Matt Levine has had several excellent columns on Luna this week. This is the most recent one.
https://www.bloomberg.com/opinion/articles/2022-05-13/elon-musk-trolls-twitter
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Luna really did lose almost all of its value almost overnight. A week agothere were about 343 million Luna outstanding with a total value of $26.5 billion, today there are 6.5 trillion Luna outstanding with a total value of, let’s face it, nothing. (CoinMarketCap says about $540 million, but that does not reflect the price at which you could sell a trillion Luna.) A $26 billion ecosystem completely evaporated.
Did that happen because people lost faith in that ecosystem? I mean, sure, yeah; the main job of that ecosystem was surely to preserve the value of a $1 stablecoin, and it manifestly failed. But, again, that’s a weird thing to happen overnight. The people passionately building apps in the Terra ecosystem last week didn’t lose all their passion this week.
Other people, though, bought UST , not because they were betting on Terra but because they wanted a safe place in the crypto world to put their dollars. (And earn 19.5% interest, sure.) UST was not an equity bet on the value of the Terra ecosystem and the passion of its developers; UST was a safe asset .
Safe assets are much riskier than risky ones . This is I think the deep lesson of the 2008 financial crisis, and crypto loves re-learning the lessons of traditional finance. Systemic risks live in safe assets. Equity-like assets — tech stocks, Luna, Bitcoin — are risky, and everyone knows they’re risky, and everyone accepts the risk. If your stocks or Bitcoin go down by 20% you are sad, but you are not that surprised. And so most people arrange their lives in such a way that, if their stocks or Bitcoin go down by 20%, they are not ruined.
On the other hand safe assets — AAA mortgage securities, bank deposits, stablecoins — are not supposed to be risky, and people rely on them being worth what they say they’re worth, and when people lose even a little bit of confidence in them they crack completely. Bitcoin is valuable at $50,000 and somewhat less valuable at $40,000. A stablecoin is valuable at $1.00 and worthless at $0.98. If it hits $0.98 it might as well go to zero. And now it might!
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The part about systemic risks is really important and under appreciated. It’s really worth thinking about that part.