Was it a scam? A pyramid? Theft? Just wondering but don’t have the time to read lengthy articles.
Good description of the situation. Basically it’s like a bank / confidence game - it works and has value until people lose confidence and then it’s worthless.
When we talked about Terra last month, I wrote:
On first principles this is insane. It relies on [Luna] always being worth something . If [Luna] trades at $0.01, you can print 10 million of them and buy 100,000 [Terra] and push the price up. But if [Luna] trades at $0.00, you can print infinity quadrillion of them and you’re still not gonna be able to push up the price of [Terra]. If [Luna] is worthless, it cannot be used to support the price of [Terra]. And because you just made it up , there is no particular reason for [Luna] to be worth anything, so there is no particular reason for [Terra] to be worth a dollar. If I made up [Luna] and [Terra] on my computer and said to you “I will give you the number 10 billion in this Excel spreadsheet if you give me 1 million U.S. dollars,” you would say no, and if I raised my offer to 400 quadrillion you would not change your mind.
Nonetheless! It works? The rough intuition here is that there is a lot of demand for stablecoins; there is particularly a lot of demand for Terra because Terraform Labs, the entity that created Luna and Terra, essentially pays 19.5% promotional interest on UST deposits. People want a stablecoin that is worth a dollar, so they are inclined to treat Terra as though it’s worth a dollar, which makes it worth a dollar. They buy lots of Luna to turn into Terra, which means that the price of Luna goes up, which means that there is plenty of valuable Luna to support the price of Terra, which means that Terra is robustly worth a dollar.
Ha, well, oops:
Rather than trading at $1, as designed, the TerraUSD coin, or UST, slipped over the weekend to around 99 cents. By Monday evening in New York, it had plunged to 60 cents, obliterating its previous low of 92 cents in May 2021. It clawed back losses on Tuesday and is fluctuating between around 90 cents and $1 – a sign of trouble. …
This explains things… at least to me. I wonder if the inventors/founders got money out of it on-time. What?! Of course they did!
I’m going to print billions of $FD, and say they’re worth $0.01 each. Then we’re all going to be rich! Yay!
I’m totally shocked that this pretend fake computer money someone made up a few months ago has not worked as promised.
this article about why things didn’t look good long term for Terra (UST) is from a month ago
According to data pulled from DeFi Llama, Anchor holds $16.16 billion in total value locked (TVL).
In other words, just about everything Anchor-related is happening on Terra. Indeed, with roughly $16 billion in value on Terra’s Anchor, the project constitutes over half of all DeFi activity for the Terra ecosystem.
There’s currently 12.67 billion UST locked up in Anchor and the stablecoin has a total circulating supply of 17.84 billion. (Side note: In case you’re wondering why there is 12.67 billion UST locked up in Anchor, but its TVL is $16.16 billion, it’s because DeFi Llama is also counting the $3.2 billion worth of UST currently being borrowed from Anchor as well as the value over on Avalanche.)
That means more than 72% of all UST is currently deposited in Anchor, which is nuts.
This frenzied, Anchor-driven demand for UST is also part of the reason behind the stablecoin’s blazing expansion and perhaps the excellent price action of Terra’s native LUNA token. For every 1 UST created, $1 worth of LUNA is destroyed, and vice versa.
Now, let’s bring this all together: Anchor’s enticing yield and UST-exclusivity have created a massive demand for Terra’s stablecoin.
Critics and investors are now wondering, though, what happens when that 20% yield ever changes. Because, as of a proposal passed at the end of March, this rate will change.
The change will be a function of Anchor’s reserves. Reserves refer to the total sum that lenders draw from to earn that 20% yield and the interest generated from UST borrowers.
Currently, there are roughly four lenders for every one borrower, according to the project’s dashboard. This means that the reserves have been steadily dwindling for some time in order to pay out interest to so many lenders.
Without a clear, long-term solution, though, the rate will continue to decrease. After a certain threshold, which the market will decide over time, investors will generate returns elsewhere. This could lead to withdrawals from Anchor and investors potentially abandoning UST for another stablecoin that can be used for more lucrative opportunities in some other DeFi protocol.
If this rotation were to happen en masse, it could be catastrophic for the health of UST as well as LUNA.
Another article from today’s column on Luna.
An “algorithmic stablecoin” sounds complicated, and there are a lot of people with incentives to pretend that it is complicated, but it is not. Here is how an algorithmic stablecoin works:
- You wake up one morning and invent two crypto tokens.
- One of them is the stablecoin, which I will call “Terra,” for reasons that will become apparent.
- The other one is not the stablecoin. I will call it “Luna.”
- To be clear, they are both just things you made up, just numbers on a ledger. (Probably the ledger is maintained on a decentralized blockchain, though in theory you could do this on your computer in Excel.)
- You try to find people to buy them.
- Luna will trade at some price determined by supply and demand. If you make it up on your computer and keep the list in Excel and smirk when you tell people about this, that price will be zero, and none of this will work.
- But if you do a good job of marketing Luna, that price will not be zero. If the price is not zero then you’re in business.
- You promise that people can always exchange one Terra for $1 worth of Luna. If Luna trades at $0.10, then one Terra will get you 10 Luna. If Luna trades at $20, then one Terra will get you 0.05 Luna. Doesn’t matter. The price of Luna is arbitrary, but one Terra always gets you $1 worth of Luna. (And vice versa: People can always exchange $1 worth of Luna for one Terra.)
- You set up an automated smart contract — the “algorithm” in “algorithmic stablecoin” — to let people exchange their Terras for Lunas and Lunas for Terras.
- Terra should trade at $1. If it trades above $1, people — arbitrageurs — can buy $1 worth of Luna for $1 and exchange them for one Terra worth more than a dollar, for an instant profit. If it trades below $1, people can buy one Terra for less than a dollar and exchange it for $1 worth of Luna, for an instant profit. These arbitrage trades push the price of Terra back to $1 if it ever goes higher or lower.
- The price of Luna will fluctuate. Over time, as trust in this ecosystem grows, it will probably mostly go up. But that is not essential to the stablecoin concept. As long as Luna robustly has a non-zero value, you can exchange one Terra for some quantity of Luna that is worth $1, which means Terra should be worth $1, which means that its value should be stable.
All of this is, I think, quite straightforward and correct, except for Point 7, which is insane. If you overcome that — if you can find a way to make Luna worth some nonzero amount of money — then everything works fine. That is the whole ballgame. In theory this seems hard, since you just made up Luna. In practice it seems very easy, as there are dozens and dozens of cryptocurrencies that someone just made up that are now worth billions of dollars.
So, exactly the same as any other unstable cryptocurrency?
Tether was briefly as low as $0.87 on Binance, back to $0.99. “Stable”
“The price of Terra has fallen by 99.99% in the past 7 days. The price declined by 99.74% in the last 24 hours. In just the past hour, the price shrunk by 61.90%. The current price is $0.014504 per LUNA. Terra is 99.99% below the all time high of $119.184624.”
I"m not really sure to find out what Terra trades at vs what Luna trades at. I htink the above is about Luna.
Yes, LUNA is the token that is down 99%. I know you’re quoting something, but whoever you are quoting is making what they are saying overly confusing. It’s best to use the abbreviation since the full names of these currencies are all over the place and often include the same words.
UST has been as low as $0.30 and as high as $0.93 since it came unpegged. It is currently sitting at $0.43.
LUNA being down 99% and currently trading around 1 penny means it was 1 dollar before it’s drop. 99.99% in a week doesn’t sound that much worse than 99% in a day because percentage drops mask how much value was actually lost. 1 week ago it was $80!
Said another way, when you’re short, there’s always 100% to be made on the way to zero.
OK so looking up “UST” instead I think I found right one.
Its showing $0.19 right now. Nope now its 18 cents.
You’re better off putting your money in Chuck E Cheese tickets.
Matt Levine has had several excellent columns on Luna this week. This is the most recent one.
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!
The part about systemic risks is really important and under appreciated. It’s really worth thinking about that part.
Did Do Kwon get a few million dollars out before the collapse? Me thinks he and his inner circle did. I realize there is an implication that systemic risks affect all assets, including real currencies like the dollar or the euro. However, while governments can tax people to honor their public debts, crypto communities can’t do that. Their trust-only backing is fertile ground for algorithmic Ponzi schemes and taking advantage of the gullible.