Unchained - Why Terra Collapsed and Whether an Algo Stablecoin Can Ever Succeed - Ep.352

Episode Date: May 17, 2022

Nic Carter, general partner at Castle Island Venture, Eric Wall, former Chief Investment Officer of Arcane Assets, and Erik Voorhees, founder of ShapeShift, discuss what happened with the TerraUSD (UST) and LUNA fiasco, Do Kwon’s responsibility, the impact on the crypto ecosystem, and much more. Show highlights:  how Erik used to feel that algo stablecoins were impossible and why he changed his mind why Eric considers that the demand for UST was tied to a sh*tcoin why Nic didn’t think LUNA would work how a stablecoin could theoretically be decentralized whether Nic, Eric, and Erik think this was a deliberate attack why they think whether or not there was a deliberate attack is not even relevant how the de-peg started with a liquidity issue on Curve why Nic thinks that Terra’s biggest mistake was the 19.5% APY on Anchor whether pursuing a decentralized stablecoin is a worthy goal what aspects of UST were decentralized, according to Erik whether algo stablecoins are dead or whether in the future, death spirals of algo stablecoins can be avoided why Erik believes that everything in the crypto space is an experiment, even BTC what it says that the VCs behind Terra knew were so reputable why Do Kwon's arrogance and inexperience might have caused this chaos whether Terra can be rebuilt whether this collapse imposes risks on other blockchains and other assets why the Luna Foundation Guard’s purchase of Bitcoin might have made the UST collapse even worse what Erik thinks about the global financial system and the US dollar how this event could trigger more regulation in the crypto space and why it might hurt the entire ecosystem how regulators might use the Terra case to impose CBDCs.   Thank you to our sponsors! Crypto.com: https://crypto.onelink.me/J9Lg/unconfirmedcardearnfeb2021      Coinchange: https://coinchange.io   Beefy Finance: https://beefy.finance       Episode Links   Erik Vorhees  Twitter: https://twitter.com/ErikVoorhees   Eric Wall Twitter: https://twitter.com/ercwl   Nic Carter Twitter: https://twitter.com/nic__carter   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/  Jon Wu on how Terra got de-pegged: https://unchainedpodcast.com/did-someone-deliberately-attack-terra-luna-to-kick-off-a-death-spiral/ Terra Twitter: https://twitter.com/terra_money  UST Mechanics: https://angelprotocol.medium.com/how-does-ust-work-ec7b2f6e2c2c Luna Foundation Guard: https://lfg.org/team/ 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/ Terra Blockchain Halted: https://www.coindesk.com/business/2022/05/12/luna-issuer-terra-halts-blockchain-after-week-of-losses/ Upcoming Regulation https://www.protocol.com/bulletins/terra-stablecoin-loses-peg https://www.theblockcrypto.com/linked/146583/yellen-says-the-stablecoin-market-is-still-too-small-to-pose-systemic-risk Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone. Welcome to Unchained. You're 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 at Forbes was the first mainstream media reporter to cover cryptocurrency full-time. This is the May 17th, 2022 episode of Unchained. Buy, earn, and spend crypto on the Crypto.com app. New users can enjoy zero credit card fees on crypto purchases in the first. 30 days. Download the crypto.com app and get $25 with the code Laura. Link in the description. This episode of Unchained is brought to you by Beefy Finance, the multi-chain yield optimizer. Beefy is the easiest way to earn more from your crypto. Deposit funds into Beefy's secure vaults to auto-compound yield across 12 blockchains. Got crypto? Choose Beefy. Welcome to a new world of crypto-friendly banking with Cross River Bank. Request your Fiat-on-OffRamp solution now at crossriver.com slash crypto.

Today's topic is what went down this week with TerraUSD and Luna. Here to discuss are Nick Carter of Castle Island Ventures, Eric Wall, Chief Investment Officer at Arcane Assets, and Eric Voorhees of ShapeShift. Welcome, Eric, Eric, and Nick. Hi, Laura. Hi. Hello, thank you very much. So we're doing something unusual. As I mentioned earlier, we're live streaming this podcast episode

because events have been moving so quickly when it comes to Terra slash Luna that I felt the podcast might be somewhat outdated by the time it comes out on Tuesday. So let's just start with what opinion each of you had about the Terra Luna ecosystem, and I'm saying like before the DPEG happened. Or it could even be your opinion of algorithmic stable coins in general. Why don't we start with you, Eric Voorhees? I love experimentation, and I was an owner of Luna before I got all wiped out last week with the rest of everyone. So I certainly had a vested interest in it. I've been following it for, you know, over a year.

I'm a big fan of the cosmos ecosystem, and as it was a tendermint chain, I've been watching it closely. I have to say my original bias has been that algorithmic stable coins, probably can't work. I used to think they were impossible, but I've had to open my mind a little bit and realize that maybe it can be done. So I remain skeptical that they can work long term, but I want to see people try, and I would much rather us learn that they can't work from actual iteration in the market rather than from theory. I'm glad to see these kind of things getting built. It's awful that this one got so big and then fell apart, which we'll talk about. But yeah, you could say I was a a skeptical and risk understanding supporter before the collapse.

Oh, that's really fascinating. All right. Eric Wall, what about you? I've been frustrated for some time that we, so far in this industry, haven't really synthesized a good variant of a decentralized stable coin. Like, I've been looking for that for a long time. And in that search, Luna has been, like, UST has been proposed as a good example of a decentralized stable coin. And when I looked at it originally back in, I think it was

June last year, I recognized that this was yet another uncollateralized stable coin. The Oracle mechanism was rather primitive and the price was tied to the demand of basically a shit coin. So my perception of Luna was basically, if you've seen that movie, where Sandra Bullock is driving a bus and Keanu Reeves is on that bus. That's sort of the analogy of the USD stable coin that I saw. And it was, in my opinion, a matter of time, like how far can they drive and how long can that journey go on for until it eventually collapses? And just to make sure I understand, so it's not necessarily that you think

decentralized algorithmic stablecoins will never work. It's just that you felt this particular one was not constructed well. I won't take credit and say that I've been convinced throughout this whole time that it is mathematically impossible that an algorithmic stable coin cannot exist. But I think that we've seen a number of empirical examples that these examples do not work. There are historic examples even before crypto that have tried this before. And now we have tried it in crypto. Look, I mean, I think the intuition that has confused me a little bit is that, well, if you think about proof of stake, for example, proof of stake has the ability to. to secure a blockchain by using the native asset that it conjures itself.

If proof of stake works, then maybe you could make the assumption that, well, maybe we can stabilize the price of a stable coin also inherently from the asset itself. So I didn't exclude the probability of it happening, but I think that there's enough empirical evidence to be at least extremely, extremely cautious and perhaps not be so inclined to assume that we have something that we should just push into the entire ecosystem as people have has been doing with Luna. Yeah. Well, clearly there was some merit to that thinking. Nick, what was your stance on algorithmic stablecoins as well as Tara Luna? Yeah, so I've been, you know, a stablecoin enthusiast for a long time. I support the

institution of stablecoins, you know, I defended tether on a number of occasions, right? So I think that fiat backed model is great. The fully convertible model works and provides a great service. And it's a great compliment to Bitcoin. I don't think it's incompatible with Bitcoin in any way. The algorithmic model, I first thought deeply about it when I diligence basis, base coin back in the day, looked at that investment, developed a variety of attacks on it and thought it would be impossible that it wouldn't work. In 2020, I looked into Terra. I wrote a white paper on stablecoins.

I looked at a whole bunch of different models and wrote Terra off. I thought it wouldn't work. And then I was shocked when it swelled to such a significant scale. I wasn't as critical as Eric was because I don't really have the appetite to go toe to toe with people in crypto like that. I don't have the stomach for it, frankly. But I had been critical of Luna, Tara, and I didn't think it would work. And I think there are a variety of mechanics which made it get as large as it did, which were irresponsible. But yeah, my current stance is it would be great if there was a crypto-backed stablecoin that was credibly decentralized and could resist seizure the way that Fiat-backed back stable coins can't.

That has to be over-collateralized, in my opinion. I don't believe you can do it in the under-collateralized way. I think we have abundant examples in crypto, in the history of stablecoins. history of senior share of stablecoins. We have abundant examples from financial history, monetary history. And so for a while now, I've been convinced that senior and shares stablecoins cannot work. So let's talk about what actually happened this week. There's been a lot of speculation on Twitter and elsewhere that this was a deliberate attack on Tara. Do you think that that was the case and, you know, explain why or why not? I can start. I don't think it was coordinated. I think

it is a form of coping in order to think that you've been victimized by a single entity as opposed to just investing in something that is unstable. We don't need a catalyst, actually, for a bank run to occur. You don't strictly need an attack to occur

for a fundamentally unstable system. All you need is, you know, a few sellers to get spooked, and then it catalyzes more and more, and then it's a rush to the exits, and the exits too small. So that's what we saw. Like, certainly the rumors of BlackRock are said at all doing this are completely fallacious.

You know, you didn't need a single malicious entity. And I think people are trying to reapportion blame to some fictitious presumed entity, which, which, you know, brought this whole thing down in its way of avoiding the reality of the situation, which is that it was unstable. Yeah, I just need to comment on that when terror, sorry, when Black Rock posted an article about how, you know, they, they, they, they, they, had this denial, the comments back to them were just people wanting to believe that it was them and accusing them anyway. I mean, it was, you know, I was shaking my head reading it. But anyway, Eric, you wanted to add something? Eric Voorhees. Yeah. Yeah, I agree with mostly with Nick said. I think more importantly, it doesn't matter if there are attackers out there. Like, these systems need to be able to exist and thrive and survive in an adversarial.

environment. So I don't really care if one entity did a kill shot on this or if it was, you know, a million market participants acting in their own interests, which is I think what the default position should be. If it is one attacker, I think that changes the conversation and distracts from it. Like the mechanism needs to be able to withstand a single attacker. And if it can't, then it needs to die and go away. So yeah, I mean, certainly it'd be very interesting and scandalous if it was, but I've seen no strong evidence to support that, and I think people should assume that this is the vigories of how markets work. Yeah, I just got to add something to that. I don't think that it was, I think that the timing of the event was kind of suspicious in some

sense. If you know about the three-pool on curb and the four-pool that they were moving their liquidity to, the destabilization of the peg happened. at that exact moment. If it had happened a couple of hours later, then there would have been billions in liquidity to cushion the fall of UST. So it seems like I'm not excluding, I agree completely with what Eric Vohorhe has said,

that it doesn't matter if it was an attack or not, because we didn't have these artificial pools of liquidity for Luna before, and it was just that we were removing liquidity from one pool to the other. These systems should be resilient to that. But I cannot exclude the possibility that there was something related to the timing of liquidity being moved from one pool in curve into another pool, because that decreased the threshold that an attacker would need to mount against Terra in order to be successful. So I think that it's definitely possible.

I don't have any evidence. I don't have any evidence of that. But I don't think that it's at all unlikely to assume that someone saw that in this, exact moment, there is less liquidity that would cushion the fall of UST. So if I attack now, I'm going to have a higher success rate. So the timing of the pegging seems to be related to the moving of liquidity on curb, in my opinion. Yeah, I agree that the timing is suspicious. Kevin Joe of Galois Capital, who has been sounding the, you know, an alarm about what he felt was a risky structure of UST for a long time. I was DMing with him and he said that he felt that

someone could have accidentally kicked it off when they saw the liquidity was low if they didn't know what was happening with the transfer of the liquidity from three pole to four pool and just got kind of concerned about their investment that it could have been something like that. But, you know, to me, I do think that the timing is suspicious. A few things I do want to clear up. I've just seen some. so much on Twitter and elsewhere where people are saying that this happened when someone, first of all, borrowed 100,000 Bitcoin or they started shorting Bitcoin. There's like a number of these things where you would only know that if you like worked at the place, you know,

where they did that trade or something, like, which they're not going to be publicly talking about that. So I just want to kind of separate a fact from speculation here. You know, I mean, clearly there was, actually, can somebody describe it with? something on curve that basically is what kind of kicked off the DPEG they did a large trade on curve. Can one of you explain what that was? Well, I can give it my best shot. So there was a migration that was supposed to happen on Curve where there's a so-called four pool, where you tie the liquidity of frax, USDC, UST, and I think USDT together.

and they were supposed to move the liquidity of UST from another pool into the four pool. And while they were doing that migration, they'd just taking UST out. And we're talking about hundreds of millions of dollars that they had just taken out, which if the four pool, which was going to be, it was going to be billions of dollars in that pool, if they would have attacked when the four pool was up and running, then there would have been billions of dollars. that would have cushioned the fall in the four pool. But now, since they were pulling the liquidity out of the UST pool on curb,

the liquidity there was much, much lower. I think we were talking about like 150 millions of dollars there instead of like $3,4 billion. So if someone wanted to short UST and cost the peg, the price to the peg, there was much less liquidity in curve at that particular moment. But I'm not an expert on that exact particular moment. mechanic that happened right there. So I can't speak exhaustively to it, but that's like roughly a summary of what happened. Right. And then that kind of kicked off the DPEG, basically. Well, someone started to sell a huge amount of UST, which started the DPEG. And if there was a curb pool

to arbitrage that the price difference with, then that would have cushioned the fall extensively. But now that liquidity wasn't there, it was just a couple of hundred millions of dollars there. It was much easier to make that price of UST go down relative to other stables. Yeah, and I saw people also saying that

if all of this had happened once for a pool was up and running, then it would have been even harder. So this was just like kind of a weak moment, but you know, we're not saying that we know anything happened deliberately because, you know, as I mentioned, Kevin Joe had a really plausible explanation for

how it could have been accidental. But Nick, I wanted to go back to something you said earlier, which was that you said that you felt that the way the U.S.T. ecosystem had been developing was irresponsible. You use that word. Can you talk a little bit about what you saw there that you felt was irresponsible? Yeah. I mean, if you look at the history of senior chairs style stable coins, which is such a mouthful, we need a different term for them,

they never got big because basically people don't trust them, right? And so that's always limited their fallout when they collapsed. Like Newbets was minuscule. ESD, I think, was the senior-ed-shares one, which collapsed. Basis cash never got big. It didn't really get off the ground. The biggest probably was the Iron Titan one, and that wiped out a fair amount of capital, but very small compared to this.

So, you know, basically, like, people aren't done. Like, they don't park their cash in senior-ed shares, stable coins for the most part. If you want to actually use a stable coin in crypto, you're going to use, you know, use it for, you know, as a medium of exchange or collateral in a smart contract or for settling trades with exchanges or for international trade, you're going to use USDC or USDT. You know, there's like, they're just trusted. And so, you know, the question is like, why did UST get so big? It got to 18 billion, I believe, at peak, is because of the subsidy in the anchor pool. that interest rate was way higher than what the market was paying out. Yeah, the 19.5% interest rate. Yeah, and if you overlay that against other interest rates available in crypto,

you know, you're looking at like single digit rates. And so, you know, mid single digits at the time. So that is very high and that is like any central bank raising interest rates. It sucks capital in, right? That's like what central banks do when they want to suck dollars into the banking system. It's actually kind of very similar in a way to what happened in Lebanon, where they realized the banking system was failing, and they wanted to draw in as much capital as possible,

so they hiked rates in like a Ponzi-like way, actually, in the case of Lebanon. So Anchor was subsidized, and that caused, you know, capital to enter the terror ecosystem through U.S.T and through Luna as well, right? So it had an effect on the price of Luna. That, to me, was the biggest mistake, because that caused it. this thing to grow so large. And for the safety of the system to be insured, you would want UST to actually be relatively small relative to the market cap of Luna, because all redemptions had to be processed through Luna. And so as UST grew, due to this high interest rate,

relative to the size of Luna, the system became more and more imperiled. So to me, that's, if there's one thing I would pinpoint, it's actually the subsidy in the anchor pool, which I think was the one biggest mistake that caused the harm from this to be really, really high. Instead of, like, if there hadn't been that, UST creation would have been much less, and you wouldn't have had the fallout that you did. And one other thing I want to ask you about is you started by saying that you felt, like, reliable stable coins were USDC and UST, which are obviously centralized stable coins. And, you know, something like UST, at least was aiming to be decentralized, whether or not it actually was we could debate. But, you know, I think one of the, you know, I think one of the,

appeals of a U.S.T-style stable coin is the fact that it could eventually be stablecoin, even if it, decentralized, even if it isn't now. So do you feel that when it comes to stable coins, it doesn't matter if they're centralized instead of decentralized? Or do you still? I reject the framing of U.S.T. as decentralized or as having this decentralization teleology where it's progressing towards decentralization. I think that's false. Never looked decentralized to me, and I don't think they could plausibly get there. It would always require management. It would always require a central bank doing open market operations. I didn't see a way, even if they backed with Bitcoin, backing something with Bitcoin

doesn't make you decentralized. That, you know, like micro strategy owns a lot of Bitcoin. They're not decentralized. There is no, and frankly, backing a dollar liability with a Bitcoin asset, even if they'd been fully reserved. That's still an asset liability mismatch. So, you know, I view that as entirely pretextual. I think the decentralization narrative was a pretext for supporting, you know, like rhetorically the importance of UST relative to other stable coins. I don't think there's a way to do, you know, so-called decentralized crypto-back stable coin that's under-reserved. The best model that I would want to see, there would be the maker model, which is over-collateralized, but that wasn't what they were pursuing. So maybe if they'd been explicitly doing that saying they're going to have a significant over collateralization with just Bitcoin, then I'd believe it. But I didn't believe it. I reject that framing. And do you feel that it's like some people say that kind of the holy grail of stable coins is to have a decentralized one?

Do you feel that that's like a worthy goal or you just feel it's not even possible to create such a thing unless it's over collateralized? But you're constrained by the laws of economics, you know? So, like, I do think it's a worthwhile thing to pursue, but I would like to see it pursued in the maker approach. Although maker itself has problems because it's just a U.S.D.C. thing now, basically. But, yeah, so I agree. That's a worthwhile goal. Like, I don't believe we should all be using a stable coin. We're just very exposed to the U.S. government, the banking system, if we all use U.S.D.C. and tether, those risks. So, yeah, I think digital cash should be, you know, free of the risk of arbitrary seizure.

but you also have to do it in a way that makes sense and isn't liable to cause fragility. I want to comment quickly on this. So Nick is right that to call Tara Luna decentralized in the state it was in is misguided. However, I don't think it's misguided to say it had become and was becoming more decentralized than the alternatives of USDT and USCC. There are aspects of it which were very decentralized. The chain itself, the inability to freeze or reverse funds, is nowhere in that code, whereas in USDC, Circle can actually freeze accounts, right?

So there are elements of it which were becoming more decentralized than the alternatives, but it was nowhere near sufficiently decentralized for people to comfortably call it that. I think that's a fair point. It didn't need open market operations necessarily. The main mechanism that was intended to hold that peg was the smart contract itself. That didn't require any human intervention. Now, layered onto that was some human intervention, especially when they decided to start partially backing Luna with Bitcoin.

That started to require some more people getting involved. But in theory and in practice, these mechanisms can be seen. set up to be decentralized, this one failed. I would hope that it can be done better than that. Eric, Wals, you have thoughts? Yeah, well, I don't think that the centralized stable coin is necessarily impossible. I think that probably the best example that we have currently is Rye. It's not particularly well known, but the tradeoff that Rye makes compared to Dye, I mean, die had the problem like instead they didn't want to introduce negative interest rate in dye to stabilize the price they wanted the price to be exactly one dollar so instead of having a negative

interest rate what they did was they open up for other collateral type so that's why you have us DC in die which now makes the die more centralized but there is another way to have a looser peg which is what rye does the reason that rye isn't very successful is that they didn't start out with the price of Rye being traded around $1. Instead, they made the price of Rye trade around 3.14 basically Pye, so no one understands what Rye is supposed to be. But the mechanism of Rye itself, it's an over-collateralized, decentralized stable coin that actually works.

The peg is not 100% peg to an exact price, but it sort of hovers around that. That's a pretty reasonable stable coin that we can have that would have been way better than, you know, putting all our eggs in the basket of something like UST. And wait, and I'm sorry, it's $3.14. Yeah, they started at a pie dollars. It's kind of gimmicky. Okay. So they introduced a new unit of account, which was also a mistake.

Okay. But wait, I'm sorry, because I was so thrown by that, I just need to understand. So what is it about? Is it over collateralized? How does it work? It is over collateralized, but the price peg isn't, like hardly super focused fix it's a bit looser so it trades around 3.14 it can go up it can go down but throughout its history it hasn't deviated that much so that's an alternative to die so

die has the problem that you now have centralized stable coins that are in the collateral mix if you want something that is more decentralized uh one example to go about that is rye that isn't exactly pegged to that doesn't have a very tight peg, but has a peg that works somehow. And it's over collateralized with crypto. It's like back to my crypto, not... Yeah, this one is over collateralized by Eith. Yeah, it's all.

Oh, so it's like the original maker or the original dye. Original die except not tightly pegged to one dollar, but more loosely pegged so that they don't run into the problem where the problem with die was that the price of dye started to deviate from the peg, and then they had to either introduce negative interest rates or they had to introduce collateral types like USDC to bring the price back down again. So, Rai is another example to do that without. Yeah, it's kind of complex, but, yeah. Yeah, I mean, just listening to all this, I'm a little bit like, yeah,

so many of these have flaws. I end up sort of going back to feeling like the more centralized ones are the best sort of like Nick was saying, which, you know, is probably a very, kind of anti-cryptial, anti-decentralization philosophy, but I don't know, that's my takeaway. Like, what is your big takeaway when you're looking at this whole history of all of these failures and the fallout from UST? Do you feel that Signor shares, stable coins are just sort of dead in the water from now on? Because, I mean, I don't know if you saw that the community is saying they're going to try to revive. Do you think that's possible?

Like for me personally, this failure of Luna sort of puts the nail in the coffin of something that I felt for a long time that we should not assume that these death spiral mechanics can be avoided even with the $3 billion Bitcoin Reserve. It's just not like the death spiral mechanic is so pernicious and is so unstable that it doesn't matter how many billions of dollars you have in a shit coin to sort of stabilize the price or how much Bitcoin you raise, when the death spiral kicks in, it just leads to disaster.

And I don't think that it is responsible to play around with those mechanisms. And I think that we should hold the industry leaders who vouch for this more responsible because this was not an unknown, this was not an unknown attack vector. the people that have studied stable coins, we all knew that there was a big inherent death spiral risk there. And it was just a matter of time, like, how long can this go on before it collapses? And I think, Nick, you gave yourself too much credit here. I think that you were the one that more confidently added that this experiment with Luna

was going to end sooner rather than later. I was willing to give it, you know, I was willing to give it a year. you know, why not two years. So I was like taken at the bed a little bit here, like that it actually happened so soon. Like I knew that it was going to happen at some point, but Nick was more like it was going to happen like soonish in the next couple of months or weeks. So I don't think that it's a good idea to keep experimenting with those all-go stables. I think that we should focus on over-collateralized stable coins, but I don't think that we should abandon the dream of a decentralized stable coin at all. I think that we should give more experimentation to experiments like Rye, for example.

I guess I'll say that the nature of experimentation is one in which most things fail. I have a lot of tolerance for failure. I have a lot of tolerance for experimentation. The Byzantine General's problem, for example, was unsolvable for decades, right? And had been like kind of given up on by lots of people. It's just like can't be solved in computer science. right so much theory went into that and and then there was a breakthrough and it was solved and it changed the world and i think a spirit in which we see big failures and then give up on a line of

scientific or economic pursuit that's actually the bigger disaster so i certainly wish that luna had not gotten so big before it collapsed but i think uh if the industry decides that this line of pursuit is unpalatable, that it cannot be pursued and it should not be tried because of the danger. That is actually a bigger problem than the losses. I sympathize with that, but I think that the big problem here was just the cult around Doe, the cult around Doe Kwan and how much support he was given. And I mean, if you want to try an experiment like that, I mean, go ahead by all means. But the problem here was that he was aggressively calling everyone that tried to point out flaws, retarded and useless and spreading fud. And he had a huge community of greed-driven lunashills that were helping him push that narrative and silence critics and harassed them.

And we even had huge hedge funds in his two. that were also backing all of this. And I like what you said very much, Eric, that we should not give up on experimentation. But I think that you might have heard a little bit in the case of UST in describing it as, you know, essentially, like you were, you were kind of pushing UST a little bit as well,

I think not only as, you know, this crazy experiment, but it's more of something that we should embrace and start to use and include in all of our products. So I think that, yeah, it's fine with experimentation, but we did not treat this as an experiment. There were so many parts of this industry that treated this as the solution to the decentralized stablecoin problem. And partly including you, Eric, I'm a regret to say. Yeah, I mean, I've always treated it as an experiment.

I still treat Bitcoin as an experiment. I wake up every day and think like Bitcoin could go to zero today, accept that reality and move forward with it. and I've done that every day for like a decade. These are experimental systems. And I absolutely agree that a lot of the way that this got marketed really undercuts that experimentation, right? Like on Anchor, a website like that should be saying loudly, this is an experiment. You could lose all your money.

Right? Like if I ran Anchor, I would say that. That's absolutely important. And there's no one that I ever proposed utilizing. UST to that I told them what's like this is a safe investment right it's not it's risky it has 100% risk of loss that message has to go along with the experimentation so I'm absolutely with you and I think you know I probably could have done a better job with that with Luna myself and I think it's incumbent on anyone in the industry that as you're advocating anything that you feel is

important to sometimes even overemphasize those risks I think that's fair I'll I'll see one thing here is, you know, not everyone's as sophisticated, you know, as Eric Voorhe's here in terms of sort of taking risks. In fact, you know, very few people are, right? So what happened with UST, like, that's worse than some, you know, crypto asset that, you know, free floating, that, you know, whatever collapses. This is worse because it was advertised as being a dollar, being stable, and stable coin in the name. And you, the free market of information, didn't clear, right? The information order book had a massive spread because, as Eric says, Doe Kwan was extremely hostile to informed critics and he had an army of supporters. And it certainly

kept me from saying more about it. A hundred percent. I wish I had. But I also didn't have the heart to go toe to toe to with these people and, you know, get blackballed from the industry because I was critical what other funds were investing in, right? So the information market did not clear. There was insufficient amount of skepticism. The warnings, you know, didn't percolate. And you had products built on top of anchor, right? There were neobanks built on top of anchor pitching retail, pitching anchor yields to retail, right?

Unconscionable stuff. Like a subsidized yield that was denominated and unstable coin. I mean, that's dangerous. Like, you know, big lenders. Like Celsius admitted they were involved in this thing. They put client funds in this stuff. So because it was advertised as a stable coin, despite having a huge amount of default risk, and because the marketplace didn't actually internalize the risks here properly,

because criticism was stifled, you know, the outcomes were bad. I just feel like we have to separate out two things with Anchor and UST. because you could have run something like Anchor on top of USDT. You could have run an application where you say, you can borrow USDT here if you deposit collateral, if you over deposit like 2X, the amount of collateral that you want to borrow. And then the staking returns of those assets that you deposit as collateral are going to be paid as interests into the people that,

lend out their UST. I mean, Anchor had real revenue streams. They had real interest streams that went to the people that barred out their UST. And you could have subsidized that interest that was paid out from a centralized company as a growth strategy. There are tons of businesses that subsidize the utility and the benefit of a product at a cost loss to themselves just to make their product more popular. And if their reserve, like the anchor yield reserve, which was being topped up by Luna all the time, if that ran out, if they didn't have any more money to top that up, the only thing that should have happened is that, well, the interest rates on UST should have dropped. They should have dropped from being 20% down to 4%. But it shouldn't have led to an explosion of the whole ecosystem collapsing with even the chain halting.

That was another problem. That was a problem of UST itself having a death spiral mechanic. built into itself that could easily depag if something happened in the market with the value of UST. So I don't think that necessarily it's, if someone is offering you a very high interest rate on your asset as a growth strategy to make your stable coin popular, let them do that.

And if they fail, the only thing that should happen is that the interest rate should fall. You should not have a catastrophic failure. That failure comes from the reckless, the reckless experimentation with all go stables in and of itself. So I think it's important to sort of separate out those two things. I mean, the one thing that makes it sort of intertwined is that the reason that the Terra Foundation had so much capital to subsidize these yields for UST with was because the lunar ecosystem

was growing. And the lunar ecosystem was growing because UST was expanding. And while UST was expanding because people were depositing funds into Anchor, so they saw the market cap of UST growing. They saw the expansion of this new stable coin growing, the value of Luna grew, and that gave the Terra Foundation enough capital to subsidize the yields with, which made this such a big vehicle that drew so many people in, and which is the reason that we have now this Lehman Brothers type failure and not just some small, small. blip of a failure instead. But I think it's just important to separate those things out there a little bit. So are you saying that you feel that a decentralized stable coin like UST could have could work if it grew more slowly and less aggressively, meaning if even like it could be tied with this kind of savings vehicle that, you know, attracts people to the stable coin. But if it offered

something less than 19.5% obviously probably probably. quite a bit less, do you feel that then it would have, it would work? And frankly, do you think people might try that in the future? I'm saying, like, if you take Rye, for example, let's say that Rye wanted to pay out a fixed interest rate for a while so that people start using Rye more, that's a perfectly fine growth strategy for them to use. If they run out of governance tokens to issue to subsidize those yields with or the money that they raised in an ICO to subsidize their yields with. The only thing that would happen with Rye in that example is that they'd have to turn off

the subsidized yields. And then perhaps less people would use it. But the problem with Luna is that when less people use Luna, when less people use UST, the value of Luna starts shrinking. And then the people are starting to want to get out of UST. the peg starts falling and it turns into this vicious cycle where everyone wants to get out of both UST and Luna and the whole system collapses. That wouldn't have happened in an over-collateralized system that could only happen to an ALGO stable like UST. And I think that people are sort of conflating

those issues with the aggressive growth strategy of anchor with the death spiral mechanic that was built into UST. So in a moment, I want to discuss a little bit more this issue around kind of like the cult of dough. But first a quick word from the sponsors who make this show possible. The ScoreBet 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. That's not really what I do. Is that because you don't have any knees? Or... The score bet. Trusted sports content, seamless sports betting. Download today.

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Cross River's tech stack supports crypto partners and enables real-time money movement for consumers. Welcome to a new world of crypto-friendly banking. Request your Fiat on-off-ramp solution now at crossriver.com slash crypto. Back to my conversation with Eric Forgey's Eric Wall and Nick Carter. So earlier we were discussing how people really supported Doquan, and he just played quite a bit of arrogance. You know, when I had him on my show, I remember it wasn't that I felt certain that UST was going to fail. It was more that I was very confused by the history of failures of Signored Share Coins and his level of confidence in his history. system. That was such a mismatch to me, and I just frankly didn't understand that. But, you know,

there were a lot of very reputable venture capital firms behind the Terra ecosystem, which I, this is why, like, people have been saying this is similar to Mount Gawks or the Dow. And the way I think it's differentiated is that, you know, Mount Gawks was being run by somebody who never should have been an entrepreneur. The Dow was like, these coders created the thing. And, you know, but you had reputable companies like, you know, Coinbase Ventures, Pantara, Parify Capital, Polychain. I mean, there were so many, obviously, Mike Novogran's Galaxy. Like, these are kind of, these places have, to my mind, lend credibility. And I was just curious why you thought maybe none of them kind of reigned dough in. Because I also felt when I interviewed him, like, he's a young

guy. Like, maybe he just kind of hasn't learned that humility goes a long way in leadership, which frankly, you know, after working my book, I actually feel that that is one of Italic strengths as a leader, that he is humble. So I don't know if you feel that the VCs either share in any of the blame or if you want to express anything about why it is, that they kind of didn't say like, hey, you know, there's what you're doing is risky.

Maybe you don't want to be walking around so confident. A few long-form discussions I heard with institutional investors in Terra, they did acknowledge the risk even of the death spiral concept. But that generally only comes out in a long-form discussion, like on a podcast, right? These firms are not going around advertising that there are risks of this portfolio company. That would be a little strange. And certainly the arrogance looks so bad, right? Like regardless of whether Luna worked or didn't, the arrogance is inexcusable.

That's the kind of behavior that we should eschew out of the community wherever we see it. So, yeah, I mean, but ultimately the real problem here is that the mechanism broke. And the focus of this long term should be what that mechanism was, why it broke, and can it be changed into something that plausibly works better? Everything else is kind of, you know, an interesting detail. Laura, I have a lot of sympathy for your view here. I think the information sort of gathering mechanisms and curation failed in this case. Certainly the firms that were supportive of Doquan and the Tierra ecosystem, I mean, frankly, it was a good bet for a long time. It was the most popular trade of 2021.

It was the consensus trade. So basically everyone in the industry was exposed to this in some way or another. in the formal investment management side of the industry. And there was no, there's an insufficient amount of skepticism. And certainly, this was, I think the way in which this was worse than other Ponzi-like schemes that failed was because of the credibility of the firms that were involved. And people outsource their diligence to them. They said, well, like, X and Y firms, they can't possibly be getting this wrong. So, of course it's safe, right? Like, You know, like you assume that these firms do their diligence properly.

The other, you know, stakeholder group I would, you know, lightly criticize would be the press. Not yourself, Laura, but I personally reached out to a number of journalists about two months ago and said, this thing's going to collapse. You need to look into it. Personally, I have receipts to everyone I knew in Tradfai journalism and said, like, this thing is taking time bomb. You need to look into it. It's going to be really bad. And none of them, really none of them investigated seriously. And Doe in his MSM appearances, like, didn't receive a lot of pushback.

It was mostly, like, enthusiasm that he was buying Bitcoin, frankly. Like, that was a huge PR coup. Like, Doe was buying Bitcoin, you know, like, that was clever. He got the Bitcoiners on his side, too. But, yeah, I didn't see enough pushback from, you know, interviewers. So, you know, I look. nobody likes it when, you know, some collapses and lots of people lose money and then, you know, you go around pointing fingers. But like, we need to introspect at some point, like, these mechanisms

failed. This thing got enormous. And like the recriminations are only just beginning here. I think that the, I agree with Nick. And I also think that we give way too much credibility to these big names, these VCs and the amount of credibility that they add. is very artificial, in my opinion, because I don't want to toot my own horn here, but many of these VCs, when they're doing their due diligence on some of these projects, they contact some of the nerds in this industry, and they're like, hey, can you tell me about, like, is this thing safe? What are the risks in that thing?

And I'm one of those nerds that they reach out to. I get these kinds of questions where, like, is there a risk that I should be? And I'm talking about the biggest names in the industry here. that's often how they do their due diligence. They ask some geek who they think is very deep in the weeds and just rely on that kid to know the mechanics of that thing. So I've had those conversations and I don't think that those, I don't think that those VCs are well versed in the structural risks

in many of these blockchains and many of these experiments. And I don't think that you should just because, you know, that big firm with X much capital invests, that thing. You've got to understand, like, many of these VCs, they get a deal with, like, when they're investing, because their name is so popular, they get a much cheaper deal when they're investing in something than other people in the market do. So their risk reward, when they're looking at it, it's like, okay, I'm buying it at a, you know, 50%, 75%, or even sometimes more discount. This doesn't necessarily apply to specifically Luna, but in many of those cases, they get huge

discounts. So for them to just, you know, buy something is still an extremely good risk reward bet for them, but it might not be for the people that are buying that on the open market. So you have this misalignment of incentives where people are looking at the credible VCs who are taking easy, low-hanging fruit, and they're thinking that that means that they believe in it and it's so credible because of that, but the due diligence that they do is often not very good. You can look at a number of completely crap bullshit auctions that these visas have backed that ended up failing that was predictable to many of the people who are experts in the technology of

this field. I want to push back on something here, which is that this idea that like because of VC invests in something, that means they don't see the risks in it. That's not my experience at all. I mean, like generally these these firms recognize huge risks and their default assumption is that the thing they're about to invest in is going to zero. Most of the things they invest in do go to zero. That's where they stand. So when you see a firm investing in something, that firm's default position is that that thing's going to zero. And if there's this like story going around that just because some big name puts money into a project, that means they believe there's no risks. Where is that coming from? I mean, that's a strange myth. No, I'm saying that

the risk reward that they're investing in when they're doing private deals is not the same as the public investors are exposed to when they're investing in the project. There's a mismatch there. True, although generally the public investors are buying it when the project is far well established. So the risk reward is absolutely different because they're buying something that has already gotten built and has gotten traction in the marketplace. I mean, this is certainly a separate debate here, but I see what you're saying. There's one other thing worth mentioning is that a lot of people's perception of Terra, UST, was that it was sort of indirectly also backed by the whole Terra ecosystem. you know, like that there is like this, you know, association between like the usage of Tara and like the backing of the peg and that this thing could have a soft landing if the

anchor yields evaporated. Like everybody knew the anchor was subsidized. Like that wasn't like a secret. But the view was like there could be a soft landing. And I think that like really misled people because they have these like folk theories of like tokenomics, you know, where they think, oh, like it's a vibrant blockchain. And they'll figure it out. They'll have the tools and the firepower to figure it out.

As long as this thing is big enough, there's enough apps, there's enough utility, enough usage. That was also a prevailing myth that I saw. It's like, okay, look, UST will survive because they've got all this stuff going on in the terror ecosystem. But the theory was just unsound. Let's shift a little bit. I was going to ask a few more questions about Doe.

But I don't necessarily want to pile on at this moment in time. But I do, you know, I do think there's like a lot of questions kind of about his behavior that could be raised. Actually, well, before we move on, I am curious, do people feel like someone like Do or like people involved with Terraform just wouldn't have any future in this industry? You know, there were, I saw that the community is saying that they want to revive the ecosystem without Terraform. labs. And I was kind of curious what your thoughts were on whether that was possible or a good idea. Possible, yeah. I mean, that's part of what makes Luna somewhat decentralized is that like it can actually get pulled away by other people in the community and rebuilt in some other, some other way. That can never happen with the USDC, for example. So yeah, I have no idea if it has

any future at all, you know, probably not, but it's possible. I mean, I think the credibility has been lost and I think we need a lot of answers before we actually get to the final lot sort of like diagnosis here which is like for instance what happened to the bitcoin where's the bitcoin like what did they do with it right like the bitcoin was claimed to be used in support of the peg like they'd several billion dollars worth of bitcoin they're not transparent about that like that is something that we deserve answers for before we can move on like we're still in a state of uncertainty regarding that and I think if it you know if they sacrifice the peg and let the system collapse and just hung on to the Bitcoin and kept it in their reserve, like, then that becomes like an, it's already a serious matter, but that enhances the severity.

But I'm sorry, wouldn't that be visible? We would see. We know that the coins are somewhere on chain. They moved from the reserve wallet. We don't know what happened to them. And they haven't said anything about it. Whether they were deployed in the market, whether they're borrowed against them, we just don't know. Oh, and did they make any announcements saying that they were, I feel like I saw some announcements saying that they were going to be working with market makers to try to. It's not clear. Yeah, it's not clear. Yeah, so like the level of transparency has been very poor. But yeah, they did say something when it was sort of starting to suffer a little bit, but nothing since then.

I think probably the important thing here is to look at the assets that were bridged into the Terra ecosystem, they need to be safely bridged out from there. And there are other issues like, for example, Chainlink oracles that are reporting on the Luna use the price because the spec of Chainlink didn't expect the price of Luna to go down so way down into the zero digits that there's now a mismatch. There's trillions and trillions of Luna out there that the ChainLink protocol for example, can interpret as being worth more because they don't have like the granularity of digits to describe what is what is actually worth. And there's already been attacks because of that where people deposit, you know, trillions of

Luna into a protocol and they get to withdraw some other asset because these protocols aren't pricing Luna correctly anymore. So that's one thing that needs to be resolved. Getting those assets out of Luna is also something that needs to be resolved. And then there's also like it's so cheap to attack the Luna ecosystem right. now because it's a proof of stake run chain. I think that's why the halted the thing. So just getting the thing up and running and not having it be easily attacked and reversible is another thing that needs to be addressed so that the connections with the TerraBlockchain

using the IBC protocol in the cosmos ecosystem. That's also something that needs to be carefully handled. So I think that we're not, we are not in a moment where we should be thinking about how do we relaunch this thing and make this into success? This is all about just putting out the fires that these irresponsible people have started. And once we've done that, maybe you can relaunch Tara. Maybe you can air drop a token to the people that held Tara and Luna before the crash. But I mean, who cares? Like, what's the credit?

Who's going to give credibility to those initiatives? Like, what is the interest in that experiment right now? Like maybe some of the projects that we're building on top of the ecosystem, they might still want to do something. They might want to have somewhere to build. But I see no reason why that should have to be like on a tariff work or something. It can be on some other system now that the stable coin is dead. And in general, where else do you see a risk of contagion in the rest of the crypto markets? Because I did see Lido, I guess, was talking about some of the, I think it was like steak teeth and bonded teeth that had been bridged over to.

Tara, I don't know if the rest of you kind of know some of the other ecosystems, but I was curious if you saw risks elsewhere for crypto. Yeah, so UST was, like, I think the cosmos ecosystem is at most at risk because they were like trying to make UST their, the pioneered stable coin in that ecosystem. So osmosis, for example, which is a decentralized exchange, had lots of pools with UST in it, I think. the other parts of the the cosmos ecosystem that were leveraging the UST

asset inside of lending protocols like that's where you're going to see these risks I think so the cosmos ecosystem needs to sever its bounds with UST in a safe way and there might be like liquidations happening across the board and that's inside of that ecosystem that's where like I'm mostly worried about I think like getting the like the staked ether

that was being used as collateral bridged into Luna, that's just a matter of bridging that back out. You know, what happens to Luna doesn't really matter. As long as the chain is working, you can wormhole those assets back out or you can use a bridge and get those assets out of Luna. And, I mean, the state of ether is just, you know, an IOU for post-merge ether. So, like, there is sort of like an asset underneath that. It's just that, you know, it's sort of integer.

when it will be extractable. The one risk I see is certain firms like Celsius admitted they had exposure to UST. It seems like they were nimble enough to get out in time, but we'll probably hear a little bit more in the few days, next few days about lenders whose yields were derived from Anchor, which is just tremendously irresponsible, especially if you're passing through these yields to retail investors. So my guess is yields come down, you know, just generally speaking in the stable coin space for a lot of these C-Fi lenders. And, you know, that's because some of them had it an anchor, right? So that'll sort of be evidence that the yields come down.

It's like, that's because you had it in anchor the highest yielding, most liquid. Cool. I think if any of these things were really going to blow up, we would have probably seen signs of that by now. So maybe, you know, most of these firms are nimble enough to get out. But yeah, I think that's one, you know, not necessarily catastrophic thing that we'll see, but like one outcome here is that stable coin yields go down. And Eric Voorhees, have you followed any fallout with Thorchain? I know you're kind of a promoter of that in Cosmos, so I don't know if you've heard of anything

and if you have a sense of what might happen. No, the biggest issue with Thorchain was just that during the collapse, you know, which is been ongoing. The Terra chain has been so clogged that the Thorchain Terra nodes were not able to keep up with the blockchain. And so the Thorchain validators just turned off that chain in Thorchain for the time being. But, you know, that's a good way of handling that risk. Yeah, I think the damage here is largely by the people that held Luna and UST. Tragically, it's also going to be held by people that didn't realize they were holding UST, right? So to Eric and Nick's points, if other companies were utilizing the system behind the scenes and not telling their users about it, that's a big deal,

and that's a big problem. I wouldn't assume that we know all those stories yet. You know, there could be some very uncomfortable board meetings happening right now in which they're discussing these very things and how to communicate it out to the public. So, yeah, that's really bad. We'll see what goes on there. Yeah, that's about all I know at this point. One other thing I was wondering about was whether there are any projects that had their treasuries in Anchor. Have you guys heard anything about that? Yeah, I've heard of a couple. I don't want to name them on this show, but they had some.

It wasn't catastrophic, but minimal losses from some portions of their treasury. And I think any friend that's doing that with their own money, you know, that's fine. That's their risk. And hopefully they were doing that eyes wide open. The real moral problem, the ethical problem is if anyone is, if anyone is, if anyone is, doing it with customer money and not telling those customers. Well, I mean, in my view, corporate treasuries don't belong to the executives. They belong to the shareholders.

So I think it would have been tremendously responsible for them to put their balance sheet in this thing. Yeah. One thing I just wanted to circle back to a little bit was Nick earlier when you were talking about how when Tara announced that they were going to use Bitcoin as a backstop in their reserves. what do you think that this whole story says about Bitcoin's use case as collateral? I was sort of initially intrigued by it, and then I realized that this was going to be net bad for Bitcoin because it was going to be sucking up a fair amount of Bitcoin. We thought up to $10 billion and then disgorging it when the system failed. Thus, merely intensifying the cyclicality of Bitcoin, causing more reflexivity. This is what happened with Plus token. If you were recall,

plus token scooped up something like 200,000 Bitcoins is much larger, and then it spat them back out when it failed. So, you know, these kinds of unstable systems buying a lot of Bitcoin, obviously that was a little bit different. But unstable systems sucking up Bitcoin, then spitting it out when they fail is not good for Bitcoin. Obviously, anybody can buy Bitcoin. I can't stop them doing that. So whatever, it's just, I did point this out of the times. like, like Bitcoin is probably shouldn't be celebrating this. All of that said, like Bitcoin does have a great story as a kind of pristine collateral, so to speak. I would hope to see it backing a stable coin in the Rye model.

I think the reflexor labs, people are thinking about creating something called buy, which would be Bitcoin backed Rye. And, you know, that would be over collateralized in theory. So that I like, I think that would be great. That would have to be over collateralized. But yeah, I think there's a lot more to be said about, you know, Bitcoin acting as kind of a species in a free banking model. I've long been optimistic about that. I'd love to see more models like this developed where you have, you know, interesting Chalmyan banks built on a Bitcoin Reserve, things like that.

I think that's like the long-term fate of both Bitcoin and Ether is to be more of a collateral than a medium of exchange, against which you would issue banknotes or other things like that. but I haven't seen a ton of experimentation there on the Bitcoin side at least. I have a sort of controversial take here, which I think that perhaps the addition of the Bitcoin reserve added to the collapse of the UST, and I'm going to explain how that might be. It's because if you have 17 billion of UST, and for some reason it starts to deep peg and people are running through the door, those people know that there's three billion of Bitcoin that are standing ready to cushion the fall. You don't want to be trying to exit the system after all those three billion has been used up. You want to be getting out of the door while that big Bitcoin

cushion is standing to cover for you. So it creates an incentive to even be quicker out of the door because there's a small door there that can cushion the fall in a much better way than And Luna can, it doesn't have this death spiral mechanic to it. So it creates an incentive to be even quicker out of the door. And I think that when Luna started to depag and Doe tweeted that, you know, he's deployed this $1.5 billion of Bitcoin to market makers, then people are realizing like, okay, I can't get out of the system now without losing all my UST. If I just, you know, use that $1.5 billion Bitcoin exit liquidity.

But if I'm too late, if I'm trying to exit after the Bitcoin has already been gobbled up, then I'm going to have to try to exit into Luna. And then I'm going to be a second, you know, a second grade citizen trying to exit the system. I'm probably going to get a worse price. So by tiering up, if you create like a tier of exit mechanics where one is sort of premium, then you increase the incentive to exit the system quickly. So I think that that might have, you know, if we're talking about timing, We're talking about the four pool and curve.

But I mean, this $3 billion Bitcoin Reserve also was just established moments before it all collapsed. So the establishment of the Bitcoin Reserve in and of itself might have been additive to the collapse of Luna. So I don't think that you should use Bitcoin in these undercollateralized pegging systems. If you're going to do it, it should be an overcollateralized peg, I think. it's a really interesting point. There's also like some recursive potentials there where a lot of people thought that like by backing Tara with Bitcoin, Bitcoin was the mechanism that supported the value, right? Which was a misnomer. The peg mechanism was the mechanism.

Bitcoin was meant to be sort of a bonus. But everyone started focusing on like, oh, it's Bitcoin that backs it. It's Bitcoin that backs it. So when the first problem starts showing up, people start imagining that all sorts of Bitcoin is about to get sold. And humans are bad at scale. A lot of people felt like Doquan owns so much Bitcoin that when he tries to defend this peg, it's going to destroy Bitcoin. They have no sense of scale of like $3 billion of Bitcoin is actually a pretty tiny part of the market cap.

So there's this outsized influence of what people believe will happen with Bitcoin. So if they're speculating and trading, they're going to be selling Bitcoin. just in anticipation that others will be selling it. And if the Bitcoin market is falling drastically, that's generally going to pull down the entire crypto market, which is going to pull Luna itself down further. And so these things can exacerbate themselves. I think it's totally plausible that the Bitcoin backing,

the partial backing, made this worse. It's possible that if they had far more Bitcoin, it would have made it better. So this isn't really like a simple question here, but it's an interesting one and probably one that people are going to be analyzing for a while. And it's really the same thing when Russian central bank was thinking about adding the convertibility of ruble into gold. If you take just a small part, like if you have way more ruble than you have gold, and now you add a conversion mechanism for ruble into gold,

now the people who want to get out of ruble, they're going to rush to convert their as much. Now they have like this buywall with gold that they can just sell their rubble into. And that may lead them to now try to dump the ruble more versus the case where there wasn't an exit mechanism like that at all. So it's the same type of mechanic there. So I was also sort of anxious when people were proposing that they would sort of partially back the rubble with gold as well. One thing that I couldn't help but notice was, so I'm not going to lie, like, you know, after all this happened, I just thought algorithmic stable coins are dead. And so yesterday I recorded an episode where at the end when the guest said that he felt people would try them again, I was laughing. But actually, overnight now I've changed my mind and I do think people will try them again. But I did see people saying things like, well, the U.S. dollar itself is an algorithmic stable coin. And I think what they're saying is both of these things, the U.S. dollar and these algorithmic stable coins require faith in them for them to succeed. And I was curious what your take is on that. They require guns.

I mean, I think that's vacuous, frankly. Crypto people love to, you know, try and puff their chests out a little bit by insisting that the dollar is also a pawnsy or whatever. But, I mean, like, there's, like, genuine, you know, structural dynamics, which back the dollar, like, most debt globally is denominated in it. So you need to acquire dollars to extinguish the debt. That's the main thing. We cooked up this inventive petrodollars scheme in the 70s where, you know, we price oil

and commodities and dollars and we give all these nations guns, as Eric says. Like we have the Bretton Wood system. We have these gigantic, you know, international financial institutions which, you know, promulgate the dollar, give loans and dollars, you know, insist on managing, you know, the economies of all these states globally. I mean, tax liabilities can only be extinguished in dollars. U.S. securities markets are denominated in dollars. You need dollars to buy treasuries, vice versa.

Treasuries pay out in dollars. Like, I could go on, you know, and it's just like a world of difference. And, like, ultimately, nation states have the firepower. Well, certainly the U.S. does. But there have been nation states that have tried to fix these pegs and basically say, like, I'm declaring what the market is. I'm going to try and fight the market. And so, like, there have been these analogies.

to algorithmic under reserve stable coins at the nation state level. The nation states have lost in those cases. So, you know, like, the US is not pegging the dollar. And even when we did peg the dollar to gold, we had a trade deficit or current account deficit, I think, in the 70s and like that peg came under pressure. So like, if you're pegging it,

that's different from having a free-floating currency be out. Like the value of the dollar is multifaceted. And I can't send it one. crypto. Crypto people just say it's like a collective delusion or whatever. There's like real mechanical things that support its price. Yeah, those are not exclusive. I mean, the dollar is a collective delusion and there are mechanical things that support its price. The main difference is between something like UST and the dollar is that there's no algorithm at all. It's up to just the whims of,

you know, a cadre of men that sit around and like decide things and then announce it to the market and a question of scale. I think anyone that like, cast shade on something like UST, but then embraces fiat currency generally, should do some deep soul searching. I think when and as fiat currencies themselves collapse, this kind of microcosm of the danger and destruction of this failed mechanism is going to be writ large across the entire world. And we're not going to be talking about a $20 billion experiment that fell apart, but the entire global financial system. This is the point of building something like Bitcoin as an alternative, because dollars are themselves the biggest scam

and the biggest liability in the entire world right now. But UST was not just an algorithm, even if we separate out the Bitcoin Reserve, jump were testing liquidity parameters and how much the spread fee should be when you're trying to push quidity through the UST lunar conversion mechanism in order to dampen the likelihood of a bank run by creating a spread and giving people less Luna for their UST.

And they were tweaking those parameters. So you basically had like jump coming in and say, we tested, we've done some simulations. Can you adjust these parameters so that the spread fee will adjust differently? They were also tweaking and adjusting the system all the time, much in a similar way as the Federal Reserve does when they're thinking about stabilizing their system as well. So it's not like, I'm not saying they're complete the same, but there are also similarities there. It's fair, but in UST's case, there was always an algorithm that you could find on a GitHub repo. And it could be tweaked, but everyone knows what it is at all times.

So for all of UST's failures and flaws, it was still an open system that everyone could see how it worked on a mechanical level. The mechanism broke and failed. It should have been done better. But it's an open system. And I think this makes it vastly more meritocratic, more valuable, more ethical than something that is imposed on people through violence in which there is no GitHub repo to speak of. But it didn't make it work any better. In the hand, I mean. This case failed.

Yeah, this case failed. But the iterative process of money that can be built through open source software, I think all of us would agree with time will produce superior result. I just want to ask one last question, which is, I was curious what you thought this whole debacle would result in in terms of any kind of action from regulators or any other fallout. What do you think happens after this? Ultimately, it would have to be a congressional thing in the U.S. that really draws the distinction between these different types of stable coins or tries to impose a new regulatory regime. The SEC was sort of looking into terror, but in the context of their mirror product.

call, I think. Or is that what the one that was called? Yeah, it's like a synthetic, yeah. Yeah. And so that's why they didn't like it because of the, you know, kind of minuscule synthetic equity thing, which is like kind of funny, I guess. You know, that they kind of like didn't, maybe they were already looking into the other bigger problem. But, uh, yeah, they found the piece that worked fine and had a problem with that and completely missed the part that was broken. Yeah, it's a kind of classic SEC thing. The problem is that. that Congress is not doing much of anything right now. They have never passed any crypto, really meaningful crypto legislation.

So maybe this catalyzes them into action. It might have to wait until after the midterms. I think long term, what's very possible here is that we got something like the Stable Act does go through. And, you know, your dominant major FIAVAC stable coins become regulated as banks. So they're forced to get bank charters. And so they move away from the state-by-state models, like the trust charter. You have the New York Trust Charter, Nevada Trust model, or you have the state-by-state money transmitter like USDC. You know, the federal government reasserts itself and says, okay, you can't do this federal thing, federated thing at the state level.

You have to get a bank charter. You have to be FDIC regulated. The OCC has to regulate you. And that dramatically reduces the vibrancy of the stable coin system. It reduces competitiveness. It probably increases scrutiny. Maybe it means that stable coins are less private. Maybe the model where the issuer doesn't track the internals of the network, they don't track the peer-to-peer transactions.

Maybe that goes away. So, yeah, I think it's a shame because stable coins generally are great. I want it to be competitive. I want there to be many issuers responsible at least. Yeah, certainly I think they'll take a much harsher view of any algorithmic stable coins, but also just stable coins generally. I think it's if we're lucky they're going to look at this

as just another bit connect failure if we're lucky yeah if we're lucky they're just going to say oh well you know another bit connect failure but if you look at the sheer magnitude in size of the value evaporation because of the Luna death spiral

we're talking about like almost like an order of magnitude I think it might be order of magnitude's difference here like we're talking about How much was it? Was it $40 billion or even more? I mean, if you count UST, it was almost $60 billion. Isn't that like Lehman Brotherscale failure that we just synthesized here overnight in crypto?

I mean, that collapse, if we're unlucky, and they don't just look at this as a BitConnect failure, they might look at this as like something that really needs to be clamped down on, and it's going to damage parts that weren't even, you know, it's going to touch all stable coins. It's going to touch all of crypto. Because we heard Janet Yellen commenting on this almost immediately as it happened. I'm just very, very worried that this is going to cause an immense flashback to the entire cryptocurrency industry. And if we're lucky, it'll just be, you know, another Bitcoin Connect failure that will eventually be swept under the rug with other

catastrophic failures in crypto. I think it's worth pointing out that of all the devastating losses from this, much of the wealth that was lost was first created by Luna. Right. So this is a little different than like a traditional financial institution that blows up and $50 billion is gone and that was like people's money that came from somewhere else. The majority of the market cap of this whole system was created by Luna. Right.

And that's lost now and is going to be very consequential to people. But that's important to keep in mind. Yeah, except for the people that put in their life savings and stuff, which I have seen social media posts about that. Yeah, I'm not saying that this isn't devastating for lots of people. It absolutely is. But not every dollar that was lost was some exogenous thing that just disappeared. In terms of the regulators, their agenda is pretty clear that they want to move the world toward a CBDC slowly or quickly. And anyone that pays attention to this stuff realizes how Orwellian and horrible that future will be. would be. So they will absolutely use this as an example of why it's so important that we flee to

the safety of the heavily regulated CBDC, you know, ordained by the governments. They will use this as an example of that, and they will probably use this to bolster further regulation against the industry. I think that's all inevitable anyway. This is just like something that they will use to assist in that process. Really, what matters here is the decentralized technologies. Like we need a decentralized stablecoin, whether it's done collateralized or whether an algorithm can be figured out that makes it work. A decentralized stable coin is absolutely important. And anyone who's working on that right now, I want to just give a lot of respects to because it's an extremely important part of what this whole industry is providing. And then most important of all is like a true decentralized money for the world.

And that's what we have in Bitcoin. So this is a big event. I don't want to make light of it. I don't want to like sugarcoat it. Lots of mistakes were made and the whole thing fell apart and tons of people are suffering and that's where we stand. But industry will move on from this and hopefully a lot of lessons can be learned both on the economic level and on the social and game theory levels. All right. This has been such a great discussion.

Why don't each of you just quickly throw out your Twitter handle so people know where to find you? I'm at Eric Voorhe's same spelling as in the profile here. I'm ERCWL and by the way, Laura, you introduced me as this chief investment officer of arcane assets. I've resigned from arcane assets and we'll be moving on from that shortly. So just a small edit there. Thanks for correcting. Nick underscore, underscore Carter, that's two underscores. Other one was taken.

Great. Well, it's been so great discussing all this with you. Thank you all so much for coming on Unchained. Thank you so much for having us. Thanks so much for joining us today to learn more about Eric, Eric, and Nick, and The Whole Tara Fiasco. Check out the show notes for this episode. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Nuss, Mark Murdoch, Shashonk, and CLK transcription. Thanks for listening.