> Terraform Labs was one such entity. But its protocol – which aimed to ensure TerraUSD's price would remain stable – failed miserably in part thanks to its underlying blockchain being unable to scale as scared investors sent demand for transactions soaring.
Was this an actual technical problem or was this a bank run?
A bank run. Their system relied on having a stable coin pegged to the dolar. Someone with deep pockets did a speculative attack that broke the peg and it started a bank run.
It sounds a lot like this https://en.wikipedia.org/wiki/Black_Wednesday basically use short positions to trade against the real value of the currency while selling at the "pegged" price pocket the difference. If a G7 currency can't guard against this type of attack then can a crypto service expect to compete?
Its very easy to explain (Im doing from memory so not 100% sure all the details are correct).
Prerequisites:
1.Terra/Luna was "special" because it was a cryptocurrency(Luna) with its own stablecoin(Terra/UST), with the peculiar quirk of the collateral for the stablecoin being the crypto itself(unlike Tether/USDC/whatever else where each stable is backed by USD/treasuries/commercial paper and etc).
2. The 2nd part is that the peg of Terra to dollar is maintained algorithmically, via a pretty simple mechanism: One dollar worth of Luna is always worth 1 Terra(so 1 USD in crypto land). To convert between the 2, you either burn(Luna->Terra) or mint(Terra->Luna). The peg is maintained by arbing: If you see 1 UST = 0.9 USD, you buy the UST, mint 1 dollars worth of Luna and sell it to get 10 cents of profit.
3. Anchor protocol was a lending protocol that offered 20% interest rates. You deposit your UST, Anchor lends it out to people who want to borrow it, life is good. There were other protocols that basically also offered ridiculous rates on UST(remember this is close to peak crypto bull).
What happened:
1.From the above description, the biggest question is: What is the value of LUNA? Sure, it has a value with regards to arbing UST, but what is the value by itself(0, turns out). What ended up happening is that during the bullmarket people wanted both UST and Luna(you want Luna to bet on the ecosystem, and you want Terra to farm the 20% yield). For example, if people are buying UST(to put it into Anchor), UST price goes up. You are then incentivized to buy LUNA, burn it to get 1 UST, and sell UST for above a dollar. As you can see, this is a pretty classic flywheel.
2.The actual blowup: Most people blame Anchor cutting the interest rate. Basically, certain large accounts quickly dumped UST for USDT/USDC(actual stables), and this knocked off the peg. Here, under normal conditions, arbitrageurs would massively buy the discount UST, mint LUNA and sell it. There was one problem: LUNA was also massively falling, so it was impossible to do the arb. As a result, the price kept falling as no one was buying, and as the price of LUNA fell the peg could not be defended.
tl;dr It was a stablecoin that was not backed by any actual assets but by another crypto.
This is completely misleading. Their "stable coin" system was doomed to fail from the beginning.
They made up two new coins, which were algorithmically tied together so that coin A's value was variable and coin B's value was equal to 1 dollar, and the mechanism to maintain this was that users could convert between A and B coins at whatever ratio maintained the "stable" value for B.
This means that as soon as the hype around the speculative A coin waned, it instantly went into a death-spiral of hyperinflation to maintain B's value.
The "stable coin" was never backed by actual dollars or gold or bonds or equity in a business or anything real. It was an algorithmic peg between two different useless coins made up by the same people.
I was not defending it or saying it was stable. And I believe what you said is true about the weakness, but the fact is that the life of this project was still shortned by someones actions.
People kept telling me, "These companies have billions of dollars invested in them, they're rock solid, its a great investment." And then you keep seeing these crypto companies who are valued in the billions continually going under and taking investors money with them.
I've always admired what crypto was aiming to achieve, but stuff like this hinders their effort for people to take this stuff seriously and get involved.
The timeline might be compressed for crypto, but this seems to be true for banks as well.
Looking back to the financial history of the 1800s, it seems to be the case that it is only the massive intervention of government beginning in the 1900s and especially after the Great Depression -- in particular aggressive regulation and oversight, central bank systems, deposit insurance -- that prevents perennial banking failures. And it happens anyway: see 2008. Reportedly, even the recent failures of Silicon Valley Bank and Signature Bank threatened contagion before the FDIC made the extraordinary decision to protect balances in excess of $250k.
So really, it appears to me that crypto is merely an immature financial system that is learning the lessons of legacy finance in an accelerated fashion.
I don't know if this comparison was meant to make crypto look better, but it really doesn't. The original pitch of crypto was to revolutionize global finance and replace it with something better. It seems the pitch has now devolved down to, "The current system, but less mature", which is about as unexciting as a technology pitch can get.
I think it's important to separate "crypto, the technology" from "crypto, the financial system".
But, yes, I agree. It's not good for the original value proposition, but I'm not sure that's relevant anymore -- does anybody really buy crypto in order to use it in the real economy (drugs aside)?
> Looking back to the financial history of the 1800s, it seems to be the case that it is only the massive intervention of government beginning in the 1900s and especially after the Great Depression -- in particular aggressive regulation and oversight, central bank systems, deposit insurance -- that prevents perennial banking failures.
This is a complete misunderstanding of the US banking system history.
The reason the US banking system was totally screwed up after the Civil War was because of a few major regulations. Most importantly not allowing branching. So the US literally had 10000s of banks that were incredibly small and not deversivied. And it gave NY banks a monopoly on foreign market stuff forcing all the smaller banks to deal with the NY banks creating a pyramid structure.
And then combine that with a monetary system that forced banks to back notes with US government bonds (raising money for the civil war). Guess what happened after Civil War, the US paid back debt (yes I know, crazy to think) and this basically created a constant deflationary pressure.
This is literally as if somebody had designed a system to implode, and guess what, it did, repeatably.
This was actually well understood by many back then. And the solution was also clear. Don't force banks to back notes with US government bonds (or alternatively stop reducing debt). And allow banks to operate beyond their local economy.
These changes went before congress multiple times. It was rejected each time because of lobbying. The small unit banks didn't want to compete against each other, and the NY banks didn't want to give up their privilege position in the market. Support came from the medium sized banks, in other cities like Chicago.
So it was basically a alliance of the very small banks and the very large banks that locked a horrible terrible system into place. Rural and NY teamup FTW. This system lead to repeated massive waves of bank failures and it lead to the 'Free Silver' movement and famous things like the 'Cross of Gold' speech. Ironically William Jennings Bryan was also against the actual solution to the problem we was complaining about, go figure.
This can be observed by comparing the US to Canada. During the same period Canada had no massive waves of bank failures. Canada had always allowed these things (in fact, the suggestion in the US were inspired by Canada). So in Canada you have larger banks that operate in the whole country and they were backing notes with general stocks not just government bonds. Canada had basically no bank failures, not even during the depression, even while the depression was quite deep in Canada (given their trade with the US) and Canada didn't even have a central bank during that time. And just minimal regulation in general (but it has to be said that these cooperation didn't hae all the rights of cooperation today).
This deadlock was then basically 'resolved' at least in theory by creating the Fed in 1913. The reason this was managed is because it basically the Wilson Administration bought off the NY banks by giving them even more power. And it bought of the small banks by not changing any of the unit banking laws and buy not giving all power to NY (hence the strange structure of the Fed). In practice of course NY actually took control and that's where actual policy decisions were made for the early history)
Problem was just, Fed didn't even remotely solve any of the actual problems and was a totally incompetent institution. Issues with the banking system persisted, the Fed didn't actually improve anything. They had the power to fix some of the issues, but they weren't competent enough to actually do it.
That meant that during the Great Depression the US still had 10000s of weak banks and didn't have an efficient system to provide liquidity. Its hard to say if the Fed made things worse or not. And this time the deflationary pressure came from all the dumb shit central banks were doing at the time (name...
Maybe I'm naive and brainwashed and so on. But one of the big selling point of crypto was that you don't get "under the opressive control of banks and the state" and such. And, I can get the merit of that idea. Banks can have a massive amount of control over some peoples life.
But at some point, a bunch of financial sharks got involved into the crypto pond. These guys have decades of experience at exploiting financial markets, and a bunch of the regulations and rules we have through banks and the state is to protect naive people like me from sharks like those. And it doesn't work beyond a certain state, sure. If you can pay millions to dudes finding loopholes to make billions, alright. But at my level of money I can trust the system to some degree. At least more than an unregulated market full of people with decades of experience at exploiting companies and people financially.
And while I like the idea behind crypto, that thought has shaken my confidence into the idea beyond repair, to be honest.
> But at some point, a bunch of financial sharks got involved into the crypto pond.
It’s not like things were any better before the sharks arrived. In the old days you had Mt. Gox where they lost your money through rank incompetence. Now you have FTX/Terraform/etc. where they lose your money through evil (and also rank incompetence). At no point was there a golden age when crypto wasn’t a shitshow.
I think the biggest problem with crypto is the difficulty to get reliable information about pretty much anything. The vast majority of crypto related "discussion" on twitter or reddit is worthless. You have to dig pretty deep in to various developer communities (node, blockchain analysis, mev bot developers) to find people who actually have at least some basic understanding of smart contract interactions and can better assess the risks of different projects.
I don't share the view that Terra or FTX are good reasons to give up on crypto. Terra's promise of 15-20% interest on staking a "stable coin" should have raised big red flags. Even at the time there were notable people warning of risks in such algorithmic stable coin, but their voices were drown out under the massive hype parade on twitter that then spread on to various news outlets and so the stage was set for regular investors to lose their money.
FTX on the other hand was harder to predict but anybody following the age old mantra "Not your keys, not your coins" was safe from that fiasco.
On a purely technical level I think it is incredible what Ethereum has succeeded to achieve. A decentralized ecosystem with decentralized exchanges, loan systems, staking, and so on. Scams, shitcoins are an unfortunate side-effect but I don't see how a decentralized system could ever avoid those.
I personally use crypto whenever possible and think it is absolutely the easiest and cheapest way to transfer money to anywhere in the world. At its best it can also be a very convenient way to make online purchases.
Whatever your thoughts on crypto, bitcoin was an interesting idea with potential applications. But none of the new "cryptocoins" added anything to what it offered. Thus, it was clear they were filled with grifters. When people invest in something that has no clear use in an already saturated market, it's safe to say that this is a grift. Furthermore, one of the key features of bitcoin was that no one needed to use an exchange, the entire idea of bitcoin was centered around the obsolescence of banks. You could keep your own money safer than it would be in a vault at the bank. Thus it's safe to say that these are grifts too.
If anyone goes into these thinking "they're rock solid investments", they don't know what investment means, they don't know what rock solid means, and they understand absolutely nothing, not even the basics, about cryptocurrency. Saying that you'd "invest in crypto" is like claiming you invest in dollar bills. If a person says this, they are a stooge. If you want crypto because you wish to buy something that the seller only takes crypto for, then crypto is a good thing. If you're "investing", then you're just a stooge that got caught by this scam first, rather than by some Nigerian prince.
Well - if you're currently living in Argentina, with ultra-high interest rates[0], you should invest in dollars. Investing in another currency is definitely a thing.
The problem with crypto isn't at all what you're saying, to the extend you're saying anything. The problem with cryptocurrencies is the majority of the underlying value isn't "this country/group of countries uses this currency, so it's valuable". It's "other people who buy in later will allow you to sell for more than you bought".
A crypto "company" is fundamentally antithetical to the entire ethos of cryptocurrencies. Yet that didn't stop grifter and greedy "investors" pumping money into them.
> Another reason not to get involved with crypto.
> People kept telling me, "These companies have billions of dollars invested in them, they're rock solid, its a great investment."
No matter if it's correct or not, that's an argument to not invest in stocks like MSTR (Microstrategy) or COIN (Coinbase) and that's an argument to not put your coins on a centralized services.
It's not an argument against cryptocurrencies themselves.
It just prove that those who are repeating, since 10+ years, "not your keys, not your coins" are right.
I think that is what happened. From the SEC press release:
> As part of the settlement, Terraform agreed to pay $3,586,875,883 in disgorgement, $466,952,423 in prejudgment interest, and a $420,000,000 civil penalty.
41 comments
[ 3.5 ms ] story [ 93.6 ms ] threadWas this an actual technical problem or was this a bank run?
I'd find a forensic accounting investigation that explains what they did and how it worked quite interesting.
I joke, but realistically, the UK has not gone the way of Terraform of FTX, so ...
Prerequisites: 1.Terra/Luna was "special" because it was a cryptocurrency(Luna) with its own stablecoin(Terra/UST), with the peculiar quirk of the collateral for the stablecoin being the crypto itself(unlike Tether/USDC/whatever else where each stable is backed by USD/treasuries/commercial paper and etc).
2. The 2nd part is that the peg of Terra to dollar is maintained algorithmically, via a pretty simple mechanism: One dollar worth of Luna is always worth 1 Terra(so 1 USD in crypto land). To convert between the 2, you either burn(Luna->Terra) or mint(Terra->Luna). The peg is maintained by arbing: If you see 1 UST = 0.9 USD, you buy the UST, mint 1 dollars worth of Luna and sell it to get 10 cents of profit.
3. Anchor protocol was a lending protocol that offered 20% interest rates. You deposit your UST, Anchor lends it out to people who want to borrow it, life is good. There were other protocols that basically also offered ridiculous rates on UST(remember this is close to peak crypto bull).
What happened: 1.From the above description, the biggest question is: What is the value of LUNA? Sure, it has a value with regards to arbing UST, but what is the value by itself(0, turns out). What ended up happening is that during the bullmarket people wanted both UST and Luna(you want Luna to bet on the ecosystem, and you want Terra to farm the 20% yield). For example, if people are buying UST(to put it into Anchor), UST price goes up. You are then incentivized to buy LUNA, burn it to get 1 UST, and sell UST for above a dollar. As you can see, this is a pretty classic flywheel.
2.The actual blowup: Most people blame Anchor cutting the interest rate. Basically, certain large accounts quickly dumped UST for USDT/USDC(actual stables), and this knocked off the peg. Here, under normal conditions, arbitrageurs would massively buy the discount UST, mint LUNA and sell it. There was one problem: LUNA was also massively falling, so it was impossible to do the arb. As a result, the price kept falling as no one was buying, and as the price of LUNA fell the peg could not be defended.
tl;dr It was a stablecoin that was not backed by any actual assets but by another crypto.
They made up two new coins, which were algorithmically tied together so that coin A's value was variable and coin B's value was equal to 1 dollar, and the mechanism to maintain this was that users could convert between A and B coins at whatever ratio maintained the "stable" value for B.
This means that as soon as the hype around the speculative A coin waned, it instantly went into a death-spiral of hyperinflation to maintain B's value.
The "stable coin" was never backed by actual dollars or gold or bonds or equity in a business or anything real. It was an algorithmic peg between two different useless coins made up by the same people.
https://medium.com/coinmonks/the-40b-wipeout-the-fall-of-ter...
The last laugh: https://x.com/FreddieRaynolds/status/1524139694388355072
People kept telling me, "These companies have billions of dollars invested in them, they're rock solid, its a great investment." And then you keep seeing these crypto companies who are valued in the billions continually going under and taking investors money with them.
I've always admired what crypto was aiming to achieve, but stuff like this hinders their effort for people to take this stuff seriously and get involved.
Looking back to the financial history of the 1800s, it seems to be the case that it is only the massive intervention of government beginning in the 1900s and especially after the Great Depression -- in particular aggressive regulation and oversight, central bank systems, deposit insurance -- that prevents perennial banking failures. And it happens anyway: see 2008. Reportedly, even the recent failures of Silicon Valley Bank and Signature Bank threatened contagion before the FDIC made the extraordinary decision to protect balances in excess of $250k.
So really, it appears to me that crypto is merely an immature financial system that is learning the lessons of legacy finance in an accelerated fashion.
But, yes, I agree. It's not good for the original value proposition, but I'm not sure that's relevant anymore -- does anybody really buy crypto in order to use it in the real economy (drugs aside)?
This is a complete misunderstanding of the US banking system history.
The reason the US banking system was totally screwed up after the Civil War was because of a few major regulations. Most importantly not allowing branching. So the US literally had 10000s of banks that were incredibly small and not deversivied. And it gave NY banks a monopoly on foreign market stuff forcing all the smaller banks to deal with the NY banks creating a pyramid structure.
And then combine that with a monetary system that forced banks to back notes with US government bonds (raising money for the civil war). Guess what happened after Civil War, the US paid back debt (yes I know, crazy to think) and this basically created a constant deflationary pressure.
This is literally as if somebody had designed a system to implode, and guess what, it did, repeatably.
This was actually well understood by many back then. And the solution was also clear. Don't force banks to back notes with US government bonds (or alternatively stop reducing debt). And allow banks to operate beyond their local economy.
These changes went before congress multiple times. It was rejected each time because of lobbying. The small unit banks didn't want to compete against each other, and the NY banks didn't want to give up their privilege position in the market. Support came from the medium sized banks, in other cities like Chicago.
So it was basically a alliance of the very small banks and the very large banks that locked a horrible terrible system into place. Rural and NY teamup FTW. This system lead to repeated massive waves of bank failures and it lead to the 'Free Silver' movement and famous things like the 'Cross of Gold' speech. Ironically William Jennings Bryan was also against the actual solution to the problem we was complaining about, go figure.
This can be observed by comparing the US to Canada. During the same period Canada had no massive waves of bank failures. Canada had always allowed these things (in fact, the suggestion in the US were inspired by Canada). So in Canada you have larger banks that operate in the whole country and they were backing notes with general stocks not just government bonds. Canada had basically no bank failures, not even during the depression, even while the depression was quite deep in Canada (given their trade with the US) and Canada didn't even have a central bank during that time. And just minimal regulation in general (but it has to be said that these cooperation didn't hae all the rights of cooperation today).
This deadlock was then basically 'resolved' at least in theory by creating the Fed in 1913. The reason this was managed is because it basically the Wilson Administration bought off the NY banks by giving them even more power. And it bought of the small banks by not changing any of the unit banking laws and buy not giving all power to NY (hence the strange structure of the Fed). In practice of course NY actually took control and that's where actual policy decisions were made for the early history)
Problem was just, Fed didn't even remotely solve any of the actual problems and was a totally incompetent institution. Issues with the banking system persisted, the Fed didn't actually improve anything. They had the power to fix some of the issues, but they weren't competent enough to actually do it.
That meant that during the Great Depression the US still had 10000s of weak banks and didn't have an efficient system to provide liquidity. Its hard to say if the Fed made things worse or not. And this time the deflationary pressure came from all the dumb shit central banks were doing at the time (name...
But at some point, a bunch of financial sharks got involved into the crypto pond. These guys have decades of experience at exploiting financial markets, and a bunch of the regulations and rules we have through banks and the state is to protect naive people like me from sharks like those. And it doesn't work beyond a certain state, sure. If you can pay millions to dudes finding loopholes to make billions, alright. But at my level of money I can trust the system to some degree. At least more than an unregulated market full of people with decades of experience at exploiting companies and people financially.
And while I like the idea behind crypto, that thought has shaken my confidence into the idea beyond repair, to be honest.
It’s not like things were any better before the sharks arrived. In the old days you had Mt. Gox where they lost your money through rank incompetence. Now you have FTX/Terraform/etc. where they lose your money through evil (and also rank incompetence). At no point was there a golden age when crypto wasn’t a shitshow.
In reality, everyone would behave the same way if they were similarly scaled.
The idea that crypto lets you avoid banks is akin to the idea of thinking you can have an economy without humans.
I don't share the view that Terra or FTX are good reasons to give up on crypto. Terra's promise of 15-20% interest on staking a "stable coin" should have raised big red flags. Even at the time there were notable people warning of risks in such algorithmic stable coin, but their voices were drown out under the massive hype parade on twitter that then spread on to various news outlets and so the stage was set for regular investors to lose their money.
FTX on the other hand was harder to predict but anybody following the age old mantra "Not your keys, not your coins" was safe from that fiasco.
On a purely technical level I think it is incredible what Ethereum has succeeded to achieve. A decentralized ecosystem with decentralized exchanges, loan systems, staking, and so on. Scams, shitcoins are an unfortunate side-effect but I don't see how a decentralized system could ever avoid those.
I personally use crypto whenever possible and think it is absolutely the easiest and cheapest way to transfer money to anywhere in the world. At its best it can also be a very convenient way to make online purchases.
If anyone goes into these thinking "they're rock solid investments", they don't know what investment means, they don't know what rock solid means, and they understand absolutely nothing, not even the basics, about cryptocurrency. Saying that you'd "invest in crypto" is like claiming you invest in dollar bills. If a person says this, they are a stooge. If you want crypto because you wish to buy something that the seller only takes crypto for, then crypto is a good thing. If you're "investing", then you're just a stooge that got caught by this scam first, rather than by some Nigerian prince.
Well - if you're currently living in Argentina, with ultra-high interest rates[0], you should invest in dollars. Investing in another currency is definitely a thing.
The problem with crypto isn't at all what you're saying, to the extend you're saying anything. The problem with cryptocurrencies is the majority of the underlying value isn't "this country/group of countries uses this currency, so it's valuable". It's "other people who buy in later will allow you to sell for more than you bought".
[0] https://edition.cnn.com/2023/05/15/business/argentina-intere...
No matter if it's correct or not, that's an argument to not invest in stocks like MSTR (Microstrategy) or COIN (Coinbase) and that's an argument to not put your coins on a centralized services.
It's not an argument against cryptocurrencies themselves.
It just prove that those who are repeating, since 10+ years, "not your keys, not your coins" are right.
> As part of the settlement, Terraform agreed to pay $3,586,875,883 in disgorgement, $466,952,423 in prejudgment interest, and a $420,000,000 civil penalty.
I had to look up disgorgement (https://www.investopedia.com/terms/d/disgorgement.asp), but it's repayment to those who lost the money.