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It looks like this (un-)stablecoin has lost its peg two times in the past. The interesting thing is that's it's an algorithmic stable coin: if its price is belo

by mckirk 4y ago

It looks like this (un-)stablecoin has lost its peg two times in the past. The interesting thing is that's it's an algorithmic stable coin: if its price is below a dollar, you can 'burn' one UST to get $1 worth of LUNA (a regular crypto currency without an enforced peg). That has a deflationary effect and is meant to raise UST's price. Conversely, if UST's price is above $1, you can burn LUNA to get back UST, inflating the supply and lowering the price. It's quite the neat idea really -- but I suppose it hinges on people believing that there is a healthy UST-LUNA ecosystem tomorrow that you can use to withdraw your funds if you want. Burning UST to get LUNA doesn't make sense if LUNA loses enough value by the time you could exchange it for something else, so I assume people rather take the loss on selling UST for less than $1, which would explain what we're seeing: Right now UST is at $0.81 and LUNA is down 47% in the last 24h. We'll see if the system is robust enough to recover from a 'bank run', if you can call it that. It at least isn't the first time the peg has been broken, and so far it's stabilized at $1 again every time.

1270018080 4y ago
It's not a neat idea. There's no novel economic concept here. It's just a ponzi scheme that has run out of greater fools. Remove the layers of deception and it is fundamentally a ponzi scheme.
- mannanj 4y ago
  As is the printing of the dollar, except it's backed by a big military and fancy bankers. Don't forget to point out how most other markets operate on similar Ponzi principles too. You can't make profit off of anything unless you can have someone else pay more for it than what you paid.
  - amanaplanacanal 4y ago
    Or if it actually creates wealth like real companies.
- mckirk 4y ago
  You could make that argument about the majority of the crypto-currency universe, yes. I wouldn't consider an algorithmic stablecoin a ponzi scheme, though. People don't buy UST because they expect to be able to sell it to a greater fool for more; they buy it, because they expect to be able to sell it back to an equally-great fool for the same price. That expectation is founded in a shared belief in the 'value control algorithm' -- which I still think is a neat idea, in itself, because it's like a central bank in code form.
  - ZitchDog 4y ago
    It turns out, you need a lot of guns to make a central bank work.
    - mckirk 4y ago
      That's what I keep telling people: until we have the autonomous murder drones, a smart contract can't really be binding outside of the cryptoverse.
    - MomoXenosaga 4y ago
      A currency is backed by armies and millions of productive citizens.
      - eudoxus 4y ago
        The problem here is that the country with the most guns (largest armies) gets to define what a "productive citizen" is. So the parent comment still stands.
  - bb88 4y ago
    > I wouldn't consider an algorithmic stablecoin a ponzi scheme I would unless it's trading paper or some other non-crypto security somewhere behind the backend.
  - betwixthewires 4y ago
    This particular algorithmic stablecoin is and has always been 100% a scam. If you actually look at the way the system works, it's pegged by exactly nothing, the only demand for LUNA is to burn it for UST, or to hold it for speculative purposes. Terra was never going to survive a bear, and this is only a little blip compared to past bear markets (so far).
- 2bitencryption 4y ago
  > There's no novel economic concept here. It's just a ponzi scheme that has run out of greater fools. Remove the layers of deception and it is fundamentally a ponzi scheme. I'm not defending the coin, but in what way is this a Ponzi scheme? It may be hair-brained and an absolutely terrible investment, but from OPs description it does sound "novel" to my novice ears. How is this specific concept (pegging one coin to $1 by using a second coin) a ponzi scheme?
  - ipnon 4y ago
    It seems Ponzi scheme has become a misnomer for "scam".
    - miracle2k 4y ago
      Whereas "scam" has become to mean "thing I don't like".
      - grapeskin 4y ago
        Whereas “thing I don’t like” is used to dismiss people calling out scams.
  - jhugo 4y ago
    It relies on people to keep buying the second coin (Luna) in order that its price is supported to a level that the peg mechanics work. But there's no fundamental value anywhere in the system, you can't pay your taxes with this, it's not backed up by a government with a monopoly on violence nor by a large economy of productive output. So the "trust us, it's valuable" part (which ends up being the only part that matters) doesn't work.
  - deleted 4y ago
    [deleted]
  - Geee 4y ago
    There's also Anchor, which is the third piece of this Ponzi. Anchor promises 20% yield on UST, and this is what generates demand for UST. However, the yield contains risk which is hidden on purpose or not generally understood. Ponzi schemers profit from this information asymmetry, and work to maintain it. Most of the yield in crypto is generated from dilution, and therefore the real return can be positive as long as there are new investors, which offset the effect of dilution. Now, classifying them as Ponzi schemes depends on how these assets are marketed and sold. Expected return of these kind of schemes is zero, which is how they should be marketed.
dragontamer 4y ago
> Right now UST is at $0.81 $0.72 on Coinbase. But to be fair, the last 5 minutes have been brutal...
- mckirk 4y ago
  Yup, I thought about posting a correction, but figured it would be outdated by the time I was finished, heh. It's not looking good at the moment... I know HN isn't very fond of crypto, but I still feel for everyone stuck in UST space right now. I've been there with other assets, and it's too damn stressful. There is so much red across the board in cryptoland... it's gonna be a stress test for more than UST and LUNA.
  - dragontamer 4y ago
    The value is "holding" at $0.66 right now (in that it stopped going down... for now... anyway). This crash is utterly fascinating to me. Its definitely a slow-motion train wreck. I do feel for the people who are in this crash right now, wondering if they should get out right now, or if it will be back to normal tomorrow morning. But I don't think this stablecoin has ever dropped this low before. I think I can understand the stress anybody is feeling from this. Its kinda horrific. I remember when money-markets lost their peg back in 2008 and pretty much the world went apocalyptic. I can't imagine what it feels like to lose 30% of an alleged "stable" value in a few hours.
    - codefreeordie 4y ago
      The thing is that people had pretty good reasons to expect Money Market Mutual Funds to be stable at $1. Everybody who really understood them knew that breaking the buck was possible, but absent fraud, it wouldn't have been possible without a massive economic collapse (which didn't happen). Nobody in their right mind should have expected UST to remain stable for any length of time at all, as it is fundamentally built on smoke, mirrors, and Ponzi's best friend. I'm sure there will be some sad stories about people who had no idea what they were buying that lost money they couldn't afford to gamble with, but it's really hard to feel too bad for the suckers and hypemonkeys who memed this stuff into having temporary value.
initplus 4y ago
It also relies an a healthy USD-LUNA market. If there aren't any buyers on the LUNA side it doesn't matter how man LUNA you can mint from your UST because you can't exit the LUNA side anyway. It's the same problem for basically any stablecoin: they exist because the paths between traditional finance and crypto are narrow and tricky. But this in turn limits the ability of a stablecoin to actually peg to a value from traditional finance. If there are mass net outflows from the cryptocurrency ecosystem back into traditional finance it will be impossible for these stablecoins to maintain their value. They are essentially a bet on the downside of crypto (if everything goes to custard you won't be able to exit) with none of the upside of crazy returns found in non-stablecoin cryptocurrencies.
noodles_nomore 4y ago
Doesn't that make UST a derivative of LUNA? The price of UST when it is below $1 should be equal to the expected percentage that LUNA falls during the time it takes to convert your UST to LUNA and then sell that LUNA. Since doing that actually inflates the LUNA supply there is no point at which LUNA should stop falling (absent other value propositions) and therefore UST should always be below $1 and so LUNA should inflate away. I'm probably missing something, but stable this is not.
- influxmoment 4y ago
  - CryptoPunk 4y ago
    There is nothing inherently scammy in using a distributed blockchain to record balances, and cryptography to authenticate updates to the balances. While opening the door to financial contracts to every one in the world with a computing device may make scam offerings more common, it's overly simplistic and lazy to resort to a caricature of crypto tokens being, as a rule, scams. The vast majority of crypto projects in top 100 by market cap are not like UST/LUNA. The demand for them comes from speculation about future utility, but there is no unsustainable market-beating yield to entice people to deposit new money.
    - influxmoment 4y ago
      Copying a project that was supposed to have limited tokens and then making your own private money and selling it is inherently scammy. And then avoiding security laws and responsibilities for your personal project by claiming decentralision
      - CryptoPunk 4y ago
        I was not referring to this particular project. You implied all crypto projects are scammy. I was taking issue with the over-generalization. And as an aside, not being in compliance with SEC regulation does not in any way make a project scammy. Being non-compliant with SEC regulations could be the case with LUNA, and still be entirely incidental to it being scammy, as it is possible to operate with no deception and without exploiting any one - which is an essential component of any scam - and still run afoul many SEC regulations.

by mckirk 4y ago

1270018080 4y ago

It's not a neat idea. There's no novel economic concept here. It's just a ponzi scheme that has run out of greater fools. Remove the layers of deception and it is fundamentally a ponzi scheme.

mannanj 4y ago
As is the printing of the dollar, except it's backed by a big military and fancy bankers. Don't forget to point out how most other markets operate on similar Ponzi principles too. You can't make profit off of anything unless you can have someone else pay more for it than what you paid.
- amanaplanacanal 4y ago
  Or if it actually creates wealth like real companies.
mckirk 4y ago
You could make that argument about the majority of the crypto-currency universe, yes. I wouldn't consider an algorithmic stablecoin a ponzi scheme, though. People don't buy UST because they expect to be able to sell it to a greater fool for more; they buy it, because they expect to be able to sell it back to an equally-great fool for the same price. That expectation is founded in a shared belief in the 'value control algorithm' -- which I still think is a neat idea, in itself, because it's like a central bank in code form.
- ZitchDog 4y ago
  It turns out, you need a lot of guns to make a central bank work.
  - mckirk 4y ago
    That's what I keep telling people: until we have the autonomous murder drones, a smart contract can't really be binding outside of the cryptoverse.
  - MomoXenosaga 4y ago
    A currency is backed by armies and millions of productive citizens.
    - eudoxus 4y ago
      The problem here is that the country with the most guns (largest armies) gets to define what a "productive citizen" is. So the parent comment still stands.
- bb88 4y ago
  > I wouldn't consider an algorithmic stablecoin a ponzi scheme I would unless it's trading paper or some other non-crypto security somewhere behind the backend.
- betwixthewires 4y ago
  This particular algorithmic stablecoin is and has always been 100% a scam. If you actually look at the way the system works, it's pegged by exactly nothing, the only demand for LUNA is to burn it for UST, or to hold it for speculative purposes. Terra was never going to survive a bear, and this is only a little blip compared to past bear markets (so far).
2bitencryption 4y ago
> There's no novel economic concept here. It's just a ponzi scheme that has run out of greater fools. Remove the layers of deception and it is fundamentally a ponzi scheme. I'm not defending the coin, but in what way is this a Ponzi scheme? It may be hair-brained and an absolutely terrible investment, but from OPs description it does sound "novel" to my novice ears. How is this specific concept (pegging one coin to $1 by using a second coin) a ponzi scheme?
- ipnon 4y ago
  It seems Ponzi scheme has become a misnomer for "scam".
  - miracle2k 4y ago
    Whereas "scam" has become to mean "thing I don't like".
    - grapeskin 4y ago
      Whereas “thing I don’t like” is used to dismiss people calling out scams.
- jhugo 4y ago
  It relies on people to keep buying the second coin (Luna) in order that its price is supported to a level that the peg mechanics work. But there's no fundamental value anywhere in the system, you can't pay your taxes with this, it's not backed up by a government with a monopoly on violence nor by a large economy of productive output. So the "trust us, it's valuable" part (which ends up being the only part that matters) doesn't work.
- deleted 4y ago
  [deleted]
- Geee 4y ago
  There's also Anchor, which is the third piece of this Ponzi. Anchor promises 20% yield on UST, and this is what generates demand for UST. However, the yield contains risk which is hidden on purpose or not generally understood. Ponzi schemers profit from this information asymmetry, and work to maintain it. Most of the yield in crypto is generated from dilution, and therefore the real return can be positive as long as there are new investors, which offset the effect of dilution. Now, classifying them as Ponzi schemes depends on how these assets are marketed and sold. Expected return of these kind of schemes is zero, which is how they should be marketed.

dragontamer 4y ago

> Right now UST is at $0.81 $0.72 on Coinbase. But to be fair, the last 5 minutes have been brutal...

mckirk 4y ago
Yup, I thought about posting a correction, but figured it would be outdated by the time I was finished, heh. It's not looking good at the moment... I know HN isn't very fond of crypto, but I still feel for everyone stuck in UST space right now. I've been there with other assets, and it's too damn stressful. There is so much red across the board in cryptoland... it's gonna be a stress test for more than UST and LUNA.
- dragontamer 4y ago
  The value is "holding" at $0.66 right now (in that it stopped going down... for now... anyway). This crash is utterly fascinating to me. Its definitely a slow-motion train wreck. I do feel for the people who are in this crash right now, wondering if they should get out right now, or if it will be back to normal tomorrow morning. But I don't think this stablecoin has ever dropped this low before. I think I can understand the stress anybody is feeling from this. Its kinda horrific. I remember when money-markets lost their peg back in 2008 and pretty much the world went apocalyptic. I can't imagine what it feels like to lose 30% of an alleged "stable" value in a few hours.
  - codefreeordie 4y ago
    The thing is that people had pretty good reasons to expect Money Market Mutual Funds to be stable at $1. Everybody who really understood them knew that breaking the buck was possible, but absent fraud, it wouldn't have been possible without a massive economic collapse (which didn't happen). Nobody in their right mind should have expected UST to remain stable for any length of time at all, as it is fundamentally built on smoke, mirrors, and Ponzi's best friend. I'm sure there will be some sad stories about people who had no idea what they were buying that lost money they couldn't afford to gamble with, but it's really hard to feel too bad for the suckers and hypemonkeys who memed this stuff into having temporary value.

initplus 4y ago

It also relies an a healthy USD-LUNA market. If there aren't any buyers on the LUNA side it doesn't matter how man LUNA you can mint from your UST because you can't exit the LUNA side anyway. It's the same problem for basically any stablecoin: they exist because the paths between traditional finance and crypto are narrow and tricky. But this in turn limits the ability of a stablecoin to actually peg to a value from traditional finance. If there are mass net outflows from the cryptocurrency ecosystem back into traditional finance it will be impossible for these stablecoins to maintain their value. They are essentially a bet on the downside of crypto (if everything goes to custard you won't be able to exit) with none of the upside of crazy returns found in non-stablecoin cryptocurrencies.

noodles_nomore 4y ago

Doesn't that make UST a derivative of LUNA? The price of UST when it is below $1 should be equal to the expected percentage that LUNA falls during the time it takes to convert your UST to LUNA and then sell that LUNA. Since doing that actually inflates the LUNA supply there is no point at which LUNA should stop falling (absent other value propositions) and therefore UST should always be below $1 and so LUNA should inflate away. I'm probably missing something, but stable this is not.

influxmoment 4y ago
- CryptoPunk 4y ago
  There is nothing inherently scammy in using a distributed blockchain to record balances, and cryptography to authenticate updates to the balances. While opening the door to financial contracts to every one in the world with a computing device may make scam offerings more common, it's overly simplistic and lazy to resort to a caricature of crypto tokens being, as a rule, scams. The vast majority of crypto projects in top 100 by market cap are not like UST/LUNA. The demand for them comes from speculation about future utility, but there is no unsustainable market-beating yield to entice people to deposit new money.
  - influxmoment 4y ago
    Copying a project that was supposed to have limited tokens and then making your own private money and selling it is inherently scammy. And then avoiding security laws and responsibilities for your personal project by claiming decentralision
    - CryptoPunk 4y ago
      I was not referring to this particular project. You implied all crypto projects are scammy. I was taking issue with the over-generalization. And as an aside, not being in compliance with SEC regulation does not in any way make a project scammy. Being non-compliant with SEC regulations could be the case with LUNA, and still be entirely incidental to it being scammy, as it is possible to operate with no deception and without exploiting any one - which is an essential component of any scam - and still run afoul many SEC regulations.