Luna has fallen
Welcome to the worst week in Crypto history. Terra Luna and $UST has collapsed. I have never seen anything like this before.
The only other events on par with this would be the Mt.Gox exploit in 2014, and The Dao hack for Ethereum in 2016.
Today I will cover:
- an 80/20 of what happened to Luna and UST
- Lessons learned as an Investor
Let’s go 🙁
What Happened to Terra Luna?
May 6 (a week ago)
Luna Price: $77 (A top 10 coin by market cap)
UST Price: $1 ($18 billion dollars)
This morning:
Luna Price: $.0000294
UST Price: $.15
And the entire Terra Luna network has been halted since last night, and resumed this morning.
Terra’s ecosystem is centered around $UST. It’s their stablecoin that’s supposed to be pegged to $1.
There are different types of stable coins out there.
• Fiat backed. This is like USDC. For every $1 in USDC, there’s a $1 held in a bank somewhere.
• Backed and collateralized by Crypto. You put in Crypto interest bearing assets, and you get stablecoins like Dai or Mim. It’s capital inefficient because you have to overcollaterize it.
• Algorithmic: Under collateralized. Most of them are based on arbitrage opportunities when the coin is “off” the $1 peg.
How Luna works is kinda hard to explain, so I found a visual guide that’ll help.
$UST having another stress test today a.k.a. de-peg, it is best to revisit basic principles of $UST and $LUNA in layman’s terms. #Lunatics #Terra #UST #LUNA@terra_money @stablekwon @Remi_Tetot @nickplatias @ZeMariaMacedo @KanavKariya @CryptoHarry_
(1/x) pic.twitter.com/dKIblCrd4I
— ELI5DeFi (@eli5_defi) May 8, 2022
1 UST = $1 United States Dollar in theory. The main mechanism is through encouraging arbitrage. Its game theory.
• If 1 UST is down to 98 cents, then people can buy it and get $1 worth of Luna. Gaining a 2 cent profit.
• If 1 UST is UP to $1.02, they can do the reverse. Trade $1 Luna for $1 UST and pocket 2 cents.
It’s simplified, but that’s the main Mechanism that keeps 1 UST at $1 USD.
And then the “value” of UST came from Anchor Protocol. People could deposit UST and earn 19.5% APY.
Terra was building out an entire ecosystem that would allow UST to be used in the real world. I literally signed up for Alice Finance last week.
Where did the 20% APY come from? Some of it came from staking assets like Luna and ETH. And then there were borrowing fees. For the most part, that 20% APY wasn’t sustainable. It was funded by The Luna Foundation Guard and other Venture Capitalists.
They funded it like it was a loss leader. Kinda like how Costco sells their Hot Dogs and Roast Chicken at below cost to get you in the door.
They used Anchor Protocol as a way to get users into the Terra ecosystem. And in the backend, they were trying to get more real world adoption for $UST.
Terra also had some other mechanisms in place to defend the peg. They bought billions of dollars worth of BTC (and some AVAX) in order to help defend the peg.
So what happened?
Death Spiral.
People with deep pockets (billions) attacked $UST, and $UST couldn’t maintain its peg.
ok here is how the $luna $ust attack was coordinated & executed. 🧵 (quoted from a friend)
– attacker OTC accumulated $1bn of UST
– borrowed $3bn in $btc
– spread around some fud about peg and bank runs
– dumped the fuck out of their $3bn $btc on market to trigger wider panic— 4484 (@4484) May 10, 2022
Now, there’s a lot of speculation on who did it. I’m not going to participate in speculation until we have more facts.
But yea that’s it in a nutshell.
- The Luna Foundation Guard has been selling BTC like crazy and causing huge sell pressure on BTC.
- Because the market’s so correlated to BTC, everything’s down. Altcoin prices have been destroyed.
- People are taking their money out.
- Terra has been pausing, resuming, pausing, resuming their network
- People are literally committing suicide over this. Because Anchor was promoted as such a safe investment, people invested far more than they should have. They treated it as if it was a bank, and not a crypto asset.
My Investments
I went on vacation last week, and got back in the middle of the death spiral. (Seriously…the ONE time I take a vacation this year)
I had around 5% of my portfolio in Luna, and 15% in UST. I sold my $UST at ~$0.78 and took a loss.
I shouldn’t have called Luna a blue chip, and I shouldn’t have thought of Anchor Protocol as “safe.” I research things as best as I possibly can, and I’m going to get things wrong sometimes.
I take accountability and will improve my theses.
Further Reading:
Terra: To the Moon and Back (NotBoring.co)
Lessons Learned from the Terra Luna Collapse
I’ve taken to heart Ray Dalio’s #1 principle: Pain + Reflection = Progress.
Last week I called Luna a bluechip, and was planning on dollar cost averaging more money into it.
I’m not a perfect investor.
Here are some lessons I’ve learned.
1. Avoid the Cult of Personality Leaders
Remember Daniele Sesta and Andre Cronje? And now you can add Do kwon to the list. These are guys with larger than life personalities. They’re charismatic, strong, and know how to generate hype.
As soon as their followers starts making profits, they’re ready to crown these men Kings. I don’t know what it is, but Crypto wants Rockstars.
The problem is when these guys start getting some success, and they can’t handle it. Their ego and narcism comes out. Anytime someone is critical of their projects, they go on the offense and attack the critics. The critics get tarred and feathered. Everyone else becomes silent. No one wants to deal with their insane followers.
So this creates an echo chamber that blocks any feedback or warning signs.
Until the eventual collapse.
There will be more Rockstars in the next bull cycles. Crypto Twitter has a need to create them.
2. Proper Risk Allocation
I have a rule that no more than 15% of my portfolio goes into a single token. It’s to avoid “concentration risk.” So the most $UST I was exposed to was only 15%. I was tempted to put more money into Anchor Protocol, but my rule saved me from my own bias.
It confused me when I read that people were losing their life savings. How’s that possible? This was a crypto investment. Where was your portfolio management?
And then it hit me. People didn’t view Anchor Protocol as a Crypto investment, people viewed Anchor Protocol like it was a bank.
19.5% APY > .6%
Read the rest of the lessons in this thread
My Lessons From the Terra Luna Collapse:
— The DeFi Edge 🗡️ (@thedefiedge) May 12, 2022
Final Thoughts
This sucks. I’ve been in this space since 2013 and have never seen an event like this.
I lost my first bitcoins in 2014 due to Mt. Gox hack.
I lost 5 figures worth of Nano in 2017 due to Bitgrail going insolvent.
I know how devastating this must feel.
Money is money. You can always make more.
I know it feels like the end of the world, but it isn’t. You learned and you leveled up.
The industry will learn, and the industry will become more robust.
Short term it’s up down up down up down.
Long term it’s up only. It won’t be the same coins each cycle, but this industry always bounces back.
