on sort of like the flows and the short-term supply and demand imbalances, if we had just held the thing from where we started to where we ended, we probably would have made about the same. So it wasn't that we did worse, but we just caused extra work for ourselves to, like, sometimes miss out on parts of the down move and then sometimes just actually, you know, get randomly some parts of the up move. Now, that being said, like most of it was on the short side. And we actually did play both Luna and UST. And there were also some other structural plays that are related tangentially, which were also very lucrative too. I'm curious on the UST part on how you played that, because I think that was one of the common refrains you hear from traders in the market, which is there isn't actually a way to trade, you know, the UST peg and to sort of, you know, short UST effectively.

I actually like asked O about this when he came on, which I'm like, why aren't you taking a bet against UST? And it's like, oh, there's no way to hedge it. I'm curious if you, if you don't mind sharing how you guys thought about playing UST, or is it just sort of this anchor trade that you mentioned? Yeah, I mean, there are actually ways to trade U.S.T. I mean, there are certain books out there with a few exchanges where you can trade U.S.T against other stable coins or, you know, against U.S.D itself. So you could short it.

What I would say is that when the depegging is first happening, it doesn't really make sense to short U.S.T because they still have a lot of firepower on the reserve that they're going to burn through to defend the peg. So you really only want to put on the U.S.T. short after two things. The first is that they run out of money to defend it, or they just actually give up and want to save the rest of it. That's a little bit harder to tell. And then the second thing is that you have to pay attention to the redemption and mint mechanism and how much of that, how much capacity that has, right? Initially, if it's, you know, 250 mil per day, then as long as the outflows of U.S.T. to Luna is less than that, then U.S.T. should not depeg.

And U.S.T would only depeg if it exceeds that kind of demand for swapping between the two. Now, later on, they started releasing this gate, right? And they said, okay, now we can do a million units of Luna per minute. And then eventually they released that entirely and just let it go into hyper-hyperinflation. There was no gate whatsoever. All of those things matter. And, you know, one of the things that I felt like we were a bit disadvantaged on, you know, even though we traded this well, is that we don't know when these kinds of decisions will be made, right? It's all up to TFL and LFG and they're inside a war room to decide, oh, now we're going to change, you know, the limits on the redemption, mechanism, well, that completely affects whether or not you actually want to short Luna or UST. Now, I don't want to also spin any conspiracy theories, but what I would say is that there's at least a possibility that there were times where they were short their own asset, either UST or on the Luna side based on the decisions that they were going to make. Like if they knew that they were going to release the gate, then Luna is definitely going to spiral and UST is at least going to be somewhat preserved from all the losses going to

the hyperinflation of Luna, right? So in that sense, they could have just long UST and shorted Luna and just made that kind of relative value play right before making the announcement, make the announcement, you know, everything rips or drops and then just close out, right? So I think there was a lot of information asymmetry, not just for us that, you know, we were disadvantaged a bit, but on top of that to the general public, right? Like whoever was not an investor who was not part of the inside team didn't know when all of these arbitrary decisions would be made. Like we didn't, we didn't know when they were going to start defending and when they were going to stop defending with the reserve. either, right? And you can see that in within, you know, sort of on the price chart, you can see where they actually spent money to defend and where they did it. You know, you can see that on the first DPEG, okay, you know, they put it back to PEG or, you know, very close to it, and then

they let it drop, and then they start defending again, you know, all this kind of stop and go execution for the selling of Bitcoin and the reserves to defend the peg. I mean, whoever had inside knowledge of when that was going to happen very easily could have gone out of their own UST position. They just need to know when that's going to happen, dump the UST, and when it's not happening, you know, they could even buy a UST. They could even go long UST to dump it later once the peg defense comes back. So I just feel like this whole thing was just not very transparent. And I think at the end of the day, it's the insiders that benefited and it's the general public. And I guess people on the other side like me that were a disadvantage.

So I've heard from someone who's very close to LFG that basically it was all dough, pulling the levers. that the folks who were around him are also in the dark. Nobody actually really knew what was happening that day. Again, I don't have a ton of details. And right now there's a lot of drama and fingers being pointed about how LFG actually spent the funds and whether or not the funds were actually used to how much of the funds were used to defend the peg in the market versus, as you sort of insinuated, bailing out insiders who had, you know, their UST impaired. But we don't know. And it seems like a clear picture hasn't really emerged yet. But it is clear that LFG no longer has the Bitcoin. They now have, I think, about 70 million out of the three

billion that they previously had on hand. They definitely don't have it anymore, but how it was spent, there are a lot of questions being asked now. I'm pretty sure that they did spend it. You know, I think they did, you know, what they're supposed to do with the money. It's just that the timing was just very arbitrary. So, you know, whoever the market maker was that they did, you know, these two market makers that they did this deal with, and Doe himself had access to privilege information. Who's to say the market maker? You know, I wouldn't say that they just, you know, OTCED it to themselves, you know, to get out of UST at the peg. I mean, I don't think they would be that But they could still just put it through, push through the books, right? And then, you know,

you just know that in this minute, there's just going to be a giant bid wall. And then you just dump your UST into it. You pay up a little bit on the exchange side, but you mask a little bit of that activity. And it's a little bit of like self-trading right there, right? So like that I wouldn't preclude. Now, I don't want to accuse them of doing something that I don't have evidence of. But I would like to see the war, the war room chat logs. I would like to see, you know, some of these things. And now, you know, we don't have a right to that, you know, but at the same time, I think for, you know, for the sake of the space, I think, and for the sake of their reputation, I think it would be nice for them to voluntarily give this up and be willing to show the public that what had happened.

Yeah, so speaking of the space and of reputations, so I also, I don't want this conversation to be too reductive, although it's fascinating the way that you, the play by play of exactly what happened that day. I have to ask Kevin one question. What's the highest funding rate you paid? So I'll say that that would kind of give away. whether or not we were playing during the hyperinflation period. And we were, but we were also very cognizant of the funding rate. And I think at some point it hit like quadruple or quintuple digits. So it would be very expensive.

Now, that being said, the hyperinflation rate itself, I think at the very peak, was a doubling of the supply every 18 minutes. So, you know, you can imagine that even extreme amounts of funding probably don't, you know, relatively is still a rounding error to just how bad the hyperinflation was. So, yeah, I don't really want to give away exactly what we're doing during the hyperinflation period, but we were definitely active in the market. Fair enough. Yeah. I mean, look, obviously from the perspective of a trade, it sounds like you guys absolutely nailed it. But, of course, you know, Tara has had much broader consequences through its collapse. So, I mean, not just is it obviously a catastrophic wipeout of a lot of paper wealth that has existed in crypto.

It was, of course, a very attractive investment for a lot of retail investors. and there have been a lot of really awful stories about folks who completely lost their net worth, especially people in the terror community, and even folks who have committed suicide or threatened to commit suicide or who lost more than they could afford to lose. So anytime that something like that happens,

obviously there's a lot of tragedies underneath the headline of the economic wipeout. But of course, the other thing that this has done is it's put crypto and defy absolutely center stage globally. So everybody in the world was talking about this. It was the front page of the Wall Street Journal, front page of Bloomberg. There were hearings in Congress. South Korea is now talking about also holding hearings about what happened

with Terra. And it's pretty clear now that it's going to accelerate a response, most likely a regulatory one against Stablecoins. So how are you guys seeing the overall reaction to the downfall of Terra? I guess I can start. I mean, I think, you know, I think this was kind of expected. You know, whenever you have something like this where, you know, 40, 50 billion just gets evaporated, you know, there's going to be some people on the losing end where, you know, it's going to be devastating for them because maybe they put in more money than they could have afforded to lose. I would just say that, you know, at the very least that it happened now rather than later, you know, if it was, you know, 100 billion market cap with 90 billion of bad debt, I mean, it would have been

even more devastating, probably more lives would be lost. And that being said, I would also say that, you know, there's always. some kind of siops that is going on. I have no doubt that there would be people who, you know, end their lives because of this, but, you know, maybe not to the extent that it's made out to be, because I think there's also a narrative that's been driven, you know, by, you know, the TFL and LFG in that they just want a little bit less pressure from, you know, the shorts. They want a little bit less from, you know, the people who are against them. So, you know, they're trying to spin this narrative that, you know, they should be, you know, people should take it easy. You know, I think, you know,

there's some there. And I think on the regulatory side, I think this is bound to happen. You know, I think Yelen was first saying that she doesn't think that stable coins possess, you know, some kind of systemic risk to, you know, the system. But then now, you know, like the UK regulators coming out and saying that they got to regulate this thing more heavily because of what it transpired. So I think the response has been a bit mixed, but I think it's to be expected. I mean, this happens with every kind of financial crash in every market. There's always this sense of why wasn't their regulation to protect us. And I think really for us to be a self-regulating industry, I think that entire mindset has to change. It really, it really comes down to the people who end up on the losing side to stand up and say that actually, I want to take accountability for my own financial actions. It, you know, it's not about the regulation that I'm taking personal responsibility, right? So like if, if the people on that side can do that, then I think we would all benefit, right? But I think really, I think the puck is with them now and less with us, right? And we have to see what kind of fallout comes from this. I imagine there would be more regulation, but I'm hoping that that's not the case.

Yeah, this does feel like a very weird scenario in that it was treated or Tatar was so legitimized. You had big name VCs backing it up. The product that produced, the stable coin was extremely attractive to a number of different, or a very large number of retail investors as opposed to being concentrated in a small number of people. Even institutions, we were talking about these like terror SBVs, the anchor SBVs that were floating around. Arrington had like an anchor anchor fund. It was just so pervasive. And I think also the end product was supposed to be this stable coin. It wasn't like you were speculating on, you know, Shiba Enu or something like that. It was like supposed to be this really investable product that just ended up, you know, blowing up.

And so in my mind, it's very different than a lot of the other crazy pumps and crazy speculation that happens in crypto. And that it was so legitimized and it was supposed to be so reputable. I think the other thing that in my mind, though, is that I think generally when we talk about regulation, it's because of fraud, right? Somebody, you know, claims are going to do something. They're lying about it. And then we got to them and we were trying to make sure that that kind of fraud doesn't happen again. In this scenario, you know, everything was very transparent. It was very obvious on chain what was happening with respect to anchor.

UST, how the system worked. It's not like the LFG said they had billions of dollars in Bitcoin and they didn't. They did. Maybe they could have been more transparent about how they used it, but they were honest about what they did. And so to an extent, it is like how free do you want the market to be? I think it would be obviously a huge step backwards if we banned all experimentation around, you know, different types of financial primitives.

And there was transparency in this scenario. But I don't quite know, like, how you can design a regulation that protects, you know, retail investors here will also sort of enabling experimentation to happen that is still transparent and open. Yeah, I definitely agree with that point. Yeah, it's a really good point. Going into the collapse of terror, so, you know, Dragonfly, I think we've mentioned this before, but we were seed investors into Anchor.

And this was kind of before Anchor became what it is or what it was before the collapse of terror, right? So like Anchor, just for a quick way of background. Anchor was kind of the principal sink where almost all the UST in existence lived. And maybe it's worth doing a bit of exposition just to understand. like the buildup to the U.S. you collapse. So Anchor got its start as basically a

cross-chain staking yield protocol. That's the way that it was pitched. It's like Lido-ish, but it also has like this sort of money market component so you can put in yield-bearing assets and you get a yield and the yield gets juiced by A&C token on the

on the borrower side and the depositors are paid out of a yield reserve. That's the idea. It's like, you know, it's not rocket science It's not the next, you know, it's not the next maker now, but it's something. Okay, there's a protocol. We put in a little bit of money. And at the time, defy yields were very high. So the idea of a protocol that paid 20% yield, you know, this was in the days of 100% APY,

you know, 75% APY. So having 20% guaranteed API was reasonable, right? In the early days, Tara was, you know, Anchor was not growing like gangbusters. But then, defy APIIs declined, obviously very significantly. APIs on stable coins are now sitting south of 2%. As this was happening, we saw broader decline in interest rates. Terra stood still. Anchor decided to maintain the exact same interest rate, regardless of the broader market

environment. And what that ended up doing was it made Anchor more and more attractive on a relative basis compared to the risk-free rate. And that caused UST demand to balloon. Almost all the UST in existence lived in Anchor. And so Anchor, I wrote an article kind of summarizing what happened in the Terra episode. And the way I described is that Anchor was that Anchor was that Anchor was that Anchor was, was the cancer at the heart of Terra.

Were it not for Anchor and its 20% APY, Terra would not have blown up in such a catastrophic way. It wouldn't have grown so large. It could have at least mediated its own growth in a more market-oriented way, such that at least people would have, they wouldn't have warped incentives to try to ride this thing as close to the threshold

as they possibly could. And that's ultimately what Anchors incentivized growth, I think, did. The thing that I have been reflecting on this last week is that, so on the chopping block before, We've talked a lot about Terra and Anchor. And we've intimated a bunch of times that we thought it wasn't sustainable and we were worried and whatever. But we also, you know, we brought Doe on the show and we kind of, you know, we were very respectful to him. And we've invested into other things on Terra.

We've made three investments onto the Terra platform in our fund three. And kind of the view as VCs and actually I talked to some other, you know, kind of marquee VCs who've told me in the past like, dude, the risk reward for saying bad things about layer ones or about big communities is just not in your favor. Like as an investor, your job is to make great investments, find great founders. And if you speak negatively about something that you see that you think is not sustainable or is not going to work, one, you might be wrong, which, I mean, everybody in crypto has had that experience of things something wasn't going to work and you were totally wrong. And then second is that even if you're right, what's the upside?

Even if you're right, like, okay, maybe you get celebrated, maybe you get pulled on some podcasts, but mostly you just alienate a bunch of people for the two things that don't break or that for the two years until UST actually explodes, you end up looking like an asshole and just pissing off a bunch of people and getting, you know, flame. And so it got me thinking a lot

because as a, you know, I think about somebody like Eric Wall or something like Hossu or somebody like yourself who, you know, you guys are not VCs. And as a result, you can kind of be more transparent, right? If you see something you think is bullshit,

your incentives are just, why not? Just say this bullshit. Eric is a VC. I'm sorry. be clear, Eric, you also do make early stage VC investments, but most of your trade is not simping to entrepreneurs,

the way it is for, you know, a lot of the rest of us. And so the question that I keep thinking about is like, what could and should we have done differently? Because in private, we talked all sorts of shit about UST. You know, and when we look at what we want to invest into and we are, you know, we get

pitches all the time for things that are built on Terra and things that touch UST, pretty much everybody internally at Dragonfly are our internal conversations have always been, that this thing is not, this thing is going to collapse, this thing is not sustainable. We didn't go out,

picking fights, tweeting at people, blaming the Doe was, and you know, obviously Doe didn't make it easy because of how aggressive he was toward anybody who would impugn him on Twitter.

Don't forget, though, this show did, did come up with the moniker that tied stable coins to Ted Krasnski. We did, we talked a lot of shit about aggregate. No, we did.

We talked about algorithm. I think I talked about basis in particular, which is, of course, the granddad. Eddie, I've seen your shares. Wait, we didn't talk about the fact that Doe invented basis or ran basis cash. How much, Kevin, how much do you believe this?

Or do you think that's like sort of circumstantial reporting? Because I do think the evidence. I think it's true. I've heard from employees within, I've heard from employees within TFL. And I also want to say that I think it was on this podcast that I first heard the term that Tarun used to say about, you know, some of these Algo stable coins. They're just like PID controllers. And I'd never used that analogy before, but I've adopted it into my own vocabulary.

I think it was on this show. Yeah. Yeah, that was the same episode I was drunk and decided to call everyone who makes an algorithmic stable coin, Theodore Kiddh. Yeah, so it just shows that, you know, in order to overcome the disadvantages of being undiplomatic in the space, we just need more alcohol, you know, and then have these podcasts where you get all the VCs drunk and let's hear what they really have to think about some of these portfolio projects of their own and of other, you know, of other VCs, too. For the record, being a VC is my second job. I just kind of, that's why I can be more blunt. I can be more blunt. That's true.

That's true. Well, we will be your mouthpiece then, Haseeb. You know, just whisper me their name. And I'll let people know, you know, just whisper me their name. All right. So from now on, everybody knows. Galawa Capital is saying what I really think. So let that be known.

No, I'm just kidding. No, I wouldn't do that. I think one piece of public service is enough. I don't want the heat anymore myself. And, you know, like you said, you know, I think you don't make any friends being on the show. short side. And if you look at all of our plays from before, all of our major plays, they were all on the long side. So I think someone else should do it. I think I've done my service. I think that

should be enough. Hopefully, people are not too mad at me. So it was the who's who of an investors on that cap table. So hopefully people are not too mad. I try to save everybody money. I did the best that I could. But there was too much of an echo chamber. What can you do? What was your favorite dunk that you read over the entire thing that turned out to be, you obviously maybe false. Like all the dunks in the world, right? Because, like, you know, I would say March through May was Twitter filled with people on both sides, dunking on each other and nonstop.

I'm sure you were the recipient of 50% of those. So, like, I'm curious, like, what were your favorites from Twitter? I just got dunked on so much by these Shill accounts. And then, you know, their strategy was so good, too, because they would never respond with their main accounts. And they would just straight up AstroTurf with these accounts with, like, such few followers that I wouldn't get the engaged. You know what I mean?

So they're just like on one hand flaming me and flooding my comments with negativity and the same time not even give me the engagement for it. So, you know, there was a lot of that. I mean, there were some people saying like, oh, you know, like, do you guys really think? You guys really think. You guys really think there could be like a debt spiral. Like how stupid, you know. And there was there was a death spiral after all. So, you know, it was like stuff like that, you know.

I mean, two seems to point about being on the short side to stuff does change over time, right? Like you can sort of look at the LFG and say, oh, well, they were sort of backing into a, you know, fractional reserve model and upping the reserve factor over time. You know, sort of as, you know, you know, cracks exist right now, which is, you know, 80% backed by USDC and is working okay. And so it's like, you know, you can imagine a world. They do back into a, you know, 80% stable coin backed version of Luna or of UST with, you know, some remaining float back by their own shares. And then it functions okay. and then you look like, you know, an idiot, even though maybe at the time, you know, what you said was actually correct. Well, I mean, there's a world of difference between backing something that's correlated with your own death spiral and backing with something that's uncorrelated with it.

Right. I mean, that's why a debt spiral is scary is because the feedback loop. Right. And that's why I'm saying, hey, you know, things can change over time, right? You can imagine, you know, they could also put them some stable coins in the LFG. And so it's sort of like your criticisms can be correct at the time, but market conditions and products can change. That is also true. And it's something that we reflect on often. as entrepreneurs, or sorry, as investors into entrepreneurs, is that, you know, oftentimes the first pitch that you get for something, and the original, you know, the V1 is a flaming pile of dog shit that isn't going to work. But they realize that.

They put something out in the market, and it fails. It fails almost immediately. And they're like, huh, okay, well, that didn't work. Let's iterate. Let's, like, learn from that. And you end up iteratively backing into a better and better model and learning in real time. And that's one of the advantages of crypto is that you can learn in public. And sometimes, unfortunately, you learn really other people's money,

but, you know, as long as there's a mutual understanding of, okay, hey, this thing is, you know, it might not succeed. It's fine. I think the part of it that gives me the most pause is the degree to which we had very prominent members of the community, basically pushing the stuff onto retail and advocating to retail like, hey, this thing is safe. It's super robust, like, you know, to ignore all the naysayers. Even though we were investors in Anchor, we were way too mortified to ever tell anybody

put money in Anchor. I mean, for us, we, I mean, we didn't put our own money in Anchor. And I think it is true, and Tom, it's a good counterpoint that like, look, sometimes things start off not working and it's okay to give people room to figure things out. But there was something about the energy and the, I don't know, I don't know what the word is. I guess the disdain that the Luna community showed for the people who were ultimately trying to critique it that showed bad faith that resulted in making things worse for themselves. And to your point, Kevin, short selling is really important. you cannot have a price discovery without short sellers. And so short sellers, although it's much harder to make money short selling than it is to going long,

because things in crypto, obviously, as Luna did on the way up and down, they can go up a lot easier than, you know, you can only make 2x if you short something to zero. But if you, assuming you're not using leverage, but if you go long, you can make 100 extra money. And that's why as VCs, in many ways, our jobs is much easier than somebody who's engaged in short selling, especially in a market like crypto. Yeah, you know, I would say that at least, diplomatically, it's very hard to be a short seller.

You know, I actually, you know, some of the investors on their cap table, good friends of mine, you know, and I've known them for many years. And I remember sometime in December and January, literally hitting them up and saying, oh, by the way, at some point, I'm going to short this thing. So I just want to say sorry ahead of time, you know. And that's kind of like, you know, how things are in the space. You know, it's just like you have, when you're long, you're long together. When you're short, you're alone, you know.

And it's just a bit of a tough. it's a tough lift, I would say, just on the social side. Like how many parties did I not get invited to because I was on the short side, right? Like at least one or two, right? Because I don't know. I don't know what the counterfactual is. But I imagine just by the sense of things, right,

just by intuition, probably at least one or two, right? Well, I suspect you're going to be invited to a lot more parties now. And we will make sure that you get invited to all our parties. Well, I appreciate that. I appreciate that. But yeah, no, I agree. I think there's a lot of this kind of like echo chamber effect.

And I think on top of that, there is this sense of some of the investors. I don't want to say all because I think a lot of them are well-intentioned, but some of them are in it only for a quick flip. So whether they just burn retail and rug them, it doesn't really matter to them, right? And this is something that's a little bit different than in some ways a step back from Web2 VCs, where even if they were grifting with like WeWork, they at least had to go through many, many years through Series D, through Series E, through the soft bank round and then through into the public markets, right?

Like even if they were doing it griff, they couldn't just do a quick flip. They had to really dedicate themselves to it. But I think in crypto, because time to liquidity is so quick, now the incentives there for the founders and for the VCs are really shifting. And I think it really comes down

to the personality of the people running it to not go the easy route. And I think in the long run, it benefits them even better to actually fund something that works, like, for example, like FTX, for example, right? Something that's not a quick grift, that's an actual business that one day generates great revenues, deserves to be, you know, valued very highly, rather than just, you know, recycle the money, flip it over and over again on these shit coins. But it just, it really comes down to then further up the waterfall to what the LPs want, right? So like if you were ever to try and build a VC firm where, you know, you're only going to invest into things that have long term, that you think has long term value and not purely optimize for financial gain. then the LPs have to be on the same page, that they have to understand that they could do better with their capital elsewhere, but almost in a slightly altruistic way.

I mean, I think they'll still make money, but in a slightly altruistic way, not profit maximizing and willing to, you know, fund a VC like that. So it all falls, it all, you know, it all rolls downhill, right? It all starts from the very top where the capital allocators sit. And then all of that kind of culture starts to then, you know, every layer down the way starts to seep in. So that's kind of what my thought is. So I think actually you're getting to this point, that's actually like a cultural point about VC versus trading firms. And, you know, one of the reasons I think a lot of actually pretty smart people I knew, both from tech and from quant trading were like, oh, we're going to build on Luna was effectively because of Jump. And Jump sort of pulled this slight of hand of trying to be both a VC and a trading firm at the same time.

and effectively that's what led them also to have to try to save things at the end. But of course, I would say, like, you know, there was kind of this duplicity of, you know, effectively a lot of really smart people are like jump is a place that there are a lot of smart people at. They usually do well in normal markets. Crypto thing seems like scam, the jumps doing it. So like I'll go do something. What does jump? What, where is jump saying is a good ecosystem?

oh, Tara and maybe Solana. And okay, cool, yeah, I'll just go make a defy protocol on there. I'll quit Citadel or I'll quit millennium. And like, there's a lot of people like this, right, who like fell for this trap.

And at the same time, jump basically at the hat effectively maintained a peg for everyone else. If we're being honest, just from a couple facts. One is, they had to run a ton of Luna validators because wormhole, they had to actually be staked in Luna and basically be able to stake in both

Solana and Luna to run the wormhole validators. So, you know, we can see their public addresses from that pretty clearly because there's not that many wormhole validators, maybe like 15. And then I think the other thing that's interesting is like trading firm tries to rebrand as a VC because the market structure change and then sort of ensnared a lot of people who then sort of now are probably out of luck. You know, how do you feel about that? from this perspective of like that's almost even like you know you were talking about how LPs have to be altruistic here you have actually the opposite you have like the LPs which is the trading firm themselves is actually quite maybe antithetical to almost everything not just in the

things they're investing in but the things building on top of the thing they're investing right which is actually you know I think in web 2 land you never see that right there's a reason so when I worked at dey shaw they like they had this VC firm that was horrible and failed two sigma not a very good VC firm you can go see. And one of the reasons they're not very good is like no one trusts them because they'll kind of rug you. And somehow, somehow there's a slight of hand in the Saloon of Vax 2021 where everyone just kind of like was like, oh yeah, all the trading firms are great VC investors in our project. So how do you feel, you know, being on the trading side watching that evolution? And do you think like, what do you think the like regression to the mean will be? Does it mean that like the

trading firms exit doing long-term, longer-term things? Do you think it, you know, between Alameda and Jump, I feel like it does, they sort of have both had this kind of impact on the market. I think all that I want to hear Kevin Bose to say that there's a similar dynamic with FTX and Alameda where, you know, Sam is on Twitter talking about, oh, yeah, we knew Luna was bad. We knew it was going to blow up. Like, you know, this thing was ever going to work.

And it's like, and yet, you know, you listed it and UST. And so it's like, you know, is there some moral hazard with like, you know, running an exchange, having some say over what you actually want to list on the platform. Yeah, you know, I definitely agree with both of your guys' points. Maybe just to start, I want to say that, you know, I think the reason that there was this slight of hand with jump, because I completely agree with you. I think trading firms, what's there to be said about them, their entire job is to make money and they're literally not in the business of losing money or, you know, being altruistic.

I mean, even if you look at Sam, who's a very altruistic person, he's really separated that out into effective altruism and then right now just earn as much as he can, right? Like you don't ever want to, in many ways, in the market, handicap yourself while you're doing both things badly, rather do one thing well and then just funnel all of that into the other thing and do that well too. I think there was a slight of hand.

I think it was smart of them to have Kahnov, you know, just lead the effort. They realized they needed more presence online and they needed to do some branding and PR. And for the most part, that was very successful. But I think it's all, you know, everything is just, it's a butterfly effect from the prior cycle. You know, you had 2017 where you had all these quote unquote crypto VCs that basically rugged retail. And then around that time, it was when the trading firms were a lot more neutral about things and had not started their VC arms, right?

So you had folks like, you know, CMS, you had like three arrows. You had all these guys who were on the trading side. And they were actually being pretty honest about stuff and they're calling stuff out. They were not super long biased. And then finally, when it came to this cycle, you know, the VCs, the crypto VCs had a bit of reputational damage. The trading firms didn't. They had now had enough money through that cycle to become VCs, or they were managing too much money that they couldn't keep things market neutral anymore. So they had to go along.

And then on top of that, all of the newer projects were a lot more centered around defy and financial concepts, and they could benefit from both the market making from these trading firms as well as the expertise that these guys had that the VCs did not. right? So all of a sudden the power and the influence shifted over to these trading firms. And then, you know, through that, well, then they learn the exact same lessons that the VCs learn, which is that it is way better to be on the long side and be together on the long side and do a quick flip. And, you know, you live long enough to see yourself become the villain. And I think that's literally what happened with all the trading firms. And I think, you know, it's no surprise to me that for every successful trading firm, they eventually get to a size where they're managing so much

capital, they are no longer able to deploy market neutral, and they always eventually set up VC and go long. And then you can see the tone at which they talk about things shift too. And I think that's just a natural consequence of managing too much capital. So I think maybe the only way to avoid that is to, you know, just stick to one particular thing, do it super well and not scale up. Or, you know, you scale up and you just try and, you know, get, you know, the investors on the same page that, look, we're actually not going to try and maximize.

I mean, crazy even think, because these guys, it's in their DNA to maximize. maximize profit, but, you know, to create crazy to even say, but, you know, to get them to agree that that would be the case. But I don't really, I think it's a lot of human nature. I don't even think there's anybody who's particularly at fault. I don't want to really point the finger at, you know, jump or three arrows or anything like that. I mean, it's the natural course of being very good at what you do, that you end up having too much capital that you're forced to go along into beta, right? And one thing I will say is like, I, I wasn't necessarily refer, didn't want to, like, single out jump necessarily as a bad actor themselves, right? Like, if you look at the code bases,

they've contributed a lot. In fact, probably more in the last year than the TFL associated entities. I think if you look through the Luna Code base, you'll be surprised at how few contributors there are in the last year. But I think they have, by and large, been pretty active on the development side in a way that I think trading firms usually aren't.

I think the problem is the slight of hand came in that that was used to sell a lot of very, smart people who are maybe just young and not didn't know the history of this type of stuff into thinking that like, oh, oh, we should go raise money from YC and put half of our fundraise into Anchor. There are so many stories like that. And YC themselves was basically encouraging people. I mean, if you go look at the YC crypto list, 90% of the YC crypto companies are just front ends for anchor. And if you just take a little more time and dig into like what they're doing, where their yield is coming from. They're not just putting into compound

draw. They're 100% we're just putting a tanker. And so I think there was kind of this extra duplicity where like Jump's brand was then used to like create this whole narrative of like the smart guys think UST is the best. And that thing kind of really spiral out of control in like a way that I think we've never seen in either finance or tech. Yeah. And I think really it's just that there should be a slight change in the message there. It's not. It's not. not that, oh, you know, these smart people think that it's going to work. It's that these smart people think that they'll be able to make money by backing this thing. And I think that's very different. Because they are very smart. They are very smart. I want to actually touch on, you know,

Taron's point around, you know, these teams that have raised money to build on on TARA and maybe sort of just like the sort of next step or, you know, fall out from this. There's obviously the Tera 2 proposal and there's teams that still have a lot of money that, you know, are building products to work on top of Terra, not the anchor front ends, but, you know, there are defy applications and stuff like that. I'm curious what you guys think about the Terra 2 proposal and then maybe in tandem what these, you know, teams that are in the, you know, Terra ecosystem are going to do next. Honestly, you know, I was sitting down today with an entrepreneur who basically they were building on Terra and they are like, okay, we're obviously leaving.

Like, we're not sticking around for Terra too. Like what that is. hell is the point of Terra without UST. There's going, I mean, Tara too, is going to be a hollowed out shell of what Terra was. And so, you know, to the extent that they can salvage what they do have left and use it to try to make UST users whole and Luna Holders whole for the losses they've incurred, I'm supportive of that. I haven't spent a whole lot of brain cells trying to figure out what is the best way to do that exactly. But I think it's on them to do their best to try to salvage what they can.

But the reality is that the vast majority of high. high-quality entrepreneurs are not going to stick around. Because why would they? There's such better options. And Tara, the dream is over, right? It's sort of like, you know, after the collapse of the Soviet Union, if you could leave, you're going to leave. You know, and now you still do have to have the question of like, okay, how do you rebuild

Russia? How do you rebuild some of the post-Soviet states? These are hard questions, and there's no good answers to them. And you have to do it. You can't run away from it. I should say, not everyone can run away from it. But the most, you know, the smartest, the most capable, the most well-known people, 90% of them are going to leave.

And so I think that's going to result in terror being a shell of what it was. So I feel like I've talked to maybe 10 to 15 Terra Projects and people I knew a Terra Project for the last few days and just on that sample size of, say, 15. I would say there's like

an exodus to probably Solana and AVEX seem to be the top two contenders for most people. And then third is sort of like polygon. I feel like those three seem to be like the most likely places for Google to go. There are people who are staying, although I think there's a lot of problems people are realizing from a technical implementation

standpoint. So the Terra 2 proposal has this May 27th deadline. But let's, you know, for instance, Mars protocol, which was sort of built by Delphi and people from TF, formerly from TFL. Mars basically today was like, we can't guarantee anything will work in Terra 2. withdraw right now because without UST literally none of the margin in code is correct because it like assumes it makes a lot of assumptions about like the relative value of like a LP pool share as a function of the UST price if UST doesn't exist

that doesn't make sense so there's gonna actually there's a huge amount of technical debt to remove UST that I think at least I mean obviously it's like a very chaotic situation so it's like I totally understand you don't have time to like figure out the precise technical specs but for instance you need to have some way of redeeming all of these on-chain assets, like an Astroport LP share for UST and another token, such that people can redeem that without relying on the USC token, which is going to not exist in Terra 2. So from a just like strict like programming standpoint,

I think there's it's actually, even if you really, really are diehard, there's a huge amount of basically tech debt you're going to have to have because we just turned this thing that was sort of a reliable invariant of the virtual machine into a null pointer. And like that is like a very weird that that means you have to go change all your code. Right. Like it basically means everything's wrong. Like half of your audits are wrong now. Right. So I think from a very practical standpoint, I actually think it's a really hard thing. If you use UST anywhere in your code, and that's literally every application. Yeah, no, I definitely agree. I think there's a lot of like secondary and tertiary effects there that haven't fully been thought through. I'm very curious as to why they didn't just

have a UST, but instead of mint and redeem mechanism, just have it be like a make or die system where, you know, you just have some external collateral, at least then a lot of that code can be transported over. But then it begs the question, where is that collateral going to come from? Because who in the right mind would have the confidence to actually create and mint this stuff by putting up good collateral on this new chain where we don't even know if it's going to be a complete dumbfest or there is some residual recovery value. You know, I would say that, you know, in their favor, at least, there probably is some value, residual value, to the block space,

to this L1 chain, even without UST. But how much is it? And whether or not there could be enough confidence restored that it can survive without being completely dumped again to zero as people's final exit liquidity, you know, as a way for people to recover some amount of value because they're already scared shitless that this even happened. So really hard to say.

What my proposal to them was, which also Dove refused to take the call, is that I think that they should try and favor, one, what's fair, two, the smaller holders, and three, the folks that are least likely to dump. So whether it be by ignorance or whether it be by true belief, there were some people that just never moved their Luna or never moved their UST throughout this entire thing and just held it from the point at which DPEG till now, and the address has never moved the coins. I would say that that's pretty strong hands, whether it's stupidity or whether it's just actual belief, either way, indistinguishable from each other. Maybe you want to favor them too, right? And then on top of that, you probably want to favor people, even who were buying during the hyperinflating period, but where they didn't realize there was recovery value, right? So even if they were buying lot of tickets, maybe it's still fine.

But like, once you announce that there's going to be a new chain or a new proposal to air drop people, well, then there's a lot more speculative demand, right? So like what about doing some kind of time stamping on the announcement of that there could be this new proposal? And then just anybody who was buying it before that maybe gets something a little bit more than everybody who was buying it afterwards. And then there's also political questions on how to deal with the exchanges, right? Because if they're not favoring the people who bought it during the hyperinflating period, then the exchanges are unhappy because their customers aren't happy with them. So it's just like if you piss off the exchanges too much, then they might not list your new coin anyway. So you got to throw them a bone too.

So I think that there's a lot of political considerations now in that, you know, all these different factions holding all of these different, you know, classic coins, you know, they all want more of the pie from this new coin. And I think figuring out how to divide it is a very tricky situation. But I think at least they should hear me out, you know, I mean, after all this, you know. Yeah. Well, all of that complexity is why bankruptcy law was invented. And so I guess going back to like speed running finance Where are we discovering why some of these things are so complex Yes definitely we're definitely a speed running finance where we're discovering things

Which layer one's going to have bankruptcy law as part of consensus rules For a failure No which just let's just let's just let's just take Yeah well EOS did it by forking out block one first which in theory TFL is doing to themselves here right But I'm curious like if you were to guess of the existing chains that are live and have, you know, greater than a certain, I know, greater than like a billion dollars of TVL? Who do you think, who do you think will be the first to be like, our differentiator, our differentiator is going to be, we have bankruptcy law built in for, for like, settlement. I think that's a great idea.

Yeah, UST as a protocol, right? Like, yeah, I don't think, I don't think that's, I don't think there will be a protocol that doesn't. It's too narrative breaking, though. It's just too narrative breaking. I don't, I don't agree. I think there's a way to do M&A protocols and equally. so I think there's a way to do bankruptcy, not for the layer one themselves, but for like protocols. For underlying applications.

I think it'd be too hard to understand the app semantics. No way. No way. It's too hard to understand the semantics of an app. I'll make my prediction. In this bare market, someone will basically build that. Even though it won't be called that, it will be like, you know, it's kind of the way Unisop was not called a automated market maker when it started. It was just called the Swamp thing. And like people didn't understand it. And it's like still its exposure is kind of complicated to most people who haven't thought about it, right? So I think there's going to be someone

who figures out some protocol that, like, recycles dead, defy-TVL and is able to kind of like re-hypocket it and then redistribute it to more live protocols. Do you think it would be too narrative-breaking to even have that as part of the white paper because people are going to read it and think,

wait a second, so this thing can fail? Really? This is why it needs branding. This is why you need this is why you need the unicorn no no no but this is just something where like if there's a protocol that's dead and the token holders like we want to get rid of it instead of the tvl but then what you create now is you create lobbying

right like now suddenly there are interest groups of like oh we deserve the tvL like this is this is the protocol the protocol could literally just burn it the l1 could just take it and burn it into the l1 but how is it if the thing is dead then it's already effectively burned isn't it not but it doesn't it doesn't reward the L1 token holders.

It doesn't reward the validators for keeping that state secure, right? In spite of the fact that it's not generating any income. So, like, what I'm saying is this will happen. There will be some smart kid who does this, but like it does it for a totally different reason. Like, oh, I made a memory allocator that's very not fee agnostic, and it knows how to do like Malik coalescence really well. Oh, actually, oh, lo and behold, that actually does this TVL refresh thing.

I'm just saying there's going to be like less. from this are going to reverberate and hopefully we get stuff like that which would be cool. All right. Well, speaking of reverberations, the last thing that I want to end on is, you know, many people have said that this is the end of the cycle, that the collapse of Terra will be remembered as the last gasp of the 2020 to 2022 bull cycle and that we're now going into a bear market. And obviously, you know, lots of assets are down from their peaks. Bitcoin is down, peak of trough, over 50%. a lot of defy tokens are down 70, 80%.

L1s are down about 70%, all of L1s, I should say. It's been a pretty brutal market. And obviously a lot of it this year, who's that? You know, it's comfy Tom and I, milady holders. Okay, that's true. Actually, I heard this.

Melodies are going close to all-time high in each terms. NFT floor prices have been doing pretty well. They've been doing pretty well. I actually heard that during the Terra, downfall, that actually there was an enormous amount of trading volume in NFTs on Terra. Because, of course, people couldn't get through a wormhole while Terra was falling apart. And so you saw tons, as Luna was hyperinflating, people just started buying up NFTs whose prices were going up like crazy, which is exactly what you see in a bank run is people start dumping

currency to buy commodities. And so the effective store of values were Terra NFTs, which I've also heard are looking for a new home. So, you know, we'll see where that ends up. But anyway, so to finish the point, you know, obviously a lot of the downturn this year has been driven by macro, but it seems like Tara gave an extra nudge to the bearishness around crypto. So how are you guys, and Kevin, given that you're a traitor, I'm sure that this is, you know, the water you swim in. How are you thinking about where we are in terms of the cycle? Yeah, you know, I think overall, at least historically from what I've seen, the more severe the drop, the shorter the bear market lasts. And I think a lot of it is because, you know, when everybody's kind of on the same page that this is the bear market, that this is it, right? Then it's just like there are no new pessimists to sell the price further down, right? As opposed to, you look at very, like really long bear markets, right? Like, for example, after the 2017 one or after 2013 one, that was even brutal. And it's because, you're Because a lot of that was just the digestion of hope.

As long as there is hope, as long as there's some bulls, then there are still some people to be convinced that it is, that is a bear market and they will then sell at some point. So I think the bare market bottom is only reached when basically there's no marginal seller left. Everybody is already feeling like completely bleak and there's no hope left. And for the people still holding onto the coins,

they're so die-hard believers that they will never sell in any price. So basically during every cycle, all these coins move from weak hands to strong hands, and there are some that are so strong that they will just never sell, which forms the bottom, and then there's the rampant pessimism. Then it eventually dissipates into optimism. So I think, you know, for this,

I think it's actually good that it happened now, that it happened so severely, because, you know, I was thinking that if it happened later, it'd be another nine months, it'd be another 18 months, and it could even take, like, multiple years. But now after this thing, I'm thinking, well, maybe not as long, you know,

maybe like six to nine months is enough. But that being said, we're not actually controlled in the markets anymore, you know, in crypto ourselves because the Fed itself, you know, it could do whatever it wants and everything's so correlated to equities. Hopefully this decoupling, you know, we thought there was going to be decoupling. We thought crypto was going to decouple up. It decoupled down, right? But at least there was some kind of decoupling blew out all the correlation algos. So now all those guys have to rejigger their algos. They're not going to hold things as tight in a ban to equities.

So hopefully the decouplings already happen. We do decouple from equities even further and maybe another six months. Now, if that's not the case, and we're still trading basically fed, whatever the Fed wants to do, then, you know, it's just like, we're just going to follow the rest of equities. And, you know, that'll be until they capitulate. And then it's more about macro, about when, you know, they're going to, they think either inflation has subsided enough or the market has dropped enough because of like the, you know, the Greenspan Bernacki put, if it drops a certain amount, then at some point they just

capitulate and maybe we just all die by inflation. So, you know, all those are possible. So, you know, either the Fed or hopefully very soon because I'm actually a bit more on the optimistic side. But I would say at least in the near term, a lot of funds blew up. So their LPs are going to be redeeming out of them. So that's going to cause a lot of force selling. You know, initially there was a lot of force selling because of people defending their toxic margin positions by selling good assets.

Then there was a relief rally because any time there's a lot of force selling, you know, there's a bounce back. And then after that, now there's once again force selling on the longer cycle, on the monthly, maybe one or two month cycle, where funds basically unwind and close shop and have to sell assets to redeem out investors. And then after that, we'll probably another relief rally. And then hopefully, you know, hopefully then, you know, it'll be good by then. So it sounds like what you're saying is that the pessimism is caused for optimism. Yes, exactly. Yeah.

I mean, when everybody's riding the high of mania, there are no new pessimists at all, right? And there are no new optimists at all. Everybody's just max long. And then, like, then just the tiny little prick of the bubble can just completely crash everything. So same thing for the bottom of the bear market. When there's no new marginal sellers and all the people who hold. hold that will never sell, then, you know, price can only go up. I mean, one thing that struck me about this whole, this whole terror collapse is that,

you know, obviously everybody kind of knows who was exposed, who was talking about it, who, you know, owned terror on the books. Everyone I have talked to says that they're okay. And I'm like, okay, somebody must be lying to me. It's like, I don't know who it was. I don't know where there's $14 billion of UST. Oh, my God. I literally said the same thing to Robert yesterday.

I was like every single person I asked if like they had any Luna or UST exposure. Like no, no, no, no, no. I sold Luna for like 4GX. Don't worry. I'm like, shut the fuck off. No fucking way. I don't believe this. I just don't believe.

There is no way that's true. No fucking way that's true. Yeah, I think there's no way it's true. There's this collective delusion amongst a bunch of people. And like it's a game of chicken until we read the new story and blueboard. Yeah, I would say that there's no way that's true. But what would be even more harrowing is that if it was true. Because then it really means that the insiders just dumped on retail, but they got out unscathed.

That would be even worse of an outcome. That would be absolutely devastating for the space. Retail's not coming back for like three years after that, if that's the case. Yeah. I mean, I think that there's definitely an element of that, right? Like, who was holding Luna, like, who was watching curve pools? Probably the sophisticated investors, right? Who really understood the death spiral?

It was sophisticated investors. Who were the first people coming out of Anchor when the rush started for people to leave anchor who were selling out it? you know, 95, 90 cents. It was sophisticated investor. It was not retail. Retail were almost certainly the most likely to have held to the bottom.

So I think that's true. Although I did hear of one fund that did admit that they never sold UST, but only one, only a single fund that I heard of that admitted to holding onto UST. Everybody else, it was an Asian fund. Everybody else I've spoken to claims

that they're totally fine. It's like, oh, no, no, no, we're totally okay. It wasn't a big deal. We're all good. CZ said that Binance never sold. They held their entire stake up and down to zero, basically. I mean, I can believe that.

I mean, for Binance, it probably wasn't material. They probably forgot. They probably forgot the name. Yeah, exactly. It was part of a fired team that there's somewhere in told stories. They don't even know how to get it out. A couple days ago, CZ sits down. It's like, wait, so we actually own this stuff?

Like, what happened? Like, how do we get this? Well, he did write that tweet that was just like, I've never been heard of this thing. It wasn't even on my radar. that's great he's like oh this thing is giving me so much stress now and like i'd never even heard of it like who cares about usd he wrote something like that that was like amazing yeah cez he just lost from the peak you know like a yard you know and he's like not a big deal you know there's plenty where that came from well amazing um well it's been a harrowing week and um i think

we have in in part we have you to thank for the sanity that has finally come over crypto. It seems like it's going to be a bare market for a while, which means things are going to be a little quieter, thankfully. But we'll have a lot more chopping up to do as we get into this next cycle.

One thing I really miss I wish we had talked about a little bit was the steak deep beef peg. Actually, on this show, about two months ago, I was like one of the big risks that we have to think about is the steak deep beef thing.

I think the Luna cascade into that was a very amazing thing to watch on chain. Yeah, there's so much to entangle about the story. And obviously an hour is not enough for us to really get to the bottom of it. But there were so many things. And then, of course, there was the tether scare. And there's a lot more that. So maybe we'll do. What was that protocol that hard-coded UST as equal to a dollar?

They just hard-coded it. There was some protocol that did that. Oh, Kava, USDA. Yeah. Oh, that's right. That's right. Yeah. It's a big face palm on that one. That's a big face palm. They were so confident. You should give all of Luna V2 to those guys because they're really confident that the peg would have held. I mean, those guys, you know, those guys believe anything. So give them all the Luna V2, you know.

There's a strong hands over there. I mean, and they're a maker system. So they could accept it as collateral, you know. Okay, there you go. But, I mean, look, to be, to be fair, like how many on-chain protocols are prepared for global? settlement for Maker. Probably not. If Maker triggered global settlement, probably half the things in Dufo would break.

That's fair. That's fair. Greater percentage than you think, though. I do think, like, the urine ecosystem has a bunch of things built around it. But I agree. In the sense that, like, non-Ease CDP system, no one even cares, I think.

Yeah. Yeah. So, anyway. So we do have to wrap. But Kevin, thank you so much for coming on and sharing with us your wisdom and insights. And I hope you're invited to a lot more parties going forward. No, I appreciate that. Yeah, send me the invites. Hey, Kevin, remember, I invited you to a party before you did. That's true. That's true. Tarun did. Tarun did. You know, when everybody's still hating on me, Tarun invited me to a party. So there you have it, you know. So I appreciate that. Appreciate that invite. And send me all the

invites and really appreciate you guys having me on the podcast. It was a pleasure. All right. That's everybody. All right. Take care. Thank you.