Right, its dry times in crypto and hard for crypto writers, perhaps I will do a separate post for this. Yet, there is no paucity of interesting stories in crypto, that still entice a crumbled crypto fish like me. I am now a malnourished crypto fish in this space now…anyway.
Yet, accumulated crypto wisdom is there for me to share. Today, I would like to share insights from a major failed investment I did,i.e, Luna/UST again because investors like me could have spotted the fault lines with the Luna/UST assets which are now TerraLunaClassic (LUNC) and TerraClassicUSD(USTC) after the old chain is abandoned with another hardfork done, with old investors receiving airdrops of new Luna tokens.
There were some solid logically reasons why LUNC and USTC were risky investments in the first place.
UST’s hype played a role hindering investors from seeing the obvious risks associated with the asset
I surely did venture to invest in LUNC/USTC (then Luna/UST)
drawn with the hype as TerraClassic was the second largest most widely used blockchain and Anchor protocol was super popular as a passive interest earning protocol.
As a general crypto follower in the space, I could not do a more in depth research but if I had done that, ignoring the hype caused by the popularity of USTC (then UST) being adopted and introduced in various major DEFI protocols, then ignoring the hot exhilarating news generated by interesting dialogue and actions of Do Kwon, who was boasting how UST will kill Dai stablecoin and that 10 billion $ Bitcoin Reserve Fund that Luna Foundation Gaurd was building to protect the peg of UST, I may have got the gut feeling of red flagging investing on Luna.
The flaws in the old Luna-UST that I failed to see and understand
Let’s dive and reason out the flaws this old Luna-UST had which we should have seen through.
UST coin was not backed by a asset that can absorb grand price declines in volatile times
Oh, yeah, I thought it was damn cool that UST was free from the risks that can be associated with USD dollars and free from control of centralised entities managing the USD reserves to back the dollar peg as it is with the circle's USDC.
I thought UST is censorship resistant as centralised stablecoins like USDC and UST are not.
However, what was there to really back the value of UST, was there anything solid to back the value of UST?
It was obvious from the very beginning that Luna was mostly backed by arbitrage opportunities got through burning -minting of the LUNA-UST pair. So, when the UST peg is below $1, that discounted UST is burned for 1$ of freshly minted Luna tokens which can be sold for a small profit.
Inversely, when UST’s peg is above that of 1$, 1$ of Luna is burned for that UST and small profit is made by arbitrage traders.
All this sounded novel and innovative to relatively new crypto entrants like me who learn about everything crypto on the go from practical experience but this entire algorithmic stablecoin mechanism has been tried out earlier by many projects and they failed eventually entering a death spiral.
So, if one would have just googled about algorithmic stablecoins, it's possible this information would have been available.
Unfortunately, the news I felt I was getting was UST hype - ‘oh UST is the largest decentralised stablecoin after USDT and USDC’ or ‘OMG!! , UST has overtaken the market cap of Dai stablecoin’, etc, etc.
***However, for most of the time UST was never backed by any asset with a solid value and deep market liquidity. ***
Think now, UST’s value depended on arbitrage opportunities with Luna and during crypto downtimes, when the price of Luna falls and this process of minting more Luna followed for maintaining UST peg, the risk of death spiral was always, always very much there!!
There is selling of Luna, plus the process that increases the supply of Luna and at that time using Luna to maintain the peg of UST was just risky.
Then, later of course Luna Foundation Gaurd did make efforts to build a Reserve Fund to protect the peg of UST. There was record 1$ billion purchases of decentralised currencies like BTC and AVAX to maintain peg of UST but… still UST’s peg ultimately depended on the actions of Luna Foundation Gaurd, it depended on how LFG swapped various currencies for UST to keep UST’s peg intact.
I think this entire concept sounds pretty centralised and unsustainable.
I remember, when all that Bitcoin Reserve Fund was getting built for maintaining the peg of UST, it only increased my confidence on UST, how naive?.
Stablecoins are backed by assets that can withstand most of market volatility. Here UST had no such backing. The entire stablecoin was built on an unstable premise.
Luna and UST token allocation percentages make both assets centralised
Another aspect that should have striked us, old Luna-UST investors, is Luna and UST’s tokenomics. I tried checking Luna-UST’s tokemics earlier but the terra explorer seemed to be opaque, not providing details of the proportion of Luna-UST holdings held by top investors. This is actually not being transparent I felt.
Later, I understood that the majority of Luna and UST tokens were held by whales and Do Kwog, Terra Labs and LFG, this is a big red flag. Why?
First , this meant that Luna and UST is not decentralised, UST cannot be a decentralised stablecoin if its held in large portions by mostly whales, because the price of Luna and UST will depend on if they dumped these tokens or not.
So, retail investors with relatively small holdings will find that their Luna and UST assets have lost value quickly because of the actions of whales.
There were loads of whales invested in Luna and holding bags of UST, for UST gave easy 18% interest. These whales were venture capital investors, lending companies like Celsius and many of them were quick to dump Luna and UST tokens and that was a like bomb reducing peg of UST and price of Luna.
Retail investors were like 100 steps behind, and I was a 1000 steps behind in seeing this obviously.
I don’t believe UST was a decentralised stablecoin, as most percentages of UST were held by whales, Luna Foundation Gaurd, Do Kwon and Terra Labs. UST and Luna Blockchain were controlled by 3 entities mentioned above, making UST a centralised coin, that proved later to be unstable as well.
Anchor Protocol that incentivised UST depositors functioned in an unsustainable business model
There are more fundamental reasons that should have warned Luna and UST investors, like Anchor Protocol was central in maintaining liquidity of UST.
How long can Anchor Protocol, provide its UST depositors a lucrative 20% interest for their deposits and incentivize holders to keep holding UST.
It appears that protocol was actually not making enough profits through its operations to give that kind of yield to investors because there were always more lenders of UST than borrowers. This meant Anchor Protocol spent more than the revenues it earned just to maintain liquidity of UST using Anchor Protocol.
This in hindsight does not look practical and sustainable. This meant those high yields for depositors of UST in Anchor Protocol was given out of Terra’s treasury and in a decentralised protocol, the treasury funds always belongs to the community.
Over pompous behavior and attitude showed by Do Kwon, founder of Terra Blockchain
Lastly, the attitude of Do Kwon and his devious background. It appears Do Kwon has a bad reputation already being involved in failed projects that have cripled investors.
Infact, Anonymous, the interesting global hacker group sending warning messages to major personalities harming the interests of retail investors has made this video “anonymous message to Do Kwon’ revealing to us audience (Citizens of the World) that Do Kwon under an alias name was involved in a failed algorithmic stablecoin project before.
Ouch… watch the video here.
Do Kwon’s over pompous behaviour was also indicative that he is not a civil leader to lead a Blockhain project
Do Kwon grew too arrogant and pompous, attacking anyone who was pointing out possible weak points of Luna and UST and his actions of plotting to kill Dai, and statements of enjoying 95% of the companies fail, shows that he does not care about a crypto investors holdings more than boasting about his protocol.
Do Kwon went as far as saying Terra Blockchain can be a second layer solution for Bitcoin!! Really there!!!!
I feel any head should talk responsibility, and someone who talks like that leading a project is a red flag.
I remember an article I wrote, that he formed partnerships with big institutions invested in Curve protocol, so that TerraLabs gets most Curve currency holdings as with the might of these curve holdings he planned to vote in Governance for the 4 pool that excluded Dai to get most curve incentives just to stare Dai’s 3 pool from getting Curve incentives and die having no liquidity eventually.
It sounds like more than fair competition, this Do Kwon wanted to attack other competitors using the might of his wealth and influence.
This was uncomfortable. I really was unnerved about Do Kwon’s attitude and that should have warned me to exit from being associated with his stupid terra project, because I am a crypto fish who loves crypto values of decentralisation, inclusivity not monopoly and the usual capitalistic might prevalent in the traditional business world.
Hard hit Investors feel Do Kwon and Terra committed fraud on them!!
Well, TerraClassic’s collapse is still having its after effects. I read about a lending protocol that deceived investors claiming they provide good yield on USDC deposits, but they invested their customer deposits on Anchor getting that interest and paying off investor’s in USDC yield. Indirectly, even those retail investors who were directly not invested in UST lost out as such companies defaulted on paying their depositors.
As said Terra itself seems to be a fraud with Do Kwon being investigated by financial authorities like the SEC for other financial crimes he may have committed.
So, there I feel somewhere terraClassic , the old investors of Luna-UST have been deceived and defrauded by Do Kwon. These investors are not just small retails investors like me, but professional investing firms like 3 Arrows and many more venture funds as well. Still, in the end the pain of this crypto crash is most affecting small crypto fishes like me.
As usual the world favours the street smart investors and not naive crypto fishes like me): , & sadly I feel like I have failed with crypto and can’t survive, I wonder if I can should have hopes, faith and confidence on my crypto learning and writing abilities, or is it a dead end and I should quit life itself because without crypto I know nothing else.