UST Luna - The Biggest COLLAPSE in Crypto History

We’re currently watching one of the the largest events in Crypto history. The sketchy outlook in the markets has triggered a run on the UST stablecoin, which began destabilizing in the last several weeks. As time progressed, the peg worsened, and it eventually rolled over into a complete crash of both the value of UST, and the native asset LUNA. What led to the crash? Was it a coordinated attack, or an inevitable collapse? What Red Flags were there ahead of time? What’s the fallout from all of this? What lessons can we learn? ------ 📣 OPOLIS | Sign Up to Get 1000 $WORK and 1000 $BANK https://bankless.cc/Opolis ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/ 🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/ ------ BANKLESS SPONSOR TOOLS: ⚖️ ARBITRUM | SCALED ETHEREUM https://bankless.cc/Arbitrum ❎ ACROSS | BRIDGE TO LAYER 2 https://bankless.cc/Across 🏦 ALTO IRA | TAX-FREE CRYPTO https://bankless.cc/AltoIRA 👻 AAVE V3 | LEND & BORROW CRYPTO https://bankless.cc/aave ⚡️ MAKER DAO | THE DAI STABLECOIN https://bankless.cc/MakerDAO 🦁 BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave ------ Topics Covered: 0:00 Intro 6:30 Explaining the Terra Ecosystem 9:30 Tail Risk and Background 13:50 Bitcoin, Curve, and Monsters 17:54 The Initial Destabilization 20:14 The Panic Begins 24:40 The Charts 27:18 A Total Collapse 32:30 Regulators Get Involved 35:08 Was This An Attack? 37:58 The Collateral Damage 40:00 Do Kwon’s Big Talk 41:52 Rick Sanchez and Basis Cash 44:08 Community Response 46:05 How Do We Move On? 49:14 Don’t Take Shortcuts ------ Resources: Anchor Protocol: https://app.anchorprotocol.com/earn Buying Bitcoin: https://twitter.com/LFG_Reserve/status/1507688906820620291 Curve Pools: https://dune.com/SebVentures/UST Binance Orderbook: https://twitter.com/hasufl/status/1523817151471230976?s=20&t=FiTLk5ce5JmTg_s7QnWgMw https://twitter.com/hasufl/status/1523817151471230976?s=20&t=FiTLk5ce5JmTg_s7QnWgMw External Collateral: https://twitter.com/ThinkingBitmex/status/1523526622044860416 Deploying More Capital: https://twitter.com/stablekwon/status/1523733542492016640 Collapse: https://twitter.com/ryanberckmans/status/1523712585794977792 Bitconnect: https://twitter.com/TrustlessState/status/1524451573908209664?s=20&t=1cKzW3BXwfKsAdFAsObfLQ https://twitter.com/TrustlessState/status/1524451573908209664?s=20&t=1cKzW3BXwfKsAdFAsObfLQ Historical: https://twitter.com/nic__carter/status/1524233730717585409?s=20&t=azvpduGJEOCfqyNCUFSBWA https://twitter.com/nic__carter/status/1524233730717585409?s=20&t=azvpduGJEOCfqyNCUFSBWA Janet Yellen: https://twitter.com/tier10k/status/1524031909067698180?s=20&t=FiTLk5ce5JmTg_s7QnWgMw https://twitter.com/tier10k/status/1524031909067698180?s=20&t=FiTLk5ce5JmTg_s7QnWgMw Coordinated Attack: https://twitter.com/TerraBitesPod/status/1524229263469293570?s=20&t=FiTLk5ce5JmTg_s7QnWgMw https://twitter.com/TerraBitesPod/status/1524229263469293570?s=20&t=FiTLk5ce5JmTg_s7QnWgMw Vitalik Clip: https://twitter.com/BanklessHQ/status/1523995722261147648?s=20&t=FiTLk5ce5JmTg_s7QnWgMw https://twitter.com/BanklessHQ/status/1523995722261147648?s=20&t=FiTLk5ce5JmTg_s7QnWgMw Mental Health: https://twitter.com/Shigeo808/status/1524149580048191488?s=20&t=azvpduGJEOCfqyNCUFSBWA https://twitter.com/Shigeo808/status/1524149580048191488?s=20&t=azvpduGJEOCfqyNCUFSBWA ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://newsletter.banklesshq.com/p/bankless-disclosures

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ryan Sean Adams?

  Bankless Nation, this is a special episode from us because we are witnessing something historic right now in crypto. We are witnessing the largest event, I think, in crypto history. This is the collapse of an entire stablecoin.

• 0:15Ryan Sean Adams?

  David, where are we going in this episode?

• 0:18David Hoffman?

  Yeah, so what's going on is there was about $50 billion of total capital destruction out of the Luna ecosystem, the collapse of the largest algorithmic stablecoin ever, the largest collapse of a stablecoin ever. And so we are basically watching this unfold as we speak. I don't think there's ever been a crypto event, a bad event this large in crypto history, I would say. And so we're going to run through, we're going to speed run through what happened, the timeline of events that have unfolded to where we are now as we are currently dealing with this. For the people new to this channel who don't know about the Terra Luna ecosystem, we'll also explain at a high level how the whole thing works

• 0:59David Hoffman?

  and how it came to a point where $50 billion was lost between the two tokens. A lot of people have lost a lot of money as a result of this. Many were using the stablecoin out of the Terra ecosystem as a safe haven for assets going into the bear market. Ever since January, crypto assets have been going down, down, down. So people have been using the stablecoin as a flight to safety and they've been getting yield, using the stablecoin yields in this application called Anchor, which holds a very, very prominent role in this whole entire story. In addition to people using UST, the stablecoin out of Terra, as just a place to get yield, there were also a significant amount of funds that were gaining leverage, getting leverage yield on this. Many were overexposed. Many have lost a significant

• 1:42David Hoffman?

  amount of their net worth. Some have lost it all, Ryan. And there are even reports of suicides out of the Terra community, both in this Terra subreddit and on the Terra Twitter. So this is a time to reflect as to how the hell we got here as an industry.

• 1:59Ryan Sean Adams?

  And that's what you could tell in our voices. We're not quite super chipper as usual and bullish because this is a serious set of events. And I think, you know, many in the crypto community have predicted that this could happen, this would happen. I'd refer Bankless listeners to a previous episode that we did not less than six weeks ago on whether Terra Luna was a ticking time bomb or not. It turns out it was a ticking time bomb.

• 2:24David Hoffman?

  That question is certainly answered.

• 2:25Ryan Sean Adams?

  And it exploded. And yet, for those who have been right about Terra, this is certainly not the time to gloat. I think this is the time to reflect. And so that's the tone through which David and I are going to approach this episode. We're going to tell you exactly what happened, and we're going to reflect on the events and the implications and outcomes of those events in hopes that we don't have to repeat this. And so if you were someone who is affected by Terra, you lost a lot of money. It's terrible. I'm sorry. It's happened to many people in crypto before. You will recover. You will come back. I have been smacked down by the markets many times in my history in crypto. And this is not the

• 3:09Ryan Sean Adams?

  end of the world. This is recoverable. I think the crypto community will come back stronger from this. Crypto as an asset class will come back stronger for this. There are some learning lessons that I hope you take with you and teach to the next generation who are new in this space and want to go down a path and take risks as the Luna Terra ecosystem has taken risks.

• 3:30David Hoffman?

  Yeah, just to add on to that, I also got smacked down during my first cycle in the crypto markets. And there seems to be a lot of new people who came into crypto looking for the cool new thing. And they found the very loud community of the Terra ecosystem. And so this is going to be the first experience, the first like round of pain that a lot of first cyclers have as they come into the crypto industry. Usually it's not this acute. Usually it's not this sharp.

• 3:56Ryan Sean Adams?

  Or this fast. I can't believe how fast it happened, David.

• 3:59David Hoffman?

  Right. Yeah. So, I mean, when I lost all my net worth in 2018, it was just a slow decline from the top down to the bottom, but it was not a collapse like this. So this is something. Something unique to this part of the crypto cycle. You're trying to grow and preserve your crypto wealth. Optimizing your taxes is just as lucrative as trying to find the next hidden gem. Alto IRA can help you invest in crypto in tax-advantaged ways to help you preserve your hard-earned money. Also, Crypto IRA lets you invest in more than 150 coins and tokens with all the same tax advantages of an IRA. They make it easy to fund your alternative IRA or crypto IRA via your 401K or by contributing directly from your bank account. There is no setup or account fees, and it's all you need to do to invest in crypto tax-free. Let me repeat that again.

• 4:43David Hoffman?

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• 5:27David Hoffman?

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• 6:12David Hoffman?

  And of course, portals, allowing users to port their Aave position across all of the networks that Aave operates on. Like Polygon, Phantom, Avalanche, Arbitrum, Optimism, and Harmony. The beautiful thing about Aave is that it's completely open source, decentralized, and governed by its community, enabling a truly bankless future for us all. To get your first crypto collateralized loan, get started at Aave.com. That's A-A-B-E dot com. And also check out the Aave Protocol Governance Forums to see what more than 100,000 DAO members are all robbing about at governance.aave.com. So as we get into it, I think let's start with an explanation of Terra and UST. There's two tokens in the Terra ecosystem. There's the Luna token, and that's the native asset of the Layer 1 blockchain.

• 6:56David Hoffman?

  Ether to Ethereum, Bitcoin is to Bitcoin, Luna is to Luna, Luna Terra. Terra is the chain and Luna is the asset of the chain. Right, and so people stake Luna to process the blockchain. But what's unique about the Luna Terra ecosystem is that it's a two-token model. So there's a native stablecoin called UST, which is pegged to the dollar. That is a part of the consensus protocol of the blockchain because it's tied to Luna. And so it's an algorithmic stablecoin, which means it's a stablecoin that maintains its peg to a dollar via incentives. But there is no hard collateral backing the actual UST. There's only redemptions for Terra, for Luna, excuse me.

• 7:40David Hoffman?

  So users can swap the Luna token for UST and vice versa at a guaranteed price of $1, regardless of the market price of either token at any time. So there's the market price of UST that trades on centralized exchanges like Binance or on decentralized exchanges like Curve. Both of these things become relevant later in the story, and that price can fluctuate. But as a part of the protocol, built into the protocol, you can swap one-to-one, $1 for $1 of UST to Luna, the token. And this is how it maintains the peg because you can arbitrage the opportunity between the price and the secondary market with the actual redemption price of UST to Luna. It maintains its peg. Now, this is called an algorithmic stablecoin.

• 8:24David Hoffman?

  I also like to call these reflexive stablecoins because it requires this peg mechanisms who actually work unlike many of the other stablecoins that we find out in the ecosystem. USDC and Tether, for example, are one-to-one redemptions for actual dollars in a bank. So they are not prone to these reflexive moves. And then there's also DAI, which is more decentralized, which has actual hard collateral backing it. UST does not have hard collateral backing it. And that is ultimately what came to cause the collapse of the stablecoin. We've seen algorithmic stablecoin experiments on Ethereum many, many times before. None of them have worked, but this was an algorithmic stablecoin experiment as a layer one blockchain,

• 9:05David Hoffman?

  which is unique and novel and seemed to actually propel it into success up until it finally collapsed. Ryan, any comments on that?

• 9:13Ryan Sean Adams?

  Yeah, Do Kwan is a name that you'll hear. He was the founder of Luna and definitely a spokesperson, almost operating as kind of the Jerome Powell of the Luna Terra UST ecosystem. And it's also, this was news as of today, not his first time doing an algorithmic stablecoin. We'll get to more of that later, but David, I just want to set the mental model for this a little bit. I don't know if you've ever read anything by Nassim Taleb, but he has this analogy he uses about tail risk events. And this is something that Vitalik said on our last podcast about stablecoins that are algorithmic and reflexive in the way that UST and Luna was. And that's, they can be going along swimmingly, somewhat like the turkey, right?

• 9:58Ryan Sean Adams?

  So imagine a turkey, he's getting fed every day by the farmer. Wow, by the farmer. Wow, isn't this a wonderful life? Someone comes and feeds me every day. I don't have to go hunt for my food. Fat and happy, hanging out with other turkeys. Life's good one day, life's good the next day. Life just keeps getting better and better and better. And this is a chart of the life of a turkey from one to 1,000 days. Of course, Turkey is humming along fine until there's this surprise event. The turkey didn't realize it was actually going to be eaten. Okay? And so all at once, his world collapses around him. I know that's kind of a graphic way to describe what happened, but Interestingly, interestingly enough, this is how the Terra chart looks.

• 10:43David Hoffman?

  Yeah.

• 10:43Ryan Sean Adams?

  It's pretty similar to the life of a turkey in that it was going very well. It kept very stable from, you know, a dollar price, just oscillating by like a few tenths of a of a cent along that price until bam, tail risk event, it was hit and got knocked off its peg in a big way. David, do you want to take us through the timeline of events here?

• 11:03David Hoffman?

  Yeah. So in order to get started, we have to explain the anchor protocol because that is the thing that a lot of absorbed a lot of U S T supply. So Terra has had insane growth over the last six months. And people have been using Terra to get U S T into anchor protocol to get an astounding 20% yield. And that's where this whole thing really starts. These are the months leading into 2022 and also from January to where we are till about a week ago, the the anchor protocol on Terra received a bunch of inbound deposits. And so we just saw it grow in total value locked from roughly like three to $4 billion in January

• 11:43David Hoffman?

  to up to, I think, at the at the very peak, $14 billion in deposits where it was a week ago. And again, it came from a bunch of subsidized yields. And so this was Terra's growth strategy. This was marketing for Terra. This was juicing up the yields to attract deposits. And so the the the actual yield, the true yield coming from the cost of borrowing was something like eight to 10%, which was also pretty good. But then that number was subsidized by just the Terra project of just juicing up the yields in order to attract growth. And so people were depositing U S T into the anchor protocol to get these yields. And the anchor protocol did amazing things for the for the adoption of Terra.

• 12:24David Hoffman?

  Late March was when we see the Terra project buy a bunch of Bitcoin to help backstop the U S T peg. So this is something that like, like nation states participate in this when they put foreign assets on their like on their federal bank account, when in order to defend the the price of their their currency, right? And so this is a very similar thing. The Luna Foundation Guard, which is what the L F purchased almost 25,000 Bitcoins for a total balance of 1.1 billion dollars. And this happened on March 26th. And so this is them starting to shore up their own assets and put ammo into their into their quiver. So that if they ever did have to defend the peg, they would have a bunch of ammo to do it.

• 13:06Ryan Sean Adams?

  You want a hard asset to defend the peg, similar to how a nation state might buy gold and keep gold in their reserves.

• 13:12David Hoffman?

  Right, exactly. This also drew criticisms and qualms from others, myself, and I think Brian, you would join me in that. We like our protocols to not need foreign assets to be self sustainable. And so this is in my mind, an admission that, you know, that needs external help to defend the peg. For crypto L1 blockchains, we like these things to not need external dependencies to operate on.

• 13:36Ryan Sean Adams?

  And particularly because these were held in a in a multi-sig in a custody, it's just off chain, it's not even on chain.

• 13:42David Hoffman?

  Right. But like that, that is just the culture of the Terra Project that was cool with them. And so they grew a balance sheet of over 1.1 billion dollars, starting on March 6th. And so they were selling U S T to buy Bitcoin to add to the L F G, the Luna Foundation Guard Reserve. During the same time, this is when the attack starts. Somebody, we don't really know who, there is a bunch of speculation at the same time. Is borrowed 100,000 Bitcoins, which is a lot of Bitcoin. So this is a very well capitalized player. There's there's speculation all over the place, not real any clarity here. But they borrow 100,000 Bitcoins and are selling into the Luna Foundation Guards purchasing of Bitcoins.

• 14:25David Hoffman?

  To fund what will ultimately become the attack on Terra that brought it down. And so some entity borrows 100,000 Bitcoins, sells it into the market. And that this begins on March 27th. And so the somebody, some entity has a very well capitalized war chest, which will ultimately come to bring down the whole entire system. We don't know, we can't see this happening in the moment, but we just know that this is true in hindsight. And so as a result, and there's also the story of the the curve pools on Ethereum. And so the curve pool is where a lot of stable coins. On Ethereum get a lot of liquidity and there is a U S T on Ethereum cross cross bridged from the Terra ecosystem to the Ethereum ecosystem.

• 15:07David Hoffman?

  And Do Kwan and the Terra ecosystem has been promoting this four pool where four different stable coins have liquidity adding Terra U S T to the mix. And so there is there's a current paradigm of the three pool and they were about to migrate to the four pool based on curve governance. This is a topic for another day, but they had to, people had to withdraw liquidity out of the three pool to put it into the four pool. And during that window of time when when liquidity out of the three pool was being pulled, that is when the this attack happened. They're calling this an attack because the liquidity was was removed from the three pool, the peg for U S T was was susceptible.

• 15:49David Hoffman?

  And so the attacker who had a hundred thousand, almost a billion dollars worth of U S T, which they amassed from selling Bitcoin for U S T, started selling U S T into the curve, into the curve pools. And what that does is that lowers the price of U S T because they're selling it and that puts other stable coins into the hands of the buyers, stable coins like U S D C or D I or or Frax or other stable coins. And so this starts to offset the peg and this started happening on March or on May 7th and you can see, you can see this very early blip of red on March 7th where they start to sell U S T into the into the curve pool to start to destabilize the peg.

• 16:30David Hoffman?

  This is when the Luna Foundation Guard has to begin selling the B T C that they purchased in order to defend the peg. But Bitcoin, when they bought Bitcoin, it was roughly at forty two thousand dollars and then they started to have to sell Bitcoin at roughly thirty four thousand dollars because the market had moved downwards in that time. So they, the value of their of their reserves had gone down and then they're forced to sell it.

• 16:55Ryan Sean Adams?

  Yeah, this is, you can see the kind of the wobble and this is what systems like this, you know, tend to do. It starts with a wobble, right? So picture a bike going down a hill and it's going too fast, maybe. This was me as a kid and I had a total wipeout. I was on a tiny BMX bike and the first sign that you're going too fast, you start to wobble, right? And so your tires are moving back and forth. And then it moves into the wobbling increases, a little more wobble here, and then catastrophic failure and complete wipeout. What's also interesting is what you just described, the attacker. It's also a known attack. I mean, this has happened to currencies in the past.

• 17:32David Hoffman?

  This is a George Soros attack.

• 17:33Ryan Sean Adams?

  A Soros attack, yeah. George Soros, in the early 1990s or late 1980s, I can't recall, used this type of an attack to destabilize the British pound when the central bankers in the UK were using the pound and trying to peg it. So this is a very well-known attack for these sorts of pegged monetary instruments.

• 17:54David Hoffman?

  Getting back into the attack, the attacker who amassed over a billion dollars, a billion in USD, because if they have a bunch of USD, that means they have a bunch of USD to sell, which means somebody needs to absorb what will ultimately become 1 billion USD token sell pressure. And so during this initial, the first phase of this attack, they sell 350 million USD into the curve pool. And that is what causes the initial destabilization. And this is where a lot of people start to pay attention here. And there are many different participants in the Luna Terra ecosystem. Many of them are funds and then many of them are retail. So the funds understand that they are playing a game of chicken because these Terra anchor yields are just not sustainable. They know

• 18:39David Hoffman?

  that this is kind of a game of chicken and it's really going to be a game of who can sell when the time comes up. And so when the peg goes down to about 97 and a half cents during this first sell-off of a 350 million USD, this, I think, is when a lot of funds started to clue in and say, "Hey, something's happening here, so we've got to pay extra close attention." Meanwhile, retail, they don't pay attention to that stuff like this. They're not as sophisticated. They don't know how to do the research. They don't know how to look on-chain, and they're busy doing their normal day jobs. And so the funds are keeping a very close eye on the peg, watching other funds and other market makers and how much assets they have, starting to do the Mexican standoff. It's just like, "All right, who's selling what?"

• 19:21Ryan Sean Adams?

  And you've got to shoot first and shoot fast.

• 19:24David Hoffman?

  Yeah, exactly. That's exactly right. And so this is when, at this point in time, around May 6th or 6th or 7th, the attacker, who has 650 remaining USD tokens, which they got from their borrow, which some entity let them borrow this, again, we don't know the details on this, they go to and take that 650 million USD tokens to Binance, and they start aggressively selling on Binance between lots of 300,000 to 3 million USD at a time. Some people, some entities are defending the peg while this attacker is selling into the peg, so somebody is defending the peg at 0.98 cents, preventing the price from going down. But at some point, that defender either just capitulates, or they

• 20:08David Hoffman?

  just pull their liquidity, or they ran out of money, and it breaks through the 98 cents.

• 20:13Ryan Sean Adams?

  This is the Binance order book. Is this what happened shortly after? And so, David, you and I were actually recording a podcast with Raul Paul when the wobbles started to intensify in this thing, and we were observing in real time. You can actually get Raul's real-time reaction.

• 20:28David Hoffman?

  Raul, when you hopped into this recording room, USD price was at 98 cents, being defended. Do you know what it is right now? It's at 92 cents.

• 20:39David Hoffman?

  Yeah.

• 20:41Ryan Sean Adams?

  And then later that day, the Binance order book was actually empty. What does that mean? Hossi says he's never seen that before.

• 20:49David Hoffman?

  Yeah, so this was actually a front end glitch out of Binance because they were not prepared for to place bids below 70 cents. It's unheard of that a stablecoin would be sold at 70 cents. So this is, they actually, Binance actually had to enable sub 70 cent bids in order to allow the market to clear. And so this, this, it was just got so low, it got wiped out that there was no bids because the front end wouldn't allow for it. Moments after the screenshot was taken, they did open up sub 70 cent bids on, on USD. And then the price immediately fell below 60 cents. But part of this is starts to create the reflexivity. This was not actually the attacker all of the way. As soon as the attacker broke down below the person or the entity that was defending the 0.98 cent price.

• 21:32David Hoffman?

  This, this is when deposits out of anchor started to clear. So these are the funds saying, yo, somebody, somebody is selling all of their USD. We also have to start selling our USD because there's not enough liquidity to let us all out of the door. And so this is what happens where the attacker starts to sell USD, they create and instigate other selling. And so it starts to turn into a negative feedback root loop. And that's where it starts to not just be this attacker who's intentionally de-pegging the price. But everyone else is, is willing to take the two, three, five cent loss in order just to have and shore up their, their profits that they've made from the yield for the last few months. And so this, this, this feedback loop of reflexivity, this is where we, why I call algorithmic stablecoins, reflexive stablecoins.

• 22:16David Hoffman?

  There's not enough liquidity for everyone, so everyone needs to sell first. And this creates basically a run on the bank. And that is what just plummeted the USD price down to 70 cents and then even below as once they, once they opened up the, the orders. As the USD peg fell down to 60 cents, the, the Luna Foundation Guard is having to sell their Bitcoins to, to buy and, and maintain the peg as much as possible to the best of their ability. They just don't have enough ammo in the, in the reserves to keep it up. And so they are, they had to buy Bitcoins. Bitcoin at $47,000 to sell it at $34,000 and below just to defend the peg. But the problem, Ryan, is that as they are selling Bitcoin at $34,000, they're pushing the whole entire market down.

• 23:01David Hoffman?

  And so the market was already going down anyways because of the the interest rate hikes from the Federal Reserve. And so people with Bitcoin positions were getting liquidated. People with Ether positions were getting liquidated. This was a global market liquidation event, which happens in crypto. But it was just made worse by the Luna Foundation because they had to sell into the lower price. And so they sold, they bought Bitcoin at the high price of 47. The value of that goes down to 34 when they have to begin selling it. And so it causes a global liquidation event for all of the markets, which just causes even more fear in the markets and especially for U S T and Luna holders. And we haven't even talked about the Luna price yet. But this is basically the the problem with external collateral.

• 23:43David Hoffman?

  Fiscantis tweets out, "Reflexivity, speculation and credit. Three strong but dangerous resources you can harness if you are willing to pay the price. In all three cases, it can help you bootstrap by borrowing energy from the future, but you will need to pay it back later with interest, especially with an algorithmic stablecoin doesn't always have the ammo to pay it back. And if it doesn't, you have a reflexivity to the downside." Do Kwan tweets out, "Deploying more capital, steady lads." And this is why Ryan earlier called him the Jerome Powell of Terra, because he has to instill confidence in the peg. This is a faith-based peg. This is when there's not enough liquidity for everyone. People just have to have faith that not everyone else is going to sell. And so when Do Kwan tweets out, "Deploy more capital", he's saying, "Hey, we have enough capital, don't worry about it."

• 24:28David Hoffman?

  And so Luna goes and empties the last of their Bitcoin reserve wallet, the last $1.4 billion that they have to shore up the peg. But again, it's just not enough. So here is the U S T price. And this is at May 8th, when the first first attack came with a $35 million sold into the Curve Pool. Price goes, that $1 falls down to 97 cents. But then it gets bought back up because this is just the first wave and there's plenty of ammo left. But then it starts to hover around 99.

• 24:58David Hoffman?

  9.5 cents and this is where the funds start to be like yo what's going on and then as time progresses we'll go to we'll go to the next chart you can see the scale here so that that red square is what we were looking at previously and so you can see how much worse it gets when when there starts to be this panic as the the attacker starts to sell a bunch of ust price goes all the way down to 0.64 cents where it should be a dollar it goes down to 64 cents but then it gets bought back up by the remaining Luna foundation guard reserve ammo and then and so the gang gets bought back up to 90 cents but then here again that's square the square on the left is what it was that what we were just looking at and then this is the most recent snapshot that I took just before recording this where things drop all the way down to 34 cents here's the price of Luna and this is also a contributing factor to the fear going through the whole entire ecosystem where and on May 4th the price of Luna was $87 it starts to also sell off because people are getting scared and so they want to reduce their exposure to the whole Luna ecosystem also there are many many redemptions for ust for Luna and causing and because people want to get out of ust because it's losing the peg and so they're they're selling ust for Luna Luna is getting minted because that's part of the algorithmic stablecoin and then that is getting sold and so that goes from $87 on the 4th down to something like $65 on the 7th and then on the by the 9th it's down to like $52 and then today the 10th it hit a low of one and a half dollars and so this is a total collapse of the value of the Luna token which is the the last line of defense for backstopping the value of ust and this is when the total market cap of ust Ryan starts to actually pass the total market cap of Luna which is bad is you don't like that because this is the Terra token is the thing that ultimately comes to be the final collateral of the ust and when there's more outstanding liabilities than there are assets then only some people can make it out alive and so this is how we end up where we are today where Luna is down 99% over a one week period of time and there is billions of dollars of outstanding ust that have no actual market value

• 27:19Ryan Sean Adams?

  Yeah, so guys, what we just witnessed is a textbook downward spiral of an algorithmic stablecoin, basically textbook. And the surprising thing is how quickly it happened. But once it started happening, I mean, this is a three day period of time, we witnessed the wobble, and then we witnessed the total collapse of both Luna and U S T. There were attempts to defend it, there were attempts to try to resurrect it. Do Kwan and others tried to re-inject confidence in the market, was unable to handle the downward pressure forces. And having something like Bitcoin on the reserve to try to protect this is not actually something you want to hold during a downward spiral event, because that's a very correlated

• 28:02Ryan Sean Adams?

  asset to the rest of the crypto market. If anything, you'd want a completely decorrelated asset to the market that would hold steady in this kind of downward pressure spiral. So David, that is the total collapse in a three day period of time. I think all of crypto was not surprised necessarily that this happened, but certainly all in crypto were surprised that it happened this quickly and like this, I guess emphatically. I mean, like I said, this is absolute textbook. David, do you want to talk about the fallout from this? Because now we have to deal with the fallout.

• 28:34David Hoffman?

  Yeah, right. And just to recap the numbers, Luna, the Luna, the L1 asset, went from $41 billion down to $1 billion market cap. So it lost $40 billion of capital. U S T goes from $18.7 billion to $5.2 billion, probably lower at the time of recording. And so, like I said, there's over $50 billion, almost $50 billion of capital loss. For the crypto OGs that have been around since last cycle, we had this Ponzi scheme, this actual Ponzi scheme, where everyone knew it was a Ponzi scheme. Other people were calling Terra a Ponzi scheme, but other people were saying no. So it was up for debate, and like people kind of were capitulating and letting the Luna ecosystem kind of just like ride without really giving it too much, too much flack. Now, in hindsight, now everyone's

• 29:18David Hoffman?

  calling it a Ponzi scheme in hindsight. Bitconnect was not that. Bitconnect was a Ponzi scheme through and through, everyone knew it. It was $3.5 billion at the top when it fell down to zero. This is so much larger than that. And so I took some time and I photoshopped to superimpose the value of the Bitconnect market cap on top of the the value of the Luna market cap. And so you can see just how much larger this is. And this in the the blue line being Luna, of course, does not include the value of USD, which also lost. You can add on another like $12 billion on top of that. So the massive amount of just capital destruction that has just happened is unfathomable. I've never seen it. There's no one has ever seen anything like it in the crypto space.

• 29:58Ryan Sean Adams?

  $15 billion. And this is all targeted on Luna holders primarily. It's seeped out into other areas of the crypto ecosystem, but it was amazing how resilient actually Bitcoin and Ether have been to the prices. It's certainly seeped out into other alternative layer ones.

• 30:13David Hoffman?

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• 30:58David Hoffman?

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• 31:11David Hoffman?

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• 31:54David Hoffman?

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• 32:00David Hoffman?

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• 32:44Ryan Sean Adams?

  This is the sort of thing that starts to get regulators' attention and those in governments' attention. What does he say here?

• 32:51David Hoffman?

  Yeah, he says 40 billion, this is an old tweet, it's now 50, almost totally destroyed in the space of a month. In terms of sheer magnitude, it's probably the most significant collapse in the history of the crypto space. And then, not even 12 hours later, we see Janet Yellen talking about it on the Capitol, in the US Capitol, about the UST, the destruction of capital and the need for regulation. And so this has already caught the attention of regulators and to start to pay attention to the cryptocurrency ecosystem. This was our explicit fear on Bankless about like, if this thing gets too big and it does collapse, it's going to bring the arm of the regulators down for the whole entire crypto ecosystem, because they are not educated enough to understand the difference between

• 33:34David Hoffman?

  UST, DAI, YOAT, Tether, or other cryptocurrencies. They're just going to lump them all together. So this is just a black cloud over the ecosystem at the moment.

• 33:43Speaker 02

  Terra USD experienced a run and had declined in value. And, well...

• 33:52Speaker 02

  So I think that simply illustrates that this is a rapidly growing product and that there are risks to financial stability and we need a framework.

• 34:06Ryan Sean Adams?

  When you're faced with what we saw just happen, basically the shit show that just happened, I mean, who's going to stand up and say, no, actually, there's some innovation here. It's hard. It's very difficult to make the case. This is why we said a couple of bankless episodes ago to those who were saying, eh, don't worry about Terra, it's fine, don't be a decentralization maximalist, an Ethereum maximalist or whatever, it's just, we're hopeful, Do Kwan, don't screw it up. Well, this is really screwing it up for a lot of people. And I think one of the most significant worries coming out of this is the regulatory backlash that we might face as an industry.

• 34:41David Hoffman?

  Yeah, that's exactly right. And while a lot of this loss was contained inside of the Luna ecosystem, it has definitely spilled out into funds. A lot of funds are going bankrupt at the moment that are based on Luna. And the funds that are having positions both inside and outside of Luna are going to have to sell Bitcoin and Ether and other assets to account for their losses. And so the losses of the Luna ecosystem do spill over into the rest of the space. There's a big question as to whether or not this was a black swan event or whether or not this was a coordinated attack. The Terra ecosystem is definitely leaning into this was a multi-level economic hitman attack.

• 35:21David Hoffman?

  And while it does appear that there is one well-capitalized entity that maneuvered this trade or this attack, it really doesn't matter. It's a semantics difference as to whether it's a trade or an attack, right? It's an attack if you're in a victim, but it's really just a trade because people saw an opportunity to make a billion dollars. And so I haven't said this yet, but the entity that borrowed $100,000 worth of Bitcoin, sold it into the market, bought a bunch of U S T to kill the peg, they made out with roughly $900 million of profit from this. And so this was a rational actor who saw an opportunity in the market to walk away with $900 million while also causing the collapse of the whole

• 36:04David Hoffman?

  entire ecosystem. It's beside the point as to whether it's a coordinated attack or a trade. All that matters is that if it can be attacked, it will be attacked. And Luna had this weakness from day one. Many people called it out. Many people were aggressively silenced by the Luna ecosystem, by the, what we call the lunatics, who were silencing discontent. They were swarming our YouTube channel. They were swarming us on Twitter. And anyone that expressed any amount of bearishness were just harassed by this community as being ETH maxies or whatever. And so there's definitely some part of the Luna ecosystem that probably in the back of their mind saw this weakness, but didn't want to account for it. So they just harassed others who pointed it out. And so this is, this is behavior that we've seen in crypto Twitter before.

• 36:49Ryan Sean Adams?

  I think we've seen it in other communities before that have faced a similar outcome. Vitalik even had words about this when we recorded with him about three or four weeks ago. This is a clip from Vitalik.

• 37:00Speaker 03

  Probably, you know, DAI, RY, maybe USDC are like the only three stable coins that we really need. At the same time, like, you know, I do see the, the value in ongoing innovation. And like, there's definitely, you know, projects that are getting under recognized, but there's also these other projects that are just doing kind of insanely risky, you know, under collateralized, barely collateralized sort of stuff. And that are trying to market themselves on how optimal they are without really caring about the, kind of like how fat their fat tails are. The biggest fallacy that people have in terms of like judging stable coins, for example, is that I feel like the way that a lot of, like especially newbies judge a stable coin is they're like, if a stable coin's price

• 37:41Speaker 03

  stays between 0.99 and 1.01, then it's good. And like, that mindset is very wrong, right? Because whether a stable coin like jumps up and down by 2% or 0.2% isn't a function of how good the stable coin is. It's a function of how good the market maker is. And anyone can hire a good market maker for a short period of time.

• 37:58David Hoffman?

  Somebody else that saw it coming, who I deeply respect in this space is Hazu. And Hazu says, "UST is worse than Bitconnect. At least Bitconnect didn't masquerade as a stablecoin. When your Ponzi targets people's savings, not their investment portfolio, there is a special place in hell reserved for you. Half of crypto Twitter influencers, VCs and trading firms are complicit." He follows up with another tweet saying, "If you've supported UST in the past, you don't get to look away now." And this is, this is the dark part of the story. And so we're going to the Luna Terra subreddit where you can see the national number for the suicide hotline pinned. And this was a very common thing in 2018. And then there are other stories where people have said that they have lost all of their savings.

• 38:41David Hoffman?

  Some people are reporting stories where their colleague has committed suicide. There's many, many people saying that they've lost, lost all of their savings, their friends' savings, their family's savings. So this went straight to the heart of retail, who were just not informed enough to be able to gauge these risks. And we're, of course, the last ones holding the bag because the funds who are professional were the first ones out the door because they're good at this stuff. So this whole thing, like $50 billion of capital is just absolutely destroyed. People take their lives for that, for that amount. We saw people take their lives in 2018 and like we're doing it all over again.

• 39:15Ryan Sean Adams?

  That's the, that's the other thing where regulators begin to take notice is when this starts to affect and happen to retail, regular, everyday people, right? When it's cloistered off to a small experimental group in crypto, a bunch of DeFi D gens and something blows up as it has previously, kind of like, who cares? We already had caution tape over that thing. Retail wasn't getting involved. The insidious thing about this collapse is that the Terra ecosystem, UST, was actually targeting retail. Put your money in this account. Like, let's integrate it with top CDFi apps, right? So you could create an app and use Anchor as a protocol to receive 20%. So it was sort of hidden under the covers. And I think that's going to be a lasting, a lasting blemish on the industry as well

• 39:59Ryan Sean Adams?

  and get, and get regulators' attention.

• 40:01David Hoffman?

  Definitely somebody that has now received a lot of the ire of the community is Do Kwan, the leader behind the Terra ecosystem. And Do Kwan, people were pointing out how confident and cocky Do Kwan behaves Twitter was. He was one of the people that I would say was the main culprit behind instigating this very toxic culture out of the Luna ecosystem. Here he is taking a $200 million bet about the price of the asset Luna in one year's time. I mean, sorry, but L1 founders do not do this, not good ones by any means. Don't make bets on Twitter about the price of their asset. Of course, he also has this famous comment, "By my hand, die will die, die the stablecoin." Because he had it out

• 40:45David Hoffman?

  for the MakerDAO community when some of them started talking negatively about Basis Cash, which we will later find out Do Kwan was a part of.

• 40:54Ryan Sean Adams?

  Spoiler.

• 40:55David Hoffman?

  Spoiler, yeah. And so Do Kwan famously tweets out, "By my hand, die will die." I actually respond, "My money is on die, simply because MakerDAO is the most trusted and well-secured stablecoin there is in crypto Twitter." And I was absolutely just harassed by Do Kwan himself. So Do Kwan gives this "oh, really?" meme and then follows up with saying, "Only an ETH maxi would bet on something that he's already lost, giving the bicycle helmet, no brain." This is not the behavior of a responsible founder.

• 41:25Ryan Sean Adams?

  Very popular tweets, too. This community would swarm and basically overwhelm, ratio you on Twitter on some of these comments.

• 41:34David Hoffman?

  And so we call this now toxic insecurity, where they know that their ecosystem doesn't really have all their weaknesses covered. And so they just make sure that no one talks negatively about their ecosystem on Twitter. And so this is actually where we've discovered as of today, as of the time of recording, Do Kwan was also behind the earlier failed algo stablecoin called Basis Cash, which also imploded, but it imploded much earlier in its lifecycle and caused much less harm in the ecosystem. So there was an anonymous founder called Rick and Morty, and who, it actually turns out that was Do Kwan and other employees of Terraform Labs. So after Basis Cash exploded, I guess they just rotated into doing the same thing, but as a Layer 1.

• 42:19David Hoffman?

  Which is crazy.

• 42:20Ryan Sean Adams?

  Funny story. So I didn't personally lose anything in the UST Luna ecosystem because it had so many red flags. When Basis Cash started, I was introduced to a Rick Sanchez on Telegram by a VC, venture capitalist that I very much respect. And Rick Sanchez in Telegram, the pseudonymous founder, went on to describe what Basis Cash was, tried to get me very excited about it. I ended up putting a little bit of money in, like a very small amount, because there's some possibility that an algo stablecoin would be successful. But I knew it's fraught with massive amounts of risk. And then later, the founders of that project completely abandoned it after it crashed. I ended up losing the little amount that I

• 43:03Ryan Sean Adams?

  put in. It was a learning lesson at that time. Again, not my first one, by the way. I've seen a few of these algo stablecoins try to make something. But the way I think that Doquan abandoned that project, right, speaks very much to what he intends to do, or his intents for the Luna Terra ecosystem. At least, it's a data point that people should factor in. If he was willing to abandon that project, like, what are his intents behind Luna and Terra? It calls all of that into question.

• 43:34Speaker 04

  Let me ask you a question real quick. Does evil exist? And if so, can one detect and measure it?

• 43:39David Hoffman?

  But we didn't have that information because we didn't know that he was behind Basis Cash until literally today. And so all of this stuff is coming out. Tim Copeland tweets out, we're also watching some people who have previously promoted UST on Twitter delete their tweets because of obvious reasons. And so, like, the thing is, like, we've seen this before. We've seen algo stablecoins come and go. It should be no surprise that this algo stablecoin blew up once again. Fiscanties tweets out some really good advice. This is a message for those who are, who feel loss as a result of this, who lost a bunch of money. Fiscanties gave out this tweet saying, "I don't know who needs to hear this, but losing all of your money is not the end of the world."

• 44:22David Hoffman?

  Even losing more than you have. Don't do anything stupid. I've never shared this, but once I was down negative $150,000 of net worth because of a very stupid mistake that I made. I was, that was a huge pile of money for me back then. And the day it happened and the subsequent two weeks afterwards were very crushing. It was hard for me to do even basic things like leave my bed and shower. I was too proud to even tell my friends about it, so I suffered in silence. Don't do this. It's better to let it out and share. If you don't feel like sharing with a friend or and you can't afford it, therapy is a good thing to consider. As somebody with a background in psychology, with my mom as a therapist, therapy is tight. Like if this is hurting you psychologically and you feel like this is bottled up, I definitely would encourage

• 45:06David Hoffman?

  you to just talk to anyone.

• 45:09Ryan Sean Adams?

  Yeah, absolutely. Feeling for the community out there. And I think simultaneously, it's okay to feel for the community of retail investors who didn't know any better, maybe, were kind of duped into this, sucked into them. This, it's their first time around. Listen, as we said in the intro, all of us have lost money on stupid things in crypto. Simultaneously, to hold that idea in your head with the idea that, hey, there were also a lot of VCs and influencers and investors and even founders who should have known better. They should have known better. And that is not a good look for this space. So the question is, where do we go from here? Individually, where do you go from here if you've been wrecked by this? Our hearts

• 45:53Ryan Sean Adams?

  go out to you. I think that's great advice from Fiscanti's on this. Maybe some therapy, take a pause, go for a jog, spend time with those you love. I think for an industry, the question is, how do we move on from this? And here's somewhat a cynical take. I hope this doesn't turn out, but do you want to read this from Mike McDonald, David?

• 46:13David Hoffman?

  Yeah, the sad part is, the reason why this tweet did so well is because we've seen this before. Mike McDonald gives his take as to what is about to happen. He goes, "The best part about this whole thing," being facetious here. Dough will disappear. He's probably made life-changing money. You have lost all of yours. You will also likely fall for the next grifter who employs the same tricks. He will rebrand to something else and his next project will result in him profiting again, hopefully off of you. Again, very cynical take, but this is also what we saw out of the Wonderland fiasco. And so like 0X Sifu, who turned out to be the Quadringa exchange scammer, just was just cycled into the next scam. There are just some people out there who are just these serial entrepreneur slash scammers out there who just can't stop

• 46:58David Hoffman?

  doing this stuff. And so hopefully, if you have been burned by this, this is your last time and you look towards other alternatives rather than these very, very attractive juicy returns on steroids ecosystems that ultimately collapse.

• 47:14Ryan Sean Adams?

  Yeah, the message is if this happened to you, don't let it happen to you again and try to warn the next person. We've been very critical of ecosystems like Danny Siesta from Wonderland. We got attacked from that earlier this year. It turned out, not six weeks later, that Danny was into some very shady things and so was his co-founder and that community just kind of disappeared in a puff. We saw similar sentiments and there was a similar feel and similar vibe coming out of the Luna ecosystem and Terra ecosystem.

• 47:44David Hoffman?

  Almost identical.

• 47:45Ryan Sean Adams?

  Yeah, we put together a bull case, bear case podcast, gave the bull case a fair shake, gave the bear case a fair shake, a very fair podcast. I think even the attendees thought so. And we're absolutely grilled by the lunatic community for that podcast.

• 48:04David Hoffman?

  That's their name, by the way. That's not our name for them. They are self-called the lunatics.

• 48:07Ryan Sean Adams?

  Yes, yes. We're not calling them lunatics. They call themselves lunatics. And so the moment where any critique or any questioning of an ecosystem or a mechanism is met with, "That's FUD. You're just a bunch of shills. You're maximalist. You have nothing to contribute here," rather than reasoned responses, that's when you should get worried. Those are some warning signs.

• 48:32David Hoffman?

  Well, we were absolutely grilled by the Luna ecosystem and also by the Wonderland ecosystem. I do appreciate like sometimes it hurts getting grilled by those people, but ultimately there are there are people that come out and say, thank you. Here's smart programmer saying, I would like to thank myself, Ryan Sazil, Anthony Cisano for educating us about Luna and UST. I had my money in that shit. Thanks to them. I was out without getting wrecked. Feels bad for the fallen ones. The next tweet is Swagto Miss, a friend of ours who tweets out. Where are the Luna Moonboys now who enjoyed cheating on the bankless episode when they weren't going through the existential risk? Where are you at now? And then Sazil Anthony Cisano says silent, just like the frog nation that came before them.

• 49:14Ryan Sean Adams?

  Guys, so we've taken you through the entire life cycle of the Terra UST ecosystem and up to date. Now, things could happen in the future. The ecosystem could repair, could start to rebuild. If they do, hopefully they incorporate a better mechanism design. But I also hope this is a learning lesson for everyone in crypto. First of all, the risks of these things, sometimes they are not well understood, but a lot of the principles that we talk about on bankless principles of decentralization, for instance, and and security are important. And I think this demonstrates why these fundamentals are important. Sometimes people who say stuff like this, they sound like boomers in the space. They sound like they're just old people.

• 49:59Ryan Sean Adams?

  You know, virtue signaling, repeating common tropes. But I think this is the reason we say them and we say them so often, say them so emphatically is because we don't, we want to build this industry for the long term. We want to build it responsibly. We don't want to take shortcuts. And I hope the lesson for everyone in crypto, whether you're a builder, whether you're an investor, whether a user of these systems is don't take shortcuts. Let's build this thing right. Let's build this thing from first principles, decentralized all of the way. Let's not mix up fintech risk in this. Let's not become another set of bankers. Let's not create a system just like the old system that we left. We don't have to. The future is ours. What would you say in closing, David?

• 50:42David Hoffman?

  Yeah, so many, many people for both inside the Terra ecosystem and outside of it, their net worth is approaching zero as the crypto markets come down. This is normal for first cycler. My net worth basically hit zero in 2018 and then again in 2019 and then again in 2020 as we got liquidated in the March COVID dump. But like, there's, there's plenty of paths forward. The magnitude of the crypto revolution is still ahead of us. And so it's still the best opportunity there is in the world. And so it hurts, emotions are down bad, depressed markets create depressed humans. But it's, it's no time to just like eject and, and abscond from the, from the industry.

• 51:27David Hoffman?

  And so there's still plenty of opportunity. This is a learning lesson that if you learn this now, hopefully you don't have to learn it later. And so there's, there's still a bright future ahead.

• 51:36Ryan Sean Adams?

  So hang in there, guys. If you enjoyed this episode, please make sure you subscribe in YouTube as well. If you're listening to this in the podcast, make sure you hit subscribe, like and review. Thanks a lot. Of course, have to end with this. None of this has been financial advice. ETH is risky, Bitcoin is risky, my God, so is crypto. You could lose what you put in, but we're headed west and we're still headed in that direction. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.

• 52:06David Hoffman?

  Hey, we hope you enjoyed the video. If you did, head over to Bankless HQ right now to develop your crypto investing skills and learn how to free yourself from banks and gain your financial independence. We recommend joining our daily newsletter, podcasts and community as a Bankless Premium subscriber to get the most out of your Bankless experience. You'll get access to our market analysis, our alpha leaks and exclusive content and even the Bankless token for airdrops, raffles and unlocks. If you're interested in crypto, the Bankless community is where you want to be. Click the link in the description to become a Bankless Premium subscriber today. Also, don't forget to subscribe to the channel for in-depth interviews with industry leaders, Ask Me Anythings and weekly rollups where we summarize the week in crypto and other

• 52:51David Hoffman?

  fantastic content. Thanks everyone for watching and being on the journey as we build out the Bankless Nation.