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Can someone explain what happened with Luna? I'm not aware of it. People here are calling it a ponzi scheme, but I can't find any explanation of what the deal w

Can someone explain what happened with Luna? I'm not aware of it. People here are calling it a ponzi scheme, but I can't find any explanation of what the deal was. (there is this forbes article that only talks about it tanking[0]) [0] https://www.forbes.com/sites/stevenehrlich/2022/05/11/luna-nosedives-under-2-loses-98-of-its-value-as-terraust-struggles-to-regain-its-dollar-peg/ https://www.forbes.com/sites/stevenehrlich/2022/05/11/luna-n...

once_inc 4y ago
Start here: https://www.bloomberg.com/opinion/articles/2022-05-11/terra-flops https://www.bloomberg.com/opinion/articles/2022-05-11/terra-...
- isolli 4y ago
  And while you're at it, sign up for Matt's email newsletter. It's one of the most insightful reads in finance.
  - fmajid 4y ago
    Or better, his RSS feed.
- mijoharas 4y ago
  Thanks, I should really read matt levine more regularly!
Tenoke 4y ago
It wasn't a ponzi in the traditional sense but the algorithm propping their stablecoin while likely well-meaning had a serious death spiral-based fault in the case of a coordinated attack or very bad market conditions. For what is worth, they did have a healthy (for smartchains) ecosystem beyond that stablecoin and were clearly attempting to do more than temporarily prop their token and then run away.
- raesene9 4y ago
  I don't think that Luna or UST were ponzi's but some of the things built on top of them had ponzi-like characteristics. Specifically Anchor which was promising 20% returns whilst charging borrowers less than that on the same funds, seemed doomed to failure.
  - cypress66 4y ago
    From what I understand that 20% was completely legit and made sense. It simply came from a reserve that was created to attract investors, and as soon as that reserve were depleted, those returns would be gone.
    - 55555 4y ago
      Okay, now explain the need for a 21 day lock up when trying to pull funds out.
      - charcircuit 4y ago
        There is not a 21 day lock up for pulling funds out. The Terra blockchain is a proof of stake blockchain where you can stake Luna in order to gain rewards from various fees the network collects. Unbonding your staked Luna takes 21 days to complete. One of the assets which you could use as collateral on Anchor is bLuna. bLuna is a token that represents a Luna that is currently being staked. Anyone who holds bLuna is able to redeem the rewards that staked Luna has accrued since it was last redeemed. When you give it to Anchor as collateral Anchor will start paying it's depositors with those rewards. It is possible to convert a bLuna back into Luna, but this takes at least 21 days to complete as the unstaking process takes 21 days itself. If you don't want to wait that long you can just sell the bLuna to someone else for Luna.
    - raesene9 4y ago
      I've not read all of anchor's material but I don't recall them publicly stating that the 20% APY was only going to las till they had burned through a specific amount of money. Do you know, was that stated publicly?
Bombthecat 4y ago
It's not really a ponzi scheme. More like an algorithm gone wrong. On basic: if ust coin(pegged to one dollar, so the target was to keep it at one dollar) lost value(under one dollar) new luna coins were created to buy ust coins. So.. As long ust coin was under one dollar, it created more and more luna coins to buy ust coins. I think luna started with like a few million coins and ended with something like 7 or 8 trillion coins, now the network is officially shutdown. It was a horrible idea. No matter how good your algorithm is, people will manipulate the open! Book of upcoming trades to make profits, and destroying the coin with it. Its like knowing what vanguard bak will do, before they even start trading on top of that you can force them to trade im certain ways, because you know how they will react, with hundred percent accuracy! It was doomed from the beginning.
- unmole 4y ago
  > It's not really a ponzi scheme. They were paying existing holders a ridiculously high rate for staking. Where was this coming from if not from new buyers?
  - jdasdf 4y ago
    the ponzi was really the cherry on top of the flawed algo
  - Dylan16807 4y ago
    Paying with luna, right? That's more like a stock split than a ponzi. They weren't going to run out.
    - unmole 4y ago
      Again, why did the price of Luna keep going up if not for new buyers?
      - Dylan16807 4y ago
        The trading price can be based on a lot of factors and/or tiny volumes of trades. The price of a stock can change drastically with almost no money changing hands compared to the market cap. Which would then not be a Ponzi.
nathias 4y ago
https://twitter.com/OnChainWizard/status/1524123935570382851 https://twitter.com/OnChainWizard/status/1524123935570382851 probably an attack exploiting bad algorithms, I wouldn't be surprised if the US regulatory captures stablecoins now and it somehow becomes necessary to police the whole world for 'financial terrorism' or something of that nature ...
- throw1230 4y ago
  Financial terrorism? It's an open, unregulated market. You reap what you sow.
  - nathias 4y ago
    I'm not aruging that, I'm saying they will probably regulate us by having claims like that.
Mizza 4y ago
If this is an attack like Soros vs the Bank of England, how is the profit exfiltrated if both currencies are worthless when the music stops? Is there a put option somewhere else?
- netheril96 4y ago
  > how is the profit exfiltrated if both currencies are worthless when the music stops? They sold for real USD. Or sold for another stablecoin (and then into real USD).
- 0x53 4y ago
  Certain application in the decentralized finance space will allow you to borrow a cryptocurrency based on collateral in another currency. So in this case you deposit bitcoin and get Luna out. Then you sell the Luna. Then after the price crashes you buy Luna to repay your debt. Basically shorting Luna
  - Mizza 4y ago
    So, I put up 10BTC as collateral to get 110LNA - worth 11BTC - on the promise that I'll pay back 120LNA - worth 12BTC. I sell the LNA for 11BTC worth of dollars. A meteor comes and destroys the price of LNA, sending it to a penny. When my loan is due, I buy 120LNA for a buck twenty and pay it back. I keep all of the 11BTC worth of dollars, having essentially bought them for a dollar. Something like that? Seems like it fucks lenders more than holders, but I'm guessing that a lot of holders use some trickery to act as lenders as well. Neat scam.
    - 0x53 4y ago
      Yep that’s essentially how it works. However, it can be risky either way. For instance, what if the price of Luna had gone up massively? Well then you would have had to repurchase Luna for a lot more than you sold it for. Basically, it reduces down to the exact same scenario as shorting a stock.
    - almostkorean 4y ago

once_inc 4y ago

Start here: https://www.bloomberg.com/opinion/articles/2022-05-11/terra-flops https://www.bloomberg.com/opinion/articles/2022-05-11/terra-...

isolli 4y ago
And while you're at it, sign up for Matt's email newsletter. It's one of the most insightful reads in finance.
- fmajid 4y ago
  Or better, his RSS feed.
mijoharas 4y ago
Thanks, I should really read matt levine more regularly!

Tenoke 4y ago

It wasn't a ponzi in the traditional sense but the algorithm propping their stablecoin while likely well-meaning had a serious death spiral-based fault in the case of a coordinated attack or very bad market conditions. For what is worth, they did have a healthy (for smartchains) ecosystem beyond that stablecoin and were clearly attempting to do more than temporarily prop their token and then run away.

raesene9 4y ago
I don't think that Luna or UST were ponzi's but some of the things built on top of them had ponzi-like characteristics. Specifically Anchor which was promising 20% returns whilst charging borrowers less than that on the same funds, seemed doomed to failure.
- cypress66 4y ago
  From what I understand that 20% was completely legit and made sense. It simply came from a reserve that was created to attract investors, and as soon as that reserve were depleted, those returns would be gone.
  - 55555 4y ago
    Okay, now explain the need for a 21 day lock up when trying to pull funds out.
    - charcircuit 4y ago
      There is not a 21 day lock up for pulling funds out. The Terra blockchain is a proof of stake blockchain where you can stake Luna in order to gain rewards from various fees the network collects. Unbonding your staked Luna takes 21 days to complete. One of the assets which you could use as collateral on Anchor is bLuna. bLuna is a token that represents a Luna that is currently being staked. Anyone who holds bLuna is able to redeem the rewards that staked Luna has accrued since it was last redeemed. When you give it to Anchor as collateral Anchor will start paying it's depositors with those rewards. It is possible to convert a bLuna back into Luna, but this takes at least 21 days to complete as the unstaking process takes 21 days itself. If you don't want to wait that long you can just sell the bLuna to someone else for Luna.
  - raesene9 4y ago
    I've not read all of anchor's material but I don't recall them publicly stating that the 20% APY was only going to las till they had burned through a specific amount of money. Do you know, was that stated publicly?

Bombthecat 4y ago

It's not really a ponzi scheme. More like an algorithm gone wrong. On basic: if ust coin(pegged to one dollar, so the target was to keep it at one dollar) lost value(under one dollar) new luna coins were created to buy ust coins. So.. As long ust coin was under one dollar, it created more and more luna coins to buy ust coins. I think luna started with like a few million coins and ended with something like 7 or 8 trillion coins, now the network is officially shutdown. It was a horrible idea. No matter how good your algorithm is, people will manipulate the open! Book of upcoming trades to make profits, and destroying the coin with it. Its like knowing what vanguard bak will do, before they even start trading on top of that you can force them to trade im certain ways, because you know how they will react, with hundred percent accuracy! It was doomed from the beginning.

unmole 4y ago
> It's not really a ponzi scheme. They were paying existing holders a ridiculously high rate for staking. Where was this coming from if not from new buyers?
- jdasdf 4y ago
  the ponzi was really the cherry on top of the flawed algo
- Dylan16807 4y ago
  Paying with luna, right? That's more like a stock split than a ponzi. They weren't going to run out.
  - unmole 4y ago
    Again, why did the price of Luna keep going up if not for new buyers?
    - Dylan16807 4y ago
      The trading price can be based on a lot of factors and/or tiny volumes of trades. The price of a stock can change drastically with almost no money changing hands compared to the market cap. Which would then not be a Ponzi.

nathias 4y ago

https://twitter.com/OnChainWizard/status/1524123935570382851 https://twitter.com/OnChainWizard/status/1524123935570382851 probably an attack exploiting bad algorithms, I wouldn't be surprised if the US regulatory captures stablecoins now and it somehow becomes necessary to police the whole world for 'financial terrorism' or something of that nature ...

throw1230 4y ago
Financial terrorism? It's an open, unregulated market. You reap what you sow.
- nathias 4y ago
  I'm not aruging that, I'm saying they will probably regulate us by having claims like that.

Mizza 4y ago

If this is an attack like Soros vs the Bank of England, how is the profit exfiltrated if both currencies are worthless when the music stops? Is there a put option somewhere else?

netheril96 4y ago
> how is the profit exfiltrated if both currencies are worthless when the music stops? They sold for real USD. Or sold for another stablecoin (and then into real USD).
0x53 4y ago
Certain application in the decentralized finance space will allow you to borrow a cryptocurrency based on collateral in another currency. So in this case you deposit bitcoin and get Luna out. Then you sell the Luna. Then after the price crashes you buy Luna to repay your debt. Basically shorting Luna
- Mizza 4y ago
  So, I put up 10BTC as collateral to get 110LNA - worth 11BTC - on the promise that I'll pay back 120LNA - worth 12BTC. I sell the LNA for 11BTC worth of dollars. A meteor comes and destroys the price of LNA, sending it to a penny. When my loan is due, I buy 120LNA for a buck twenty and pay it back. I keep all of the 11BTC worth of dollars, having essentially bought them for a dollar. Something like that? Seems like it fucks lenders more than holders, but I'm guessing that a lot of holders use some trickery to act as lenders as well. Neat scam.
  - 0x53 4y ago
    Yep that’s essentially how it works. However, it can be risky either way. For instance, what if the price of Luna had gone up massively? Well then you would have had to repurchase Luna for a lot more than you sold it for. Basically, it reduces down to the exact same scenario as shorting a stock.
  - almostkorean 4y ago