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Podcast 🎤 #36 Terra, LUNA, UST Meltdown – Postmortem & Lessons Learned

Today, we’re talking about what happened to Terra, LUNA & UST. Where we went wrong, lessons learned, what you can still do about it and what’s coming next.It’s May 22nd, It’s Bitcoin Pizza Day!

But strangely it also randomly happens to be the 1 year anniversary of my first LUNA purchase. My biggest purchase. And unfortunately I still have all of it.

This is definitely the most difficult podcast I’ve had to record. But It’s also one of the most difficult situations I’ve ever been a part of.

As many of you who listen to The BitLift Podcast know, I’ve been a huge fan of Terra. I’ve been bullish on LUNA. I bought LUNA at 5 and 6 bucks starting a year ago today and watched it balloon to 1/3rd of my entire crypto portfolio. In fact, I was going to sell it tomorrow! Because I was waiting to capture Long Term Capital gains, vs paying twice as much in short term capital gains. I’ve had this sell date on my calendar for 6 months, and been counting down the days.

How about that for our first lesson learned today? Probabllllllly should have been taking profits along the way, irregardless of the tax consequences.

I’ve also been recommending Anchor Protocol to everyone I know. And using it myself to farm half of my stable coin portfolio.

And unless you’ve been on a desert island retreat for the past two weeks, you probably know that the entire Terra ecosystem suffered a catastrophic meltdown. Including LUNA, UST, Anchor, and every other app in the Terra ecosystem.

We’re going to talk about why it happened. We’re going to talk about the absolute shit show of difficult decisions we’ve had to make while in the eye of the storm. We’re going to talk about lessons learned. And we’re going to talk about what happens next.

But first, I want to apologize.

My Apologies

I try to be a source of trusted information for helping friends, family and as many people as I can navigate the cryptoverse – and when it comes to Terra, I absolutely failed you – and I’m really sorry.

I know everyone listening is smart enough to do their own research. But I am part of your research and I understand that.

We know crypto is a risky, and its volatile – but when things are going well its easy to forget just what risks we’re taking, and how much of our portfolio is exposed to them.

So if my shenanigans played any role in you diving face first into LUNA or stacking UST in Anchor – I’m really sorry.

To watch something I believed in so strongly meltdown in such a catastrophic fashion and pull everyone I know down with it has been a painful experience for me.

Losing money is painful. Actually it’s not so much about losing money, as much as it’s about losing the hopes and dreams and plans we have for the money we lose.

I’ve fielded hundreds of messages and spent hours on the phone with many of you this past couple weeks doing everything I can to help navigate this mess. If you need help with this, or fuck it even if you just need someone to talk to! Hop in the BitLift discord and reach out.

We’re in this together. And it’s hard to see now, but I’m confident we’ll come out stronger.

So with that, a quick story which leads to my first lesson learned from all of this…

A Quick Story

In 2013 I discovered Bitcoin, bought at $250, rode it to $1,200 and continued buying every single month for the next three years as we rode all the way down to $200.

It was brutal. Everyone I talked to about Bitcoin over that time thought I was a fuckin lunatic (no pun intended).

Nothing backs it. The government’s going to shut it down. Bitcoin’s a ponzi!

Every time price dipped, the universe would rub it in my face

So. Many. Haters.

NONE of the people I knew (except my brother) stuck around for the ride to $20k that came in 2017. Now I know Terra isn’t bitcoin – but it helps me understand the lens I saw LUNA through

I did my homework, I read the white papers, I used Terra and ran tests, I found and followed people I trust who also had skin in the game, I followed the project closely and I blocked out the haters.

Honestly, I don’t regret any of that.

But there’s THREE lessons that stand out from this.

Lessons Learned

First, when bitcoin got too big, Satoshi disappeared. I was there when he posted his last post. I remember it.

When Terra got to big, so did Do’s ego. Do Kwon if you don’t know, is the co-founder of Terra and CEO of Terraform Labs otherwise known as TFL. That fool’s been shitposting up a storm and everyone’s been eating out of his hand for months.

I don’t personally think he ever acted maliciously, I just think Terra, and Anchor for that matter, got bigger than him and he didn’t disappear. A lesson I wish he’d learned from Satoshi.

Second, when Terra, or rather Do and the newly formed Luna Foundation Guard, decided they needed to buy tons of Bitcoin to help back UST – I didn’t question it. In fact, I cheered it on! I mean, I’m a bitcoiner at heart – and now I have a stable coin backed by bitcoin. Sounded epic!

But I should have questioned it more. Why the fuck did LUNA need Bitcoin!? I thought I understood how this system was suppose to work, and if it works we don’t need bitcoin.

And then LFG bought Avalanche too!? That did raise alarms for me, but I went along with it – cause things were good.

Third lesson, when it comes to finding and following trusted advisors, I need to include some, smart, trusted, articulate haters too. People who are not pumping their own bag.

Most of the people I was influenced by were big time VC’s and even CEO’s of public crypto companies – all of which lost tens or even hundreds of millions in this collapse.

They’ve been public and transparent with their investment thesis, and they admitted UST depegging as a risk all along – but they were flat out wrong on the level of risk they were taking on.

Everyone who followed Terra for the past few months heard the FUD around Terra and Anchor being a “ponzi”. What pisses me off about this is that I still don’t think it was a ponzi! Ponzi is just the wrong word for what happened.

A ponzi is when fresh money coming in is used to provide returns to previous investors. That’s not what was happening! So when I kept hearing Anchor was a ponzi, I just blocked it out. If I had instead followed people who could explain the argument against Terra more clearly, it’s possible I would have been more cautious.

  1. So first lesson, watch out for diabolical rulers and a trend towards MORE centralization, not less
  2. Second watch out for BIG protocol changes, especially centrally planned ones.
  3. Third, don’t block out ALL the haters. Find some smart ones, and listen to what they have to say.

BTW on that second lesson, we have the ETH merge coming up soon – its definitely a BIG change, but hundreds of people have been coordinating it for years. I’m hoping that goes differently.

What Caused UST To Collapse

So what actually did happen to cause the collapse?

There are lots of theories, many of which go into total conspiracy territory honestly. The reality is, like most things in DeFi, it’s very complicated.

Terra tweeted that they’re putting together a post mortem to be released “ASAP” which I’m looking forward to. But even that I’ll take with a grain of salt. Whether the chain was even maliciously attacked or not is still unproven.

But here’s my personal theory. It’s a combination of my gut, some conspiracies and just what I witnessed first hand following this project every single day for the past year.

My hunch (and this is the speculative part) is it all starts with Do picking a fight with two very powerful groups, either of which could have orchestrated the attack.

First, Do was served a subpoena by the SEC in person at the Blockworks conference in September of last year. In response, he sued the SEC then turned around and sponsored the Washington Nationals, slapping Terra branding and marketing all over Washington DC’s home baseball field effectively taunting regulators.

Not a good idea.

Most conspiracy theories point towards this being some sort of Wall St. hit job but let’s talk about the theory I haven’t seen discussed anywhere and thats Do’s incessant shit talking about DAI.

DAI is a stable coin issued by MakerDAO. It’s suppose to be backed by crypto like ETH and wBTC, but right now it’s backed by 43% USDC and 7% USDP both of which are centralized dollar backed stable coins.

The argument for UST all along has been DeFi needs a truly decentralized stable coin – and I agree.

So on March 22nd Do was publicly complaining on Twitter about DAI just being a wrapper for USDC and then he tweets again that he has some magical idea, and he’ll report back soon.

Then later that day he posts a tweet which in my opinion was the beginning of the end of Terra

Then on April 1st he announces the 4pool in collaboration with FRAX, another algorithmic fractionally reserved stable coin.

To understand the 4pool, you need to understand a bit about the Curve exchange. Anyone can be an LP in Curve to earn a share of the fees generated from swaps which are paid in 3CRV which is the LP token of the 3pool and stable coin of it’s own in some ways. The 3pool is a foundational primitive of the Curve exchange. It is a combination of DAI-USDC-USDT.

Do’s goal was to replace the 3pool with the 4pool consisting of UST-FRAX-USDC-USDT

The yields for LP’s on 3pool has sucked for a long time, so Do formed a cartel of sorts by gathering all the CRV and CVX token holders and convincing them to put all their voting power towards the 4pool in an effort to make 4pool the highest yielding pool on Curve.

This is a big deal.

If you’ve ever heard of “the Curve Wars”, this move was being talked about as a checkmate end the Curve Wars.

Curve token emissions are a fundamental building block of DeFi and the source of a lot of the yields we see all across DeFi.

And so Do was boxing DAI out, and in doing so I think, pissed off some more very powerful people.

MakerDAO is an Ethereum OG project. Not only is it run by some very wealthy ETH maxi’s but also A16z, one of the largest venture capital firms in the world is a big early investor in Maker

The 4pool was released on Ethereum main net on May 3rd and was set to launch the week of May 9th once Curve voting was complete.

And I remember having this thought…

“How the hell were they going to migrate the UST from the previous pools to the new 4pool without screwing things up?”

You can’t like, pause these things, or click a button to merge them…

So on May 7th, Terra removed $150M worth of UST from the Curve pool. Within a minute of that, someone dumped $84M worth of UST in that pool at a loss, effectively knocking UST off it’s peg.

That part, to me, the timing seems too perfect to not be malicious. That’s why we call this whole thing an attack.

And for the next 36 hours or so, UST flailed around a little bit below peg, but only reaching a low of 98.5 cents. Concerning for sure, but we’ve seen this happen before in UST and other stable coins and they always recover.

I had JUST see this happen to MIM stable coin a back in February when Wonderland Finance had a meltdown. MIM depegged to around 98 cents, flailed around for a bit, and then recovered!

So when I saw the same thing happen to UST, I was immediately reminded that these systems have self correcting mechanisms that will kick in. But it didn’t kick in. Someone asked Do about this on Twitter and he replied saying:

Apparently the LUNA minting function was capped at 300 million LUNA per day. This was plenty when the Curve pool had a ton of liquidity, but now that it was drained the only place left to sell UST was centralized exchanges like Binance (source).

This is what caused UST to fall to 0.75. It’s also the same time the LFG announced they were going to deploy the BTC reserves to defend the UST peg.

The problem is, $5B of UST was withdrawn from Anchor that day alone. And since BTC price had fallen the week before the reserves had dwindled from over $4B to only $2.5B. Either way, it probably was never enough, but it definitely wasn’t enough for what came next.

LFG spent all 80k bitcoin buying UST – by the end of May 10th, it was all gone.

Which if you think about it makes LFG a masssssssive holder of UST now. Which I don’t see talked about anywhere, but I’m seeing a hint of it in the recovery plan.

And thats when Terra upped the 300M daily mint cap to $1.2B and LUNA got crushed to thousandths of a penny.

I suspect that the first jolt which kicked UST off peg was intentional, I really do. It doesn’t even matter who did it at this point, the damage is done.

It’s total speculation that people behind Maker were involved, but they had a clear motive. And while the entire DeFi market was getting pummeled, the price of MKR doubled.

I thought Terra’s mint/burn mechanism should have been able to handle it gracefully, but it didn’t

Once the BTC reserves were depleted I think we experienced a classic bank run. From here forward, it was every man for himself. Because of Anchor Protocol’s massive draw, UST grew too big.

And interestingly, because of crypto’s decentralized permissionlessness, the bank run was without a doubt the fastest meltdown of all time.

At their peak, LUNA plus UST collectively represented a $60B market cap which is similar to Enron was when it collapsed.

A traditional bank would have just closed their doors and waited for the panic to settle down

I actually thought that was happening at one point when the Terra validator nodes collectively agreed to halt the blockchain.

But they truly did it to prevent governance attacks against the network now that LUNA could be bought for pennies on the dollar. Once a patch was pushed, they quickly brought it back online. I think that’s when LUNA dropped below a penny.

What Could You Do?

That was without a doubt the longest few days of my life. There were no good options for anyone at any point. No one knew what to do, but our options were clear.

  • We could sell at a loss
  • Or wait and hope for a recovery

On May 9th and 10th Do posted a few tweets letting everyone know he was working hard on a plan, but a plan never came.

According to The Block, Do was looking to raise an extra $1B in fresh capital to help defend the peg. On May 10th he sent out tweets saying:

Some people believed he could recover, but it looked like the damage had already been done. Trust in LUNA and UST was lost.

For LUNA, many of us had it staked or bonded in Anchor, and that takes 21 days to reverse. So we were stuck. But LUNA was a volatile asset designed to defend the UST peg – so us LUNA knew what we were getting ourselves into.

UST holders and Anchor users on the other hand did not. UST had always been a dollar. You don’t even follow the price of it.

The big lesson for me here was that I’m an investor not a trader. And I say that as a positive thing! I’ve learned that trading is gambling, and the house always wins. But it also means I didn’t have the skillset to react when shit got crazy and I needed to pull up the 5 minute chart. I had to make the same difficult decisions everyone else did, with very little to go on.

Another lesson we learned here was around liquidity, gateways, bridges and chokepoints. In fact, many people learned this the hard way in 2017/2018 when exchanges like Coinbase and Kraken and all of them were down under heavy load. You literally couldn’t log into Coinbase to sell your crashing crypto even if you wanted to. And I’ve always advised everyone since to make sure you have multiple exchange accounts, because when shit goes down your exchange could go down with it.

Well… Astroport, the main exchange on Terra had a hardcoded assumption that UST always equals $1 – so it became useless pretty quickly.

And there were multiple points where the bridges we use to bridge UST on and off of the Terra blockchain displayed a message that the “Chain is halted”. You couldn’t get your money out – they burned the bridges!

I discovered a hack where in the source code of the bridge to get the damn thing working again. A few of us in the discord used it to escape. Some people got out, some people didn’t. In either case, it was a wildly difficult decision.

Usually when faced with situations like this, where both options suck, I just chop it in half and do both. There’s nothing more you can do when you’re working with incomplete information.

What’s Next For Terra?

So what happens next? Even as I speak, the dust hasn’t fully settled. There are lots of proposals in Terra’s Agora forum on how to proceed.

The first proposal back on May 11th gained obvious momentum from the community as well as Vitalik because it outlined a model for taking the remaining LFG funds, converting them to USDC and refunding all the small UST and Anchor wallets at the time of the depeg.

As you can imagine, everyone with a balance in Anchor immediately agreed! But on May 16th, when LFG announced what was left of the reserve, it only equated to pennies on the dollar. That plan was all about remediation for Anchor users, and something might still happen there. But the plan for LUNA holders was, and still is, an entirely different story.

On May 13th, CZ, Founder and CEO of Binance tweeted that Terra should burn the extra minted LUNA and recover the peg. Burning the LUNA and restoring the peg became the most popular way forward. Mainly because, well, CZ said so.

Six hours later, Do posted his first version of what he called the “Terra Ecosystem Revival Plan”. Not exactly a burn, but a “reboot” of the Terra network with only 1B LUNA tokens issued. Some LUNA would go to wallets holding LUNA and UST before the peg broke and some would go to wallets at the time of the reboot. We’ll call these tokens LUNA 2.0

The thing that pissed people off the most about Do’s plan was that he wanted to give 40% of the LUNA 2.0 tokens to UST holders at the time of the reboot.

But at this point most UST holders already dumped their UST! They had to. The peg was not going to be restored and there was no plan to restore it. Zero LUNA 2.0 was earmarked for Anchor users before the depeg.

It was clear to me at this point that we shouldn’t be thinking about this as a reimbursement, but rather as just a reboot to people most likely to participate in the new network.

The thing I haven’t seen anyone talk about though is that LFG spent $1.5B buying UST all the way down, meaning they probably now hodl at least 2-4B UST!

No wonder Do wants LUNA 2.0 tokens to go to UST hodlers who hedl on.

Terra Ecosystem Revival Plan 2 [AMENDED]

Things just get more complicated from here, but Do announced Version 2 of the Revival Plan on May 16th along with the hashtag campaign #TerraIsMoreThanUST.

The idea is to strip UST and all the stable coins from Terra (since they clearly don’t work) and instead focus on supporting the thriving app and developer ecosystem.

The proposal is up for vote as I speak, it seems like it’s going to pass but it still has a few days left. There’s going to be a ton of drama around voting and lots of pissed off people no matter what happens, but here’s what’s scheduled to happen next:

  • The Terra blockchain is going to fork into LUNA Classic and LUNA 2.0
  • Your Terra address will remain the same on both chains, except on LUNA Classic your LUNA will now be LUNC
  • And on the new LUNA 2.0 chain you’re going to be airdropped LUNA 2.0 tokens based on what you held in your wallet “pre-attack” and “post-attack”
  • Pre-Attack – means if you held LUNA or UST just before the depeg occurred on May 7th
  • Post-Attack – means if you hold LUNA or UST at block 7,790,000 expected to occur on May 27th

So here’s the breakdown of how the LUNA 2.0 tokens will be issued to people who held LUNA and UST Pre-Attack:

  • 30% – of the tokens will go to a community pool to fund future development and whatever else we vote to spend it on.
  • 35% – will go to Pre-Attack LUNA holders, but there’s a vesting schedule, meaning you won’t get it all right away.
    • If you had less than 10k LUNA at the time of the attack, 30% of your LUNA 2.0 tokens will be immediately liquid and the rest will vest over 2 years with a 6 month cliff.
    • A 6 month cliff means you won’t get any of your remaining 70% for 6 months, but after 6 months you can claim 6 months all at once and then the rest will trickle in over the next 1.5 years little by little every block. If you had more than 10k LUNA there’s a 1 year cliff, even worse.
  • 10% – will go to Pre-Attack aUST holders with a 500K “whale cap”.
    • This means that if you had less than 500k UST in Anchor, yo’ll get your proportional amount of the 10%
    • If you had 500k UST or more in Anchor, you’ll get the maximum capped amount.
    • Regardless of how much you had, only 30% of your LUNA 2.0 tokens will be liquid at launch and the rest will vest over 2 years with a 6 month cliff.

Now for Post-Attack – this is for people still holding LUNA and UST at the time Luna 2.0 launches:

  • 10% – will go to Post-Attack LUNA holders.
  • 15% – will go to Post-Attack UST holders.
    • For both of these, you’ll have 30% liquid immediately with the remaining 70% vested over 2 years with a 6 month cliff.
    • Note that this is to UST holders not aUST holders, so make sure to withdraw your UST from Anchor before May 27th if you haven’t already.

Thats it, thats how LUNA 2.0 is getting dished out.

Luna 2.0 Q&A

It raises a ton of questions, very few of which have been addressed. But let’s go through what we know:

Question: What if you staked your LUNA or had it bonded and provided to Anchor, or were a LUNA LP in Astroport or held a LUNA derivative like stLUNA at the time of the attack?

  • Apparently all of this is being accounted for. However in some cases you’ll probably end up with A LOT more LUNA swapping your derivative back to LUNA before the launch. Also, if you have staked LUNA, be sure to claim your LUNA and UST staking rewards before the launch.

Question: Is it better to sell your LUNA and UST for a few cents if you still have it or wait for the airdrop?

  • No one knows what price LUNA 2.0 will trade at when it launches, so its impossible to know.

Question: Should I hold my LUNA and UST in my wallet or on an exchange? Will exchanges even get the airdrop?

  • If you know how to use the Terra Station wallet, I definitely recommend sending your LUNA and UST there. Apparently exchanges will receive the airdrop, but you’ll be waiting got them to give it to you, if they give it to you at all.

Question: Can I still bridge assets to and from the Terra blockchain? As of 5/23/2022, bridge.terra.money is still working. Make sure to use the Shuttle version to send UST to exchanges like Coinbase and Gemini, and only use the Wormhole bridge if the place you’re bridging to explicitly says WORMHOLE ONLY.

Conclusion

That’s it. That’s where we’re at. It’s a total mess and a lot a lot of people were hurt.

There’s lots of talk that this will drive further regulation in the crypto space, especially for stable coins. And this just fuels the flames of conspiracy that Wall Street and big banks could have been behind the whole thing. As we know, only banks have the legal right to create money out of thin air – and they don’t want any competition.

I’m not going to delete any past BitLift Podcast episodes or guides about Terra, rather I’ll just link to this page at the top of each with a disclaimer.

This happened. We can’t hide from it. All we can do is learn from our mistakes, grow, and do better next time.

As far as I’m concerned – the super cycle theory is dead. In some ways, it kinda got us into this mess. We got our blow off top and now we’re in the bear market. Just this time, it wasn’t Bitcoin and ETH that crashed…

It was stable coins.

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