A once-stable, “safe and happy” crypto project named terraUSD imploded earlier this month, prompting an “I told you so” chorus from detractors aimed at those unfortunate enough to be duped — and inked — by the latest crypto calamity.
It’s hard not to poke fun at a decentralized, trustless, permissionless, hard-money utopian future of finance unsuccessfully turning to quantitative easing (read: Kwontitative easing) for survival. But as is becoming distressingly clear, some investors have lost most of their life savings from the collapse of terra and its twin coin luna.
This begs the question: who has been encouraging ordinary investors to jump on the latest bandwagon flashing a ticket to the moon? Whose credibility slow luster to a doomed project? Here is FT Alphaville’s terra/luna hall of shame.
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To give Novogratz his due, the Galaxy Digital co-founder recently penned a letter preaching humility in the investment world. Before those lessons were learned, Novogratz was touting the promise of terra’s terrific technology and cheering on Do Kwon — the once-inspiring face of the “LUNAtic” movement.
When Novogratz wasn’t flexing his proof-of-LUNAtic ink on Twitter, he was overseeing a Galaxy-led funding round for Terraform Labs, the company behind the terra and luna debacle. “We are always looking at those projects because they are the canaries in the coal mines”, Novogratz said in January last year. Well, quite.
Humility is one thing. Introspection is another, it seems. “The crypto community — and Galaxy’s — mission isn’t changing. I firmly believe now more than ever that the crypto revolution is here to stay”, Novogratz said to conclude a recent shareholder letter.
The backing of big-name trad-fi trading firm Jump Trading Group added a lot to the legitimacy of the Terra ecosystem.
In February 2022, the high-frequency trader’s crypto branch Jump Crypto led a $1bn funding round that enabled the Luna Foundation Guard — terraUSD’s quasi-central bank — to establish a “UST Forex Reserve denominated in bitcoin”. Yes, really.
“The UST Forex Reserve further strengthens confidence in the peg of the market’s leading decentralized stablecoin UST,” Jump Crypto’s president Kanav Kariya said at the time. The tone is a bit different these days.
I don’t know exactly what to say. This week has been hell for our entire community. I know we’ll come out of this stronger, but that doesn’t make this any easier
— Kanav Kariya (@KanavKariya) May 13, 2022
A breakdown of Jump Crypto’s activity in the Terra community can be viewed here.
Marco Di Maggio
In a 2019 white paper, Harvard Business School scholar Marco Di Maggio teamed up with Terra’s Nicholas Platias to argue that terra’s dollar peg would prove “highly robust . . . based on 1mn years’ worth of simulation data”. Three years later, terra’s dollar peg was anything but.
But in a rebuke of Do Kwon’s leadership, Di Maggio told FT Alphaville that the terra he once knew was no more. The terra he wrote about planned to peg a stablecoin to the Korean won. His analysis of how that system might fare under strain was therefore no longer relevant, he argued.
Do Kwon decided to introduce a borrowing and lending protocol called Anchor — Terra’s first attempt to enter the market of decentralized finance. The initial idea was to allow users to borrow the terra stablecoin for other transactions within the ecosystem. In the original design, the interest rate paid to lenders should have been a market rate determined by the borrowing demand. This would have made it sustainable without posing any risk to the overall design.
Instead, to attract attention and grow the company, Do Kwon decided to subsidize and fix the deposit returns for lenders at 20% APY. All of us on the research team knew this would create an unstable system with unsustainable growth of supply. With such a high rate, Anchor attracted about $15 billion worth of capital. But the growth of the underlying capital, now decoupled from the borrowing demand, made the whole system very fragile. Depositors could withdraw large amounts of capital, sell it on the market, and cause the stablecoin to lose its peg to the US dollar. We tried to explain the risk and instability of these proposed fixed returns to Terra leadership. But with no decision-making power in the company, our words were ignored.
Misguided venture capitalists and academics are one thing, but one of the industry’s most prominent and influential companies is quite another.
Changpeng Zhao, the CEO of Binance — the dominant crypto exchange behind this story’s lead quote — has had a lot to say about terra of late, including a joke that the crypto-bro who made it into Forbes’ top 20 rich list last month was now “poor again” after the project’s collapse.
More importantly, Binance promoted a terraUSD lending scheme as a “safe and happy” investment just weeks before the terra/luna ecosystem collapsed in a heap of zeros and lost life savings.
The crypto exchange told the FT it is reviewing how it runs its adverts, but that risks too little too late for the would-be crypto investors who read the exchange’s message on Telegram, which was seen over 110,000 times.
Real Vision CEO Raoul Pal also drank the terra Kool-Aid. “You can just put money. . . stake the network, and get 20 per cent, and [it’s] basically risk free”, said the former Goldman Sachs trader turned crypto preacher during an episode of Real Vision airing last November.
“This is mind blowing”, he added.
As mind blowing as terra might have been to Pal back then, it appears he didn’t put his money where his mouth was. In a Twitter thread published on May 10 — right when terraUSD’s fateful de-pegging was gaining steam — Pal tweeted that he “had no idea how it plays out” and that he “had no skin in the game”.
Pal concluded his thread suggesting that “markets like finding pain”, a sentiment likely not shared by those feeling the real pain of paralyzing financial loss. When wounded crypto investors dug up the November video the backlash was fierce.
It is so sad to see Twitter dissolve into angry people – value or commodity investors, BTC maxi’s and other non-pragmatists – all screaming at anyone with different views. This is just investments, not a philosophical justice war. We all have different views and it’s ok! Be nice.
— Raoul Pal (@RaoulGMI) May 23, 2022
The Washington Nationals
They may be last in their division at pixel time but fans of the MLB’s Washington Nationals will surely be consoled by the franchise’s February partnership with Terra, which established a “foundation for future blockchain and cryptocurrency applications”.
Echoing the Houston Astros’ untimely tie-up with Enron in 1999, a private members’ bar at the Nationals’ stadium was quickly rebranded the Terra Club. It remains the Terra Club today, though it’s unclear whether UST will be accepted as payment next season.
In the teeth of terra’s collapse, the MLB franchise also flexed its unique ability to read the room with this tweet.
—Washington Nationals (@Nationals) May 10, 2022
Who are we missing out though? What hapless promoters should be on an extended list? Let us know in the comments below.