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The crux of the problem is not Luna itself, but the Anchor Protocol (19.5% yield), which enticed users to burn Luna by investing in UST through a, for lack of a

The crux of the problem is not Luna itself, but the Anchor Protocol (19.5% yield), which enticed users to burn Luna by investing in UST through a, for lack of a better phrase, Ponzi scheme. I get it - people like decentralization. But without some form of regulation, either by the broader crypto community itself or by governments around the world, situations like the LUNA/UST collapse will keep happening. There are also rumors of a Terra fork: https://agora.terra.money/t/terra-ecosystem-revival-plan/8701 https://agora.terra.money/t/terra-ecosystem-revival-plan/870.... Thanks, but no thanks.

kova12 4y ago
Problem with regulation is that the term itself is ambiguous. What does it mean, who will do it, what are their limits and on what authority do they act? I am not familiar with this specific crypto, but when I am offered to join a business that pays 19% in USD, I immediately know it can not possibly not fail. Regulations or not, you can't offer such dividend without major risk. Then the subject of jurisdiction comes up. Who issued the tokens? If it is a USA company or person, it is one story, and they are likely already subject to some regulations. If it is an international community like ethereum, its another story. USA can probably ban it's distribution in USA, but not regulate. Then, why would the regulations have to be mandatory? Organizations can voluntarily approach SEC and ask them to regulate the crypto they are about to issue. Submit to the appropriate rules and be an investor grade business. No new laws are really required for that. This way you could have trusted that if Luna fails, someone would go to jail. It's just wouldn't have been 19% dividend in that case, following rules comes with a price tag.
phphphphp 4y ago
I disagree. Anchor was a dumb-money trap that increased the fallout of UST’s collapse by at least an order of magnitude, sure, but it was not responsible for the collapse: algorithmic stable coins are fundamentally flawed, they’re a perpetual motion machine, they’re based on the belief that you can artificially create and sustain a market within a set of very narrow parameters. Luna was doomed to fail regardless of Anchor — and the founders knew that, because they’d failed in the same way before, anchor was their attempt to shore up the ruse (which worked… until it didn’t).
- MuffinFlavored 4y ago
  > Anchor was a dumb-money trap What % of current crypto climate/culture is "dumb money trap"?
  - phphphphp 4y ago
    Most of it, but it’s not unique to the cryptocurrency industry, only the degree to which crypto is dumb money — many aspects of traditional finance are going down the same path, where it’s no longer professional against professional, but professional shooting a bucket full of laymen.
  - vmception 4y ago
    99% I think the difference is what to do about that Users should be more discerning, that’s my vote
- px43 4y ago
  DAI works fine. Over-collateralization with a looming threat of liquidation has proven to be resilient against all imaginable forms of market turbulence. It still leans heavily on oracles that are basically run by humans, so there is risk, but the incentives seem to be about right to keep enough people honest. UST was an obvious bad idea. This exact scenario was warned about over and over again, and Do Kwon did what he could to try to delay the inevitable, but here we are.
  - phphphphp 4y ago
    If the algorithm is “give us assets more valuable than the claim we give you in return” is it an algorithmic stable coin, or just an asset with an arbitrary price? I’m unsure I understand how DAI can be characterised as an algorithmic stable coin, given “algorithmic” is usually understood to mean “the thing from which it derives it’s value is an algorithm” whereas for DAI, like Tether (ostensibly), the value is derived from its collateral. I’m open to an argument to why it is a algorithmic stable coin though, perhaps my definition is too narrow? To my understanding, the point of a stable coin is stability of value for the holder, which isn’t true of DAI — because they’re still exposed to the volatility of their collateral.
brtkdotse 4y ago
> people like decentralization I submit that very few people give a shit about decentralization. They want their currency to work and not drop 90% of its value overnight.
- cam0 4y ago
  Agreed. People like the idea of getting rich. And if they happen to get rich, they like the idea of getting richer.
- spopejoy 4y ago
  Right, but that's like saying "people don't care about how a company treats workers", "people don't care about privacy" -- speculators/shareholders occupy the most craven beliefs in all markets generally. Decentralization is an _ethos_ that _can be found_ in crypto but you have to look for it, which means you care about it. If you don't care, fine, don't bother with it. Meanwhile decentralization is actually an excellent measurement of the honesty of a given crypto scheme, and surprise surprise, only a few projects are willing to put decentralization before profits. But they do exist, just like there are a few tech cos that aren't extractive ad machines (not many).
zucker42 4y ago
Patrick Boyle argues fairly convincingly in my mind that the problem with this was the design of Luna itself[1]. TL;DW TerraUSD maintains its price by minting $1 worth of Luna in exchange for one TerraUSD coin. But this assumes that there are always going to be willing buyers for Luna, even if its price is in free-fall. When the price of Luna drops suddenly, desire to hold Luna decreases, causing TerraUSD to lose its peg, causing confidence in Luna to drop further, leading to the death spiral we currently observe. [1] https://youtu.be/iisPX_xVMV8 https://youtu.be/iisPX_xVMV8
- smrtinsert 4y ago
  Seems like something that should be so easy to catch in a simulation/test
  - JumpCrisscross 4y ago
    > Seems like something that should be so easy to catch in a simulation/test The system has two stable equilibria, one and zero. If we assume zero is virtually permanent, the system always ends there. But it's highly sensitive to a volatility assumption. Ex ante there is no way to precisely estimate that.
  - px43 4y ago
    A simulation? This flaw should be obvious to anyone who took 10 minutes to read how the system works. Synthetics backed by a 1:1 mint/burn are always going to crash and burn the same way. It's happened before, and it will probably happen again. High profile people have been shouting from the rooftops about this exact issue since launch. I have some friends who lost everything in this, and it sucks. I did my best to explain this exact scenario to people who would listen, and ended up getting some pretty high praise this week from people I saved, but you can't save everyone. We are now in a world where wealth is being rapidly redistributed from people who don't read the instructions, to those of us who do. The metaphorical sea levels on global finance are rising rapidly. Learning to swim now isn't just a recreational activity, it's a survival skill.
    - 4y ago
tptacek 4y ago
As I understand it: Anchor is the only reason UST was (briefly) workable to begin with. There wasn't enough liquidity in the UST/Luna system to support a major stablecoin; Anchor was how they dragged that liquidity in: by giving people free money to help prop it up. Take away Anchor and you're stuck at Step 7 of Matt Levine's Algorithmic Stablecoin Analysis: "if you do a good enough job marketing Luna, its price will not be zero. If the price is not zero, you're in business". As I understand it, the price of this whole ecosystem was driven largely by Anchor. https://twitter.com/tqbf/status/1524509243587575808/photo/1 https://twitter.com/tqbf/status/1524509243587575808/photo/1
hristov 4y ago
It is a ponzi scheme. There is no production to provide for this 19.5% yield. It is all taken from incoming investments into the system. And it is well known that ponzi schemes collapse when the influx of new money starts becomes insufficient to pay the yield. It is very natural for ponzi schemes to collapse even without any government involvement. I think the article should have examined that possibility in addition to speculating about an attack. It is very possible that the $2 billion that was removed on the weekend was simply a holder that having seen worldwide retreat from risky assets had decided to pull his/her money out.
- nightski 4y ago
  Except those incoming investments are all matched by an equal amount selling . That’s not something you see in a Ponzi scheme.
  - vkou 4y ago
    The selling is just smoke and mirrors that obfuscates the fraud a little. Anything promising risk-free 20% YoY returns is either a printing press, or a fraud.
    - kristjansson 4y ago
      Or extremely risky!
      - beefield 4y ago
        Not sure if there is sarcasm there, but it is pretty much a definition of fraud if someone claims that an extremely risky asset is risk-free.
        kristjansson 4y ago
        Missed the risk-free in GP comment…
  - 4y ago
codedokode 4y ago
But do you need regulation? Promises to produce 20% interest out of thin air when banks don't offer a single percent are suspicious enough in my opinion. It doesn't make sense. If there was a risk-free way to get 20% income without doing anything then people could stop working and live just from their savings.
- vmception 4y ago
  Agreed! I would emphasize (and empathize) that there are muuuuuuch higher yields in the crypto space, so, many of these people felt like they were being responsible in a happy medium. (The other yields are not fixed yields and very temporary, but it is easy to come out ahead. Not for passive investment chasers) Regardless it was still up to them to be more discerning. Amazing it got that big.
- Fargoan 4y ago
  About half the yield came from loan interest. The other half was from Luna Foundation dumping money into Anchor's reserves. Users could take out collateralized loans against Luna, Ethereum, Atom, Avalanche, and Solana tokens. Anchor isn't what brought down Terra. The way UST was supposed to remain stable is what killed the whole thing when it backfired.
  - codedokode 4y ago
    As I understood, people were taking loans at exorbitant interest rates because they could invest it back into some Anchor or UST related tokens and get even more profit. This is not a realistic business model. Here is a quote from a random article: > A popular strategy that many have used was the recursive lending strategy, this involved: > 1. Depositing bLUNA as collateral on Anchor > 2. Borrowing UST to buy LUNA > 3. Swap LUNA to bLUNA to repeat Step 1 Regarding this: > The other half was from Luna Foundation dumping money into Anchor's reserves. And where do those money ultimately come from? I guess from unlucky investors who bought UST/LUNA and were left with useless tokens? Then this resembles a classic Ponzi scheme. [1] https://medium.com/qi-capital/lessons-learned-from-the-may-crash-anchor-protocol-f06fc282a488 https://medium.com/qi-capital/lessons-learned-from-the-may-c...
javert 4y ago
> But without some form of regulation, either by the broader crypto community itself or by governments around the world, situations like the LUNA/UST collapse will keep happening. That's right, and that's OK. Capitalism allows failure. A free society allows failure. This is healthy. Luna was not a systemic risk. There has been no contagion. Nobody has lost their house or their job. When you don't allow failure, you get Lehman and the 2008 crisis. You get the Fed inflating assets to the point that it's actually dangerous, because they won't let the stock market fall.
- jeromegv 4y ago
  People definitely have lost their house on crypto. There’s allowing failure and there’s allowing Ponzi schemes. I don’t want to live in a society where those are legal.
  - javert 4y ago
    Then you don't want to live in a society, you want to live in the Soviet Union. Because nobody can tell you if a business is a fraud in advance. There is no all-seeing, all-knowing bureaucrat that can detect Ponzi schemes. You just have to take away people's permission to do stuff. Which is ridiculous---Ponzi schemes only hurt people who are reckless. Why punish and impede all of us for the sake of reckless people? Your viewpoint is literally uncivilized.
    - I-M-S 4y ago
      The totality of my life experience has shown me it's precisely the other way around - it's the reckless people who punish and impede us all for their sake. Just like there are no all-knowing bureaucrats who can detect Ponzi schemes, there are none who can detect systemic risks either.
    - stale2002 4y ago
      > Then you don't want to live in a society, you want to live in the Soviet Union I think that there are many in between states for society, between the two extreme points of "allow ponzi scheme investments to be sold to uninformed investors" and "Communist dictatorship". Instead of either of those two extremes, we could choose a middle ground of "Liberal democracy, where people running ponzi schemes are prosecuted". > There is no all-seeing, all-knowing bureaucrat that can detect Ponzi schemes Nothing is perfect. But it doesn't have to be. The government can just go after the obvious ones, at a very minimum, and get it mostly correct.
lampshades 4y ago
> But without some form of regulation, either by the broader crypto community itself or by governments around the world, situations like the LUNA/UST collapse will keep happening. I don't understand what's so bad about just letting it happen continuously. People will eventually learn and if they don't, they don't.
- mensetmanusman 4y ago
  Because the winners gain real money/weapons/power to continue to exploit the low-IQ and eventually the crime spills over into your safe world.
- ProjectArcturis 4y ago
  Same reason we have laws against Ponzi schemes and other fraud.

kova12 4y ago

Problem with regulation is that the term itself is ambiguous. What does it mean, who will do it, what are their limits and on what authority do they act? I am not familiar with this specific crypto, but when I am offered to join a business that pays 19% in USD, I immediately know it can not possibly not fail. Regulations or not, you can't offer such dividend without major risk. Then the subject of jurisdiction comes up. Who issued the tokens? If it is a USA company or person, it is one story, and they are likely already subject to some regulations. If it is an international community like ethereum, its another story. USA can probably ban it's distribution in USA, but not regulate. Then, why would the regulations have to be mandatory? Organizations can voluntarily approach SEC and ask them to regulate the crypto they are about to issue. Submit to the appropriate rules and be an investor grade business. No new laws are really required for that. This way you could have trusted that if Luna fails, someone would go to jail. It's just wouldn't have been 19% dividend in that case, following rules comes with a price tag.

phphphphp 4y ago

I disagree. Anchor was a dumb-money trap that increased the fallout of UST’s collapse by at least an order of magnitude, sure, but it was not responsible for the collapse: algorithmic stable coins are fundamentally flawed, they’re a perpetual motion machine, they’re based on the belief that you can artificially create and sustain a market within a set of very narrow parameters. Luna was doomed to fail regardless of Anchor — and the founders knew that, because they’d failed in the same way before, anchor was their attempt to shore up the ruse (which worked… until it didn’t).

MuffinFlavored 4y ago
> Anchor was a dumb-money trap What % of current crypto climate/culture is "dumb money trap"?
- phphphphp 4y ago
  Most of it, but it’s not unique to the cryptocurrency industry, only the degree to which crypto is dumb money — many aspects of traditional finance are going down the same path, where it’s no longer professional against professional, but professional shooting a bucket full of laymen.
- vmception 4y ago
  99% I think the difference is what to do about that Users should be more discerning, that’s my vote
px43 4y ago
DAI works fine. Over-collateralization with a looming threat of liquidation has proven to be resilient against all imaginable forms of market turbulence. It still leans heavily on oracles that are basically run by humans, so there is risk, but the incentives seem to be about right to keep enough people honest. UST was an obvious bad idea. This exact scenario was warned about over and over again, and Do Kwon did what he could to try to delay the inevitable, but here we are.
- phphphphp 4y ago
  If the algorithm is “give us assets more valuable than the claim we give you in return” is it an algorithmic stable coin, or just an asset with an arbitrary price? I’m unsure I understand how DAI can be characterised as an algorithmic stable coin, given “algorithmic” is usually understood to mean “the thing from which it derives it’s value is an algorithm” whereas for DAI, like Tether (ostensibly), the value is derived from its collateral. I’m open to an argument to why it is a algorithmic stable coin though, perhaps my definition is too narrow? To my understanding, the point of a stable coin is stability of value for the holder, which isn’t true of DAI — because they’re still exposed to the volatility of their collateral.

brtkdotse 4y ago

> people like decentralization I submit that very few people give a shit about decentralization. They want their currency to work and not drop 90% of its value overnight.

cam0 4y ago
Agreed. People like the idea of getting rich. And if they happen to get rich, they like the idea of getting richer.
spopejoy 4y ago
Right, but that's like saying "people don't care about how a company treats workers", "people don't care about privacy" -- speculators/shareholders occupy the most craven beliefs in all markets generally. Decentralization is an _ethos_ that _can be found_ in crypto but you have to look for it, which means you care about it. If you don't care, fine, don't bother with it. Meanwhile decentralization is actually an excellent measurement of the honesty of a given crypto scheme, and surprise surprise, only a few projects are willing to put decentralization before profits. But they do exist, just like there are a few tech cos that aren't extractive ad machines (not many).

zucker42 4y ago

Patrick Boyle argues fairly convincingly in my mind that the problem with this was the design of Luna itself[1]. TL;DW TerraUSD maintains its price by minting $1 worth of Luna in exchange for one TerraUSD coin. But this assumes that there are always going to be willing buyers for Luna, even if its price is in free-fall. When the price of Luna drops suddenly, desire to hold Luna decreases, causing TerraUSD to lose its peg, causing confidence in Luna to drop further, leading to the death spiral we currently observe. [1] https://youtu.be/iisPX_xVMV8 https://youtu.be/iisPX_xVMV8

smrtinsert 4y ago
Seems like something that should be so easy to catch in a simulation/test
- JumpCrisscross 4y ago
  > Seems like something that should be so easy to catch in a simulation/test The system has two stable equilibria, one and zero. If we assume zero is virtually permanent, the system always ends there. But it's highly sensitive to a volatility assumption. Ex ante there is no way to precisely estimate that.
- px43 4y ago
  A simulation? This flaw should be obvious to anyone who took 10 minutes to read how the system works. Synthetics backed by a 1:1 mint/burn are always going to crash and burn the same way. It's happened before, and it will probably happen again. High profile people have been shouting from the rooftops about this exact issue since launch. I have some friends who lost everything in this, and it sucks. I did my best to explain this exact scenario to people who would listen, and ended up getting some pretty high praise this week from people I saved, but you can't save everyone. We are now in a world where wealth is being rapidly redistributed from people who don't read the instructions, to those of us who do. The metaphorical sea levels on global finance are rising rapidly. Learning to swim now isn't just a recreational activity, it's a survival skill.
  - 4y ago

tptacek 4y ago

As I understand it: Anchor is the only reason UST was (briefly) workable to begin with. There wasn't enough liquidity in the UST/Luna system to support a major stablecoin; Anchor was how they dragged that liquidity in: by giving people free money to help prop it up. Take away Anchor and you're stuck at Step 7 of Matt Levine's Algorithmic Stablecoin Analysis: "if you do a good enough job marketing Luna, its price will not be zero. If the price is not zero, you're in business". As I understand it, the price of this whole ecosystem was driven largely by Anchor. https://twitter.com/tqbf/status/1524509243587575808/photo/1 https://twitter.com/tqbf/status/1524509243587575808/photo/1

hristov 4y ago

It is a ponzi scheme. There is no production to provide for this 19.5% yield. It is all taken from incoming investments into the system. And it is well known that ponzi schemes collapse when the influx of new money starts becomes insufficient to pay the yield. It is very natural for ponzi schemes to collapse even without any government involvement. I think the article should have examined that possibility in addition to speculating about an attack. It is very possible that the $2 billion that was removed on the weekend was simply a holder that having seen worldwide retreat from risky assets had decided to pull his/her money out.

nightski 4y ago
Except those incoming investments are all matched by an equal amount selling . That’s not something you see in a Ponzi scheme.
- vkou 4y ago
  The selling is just smoke and mirrors that obfuscates the fraud a little. Anything promising risk-free 20% YoY returns is either a printing press, or a fraud.
  - kristjansson 4y ago
    Or extremely risky!
    - beefield 4y ago
      Not sure if there is sarcasm there, but it is pretty much a definition of fraud if someone claims that an extremely risky asset is risk-free.
      - kristjansson 4y ago
        Missed the risk-free in GP comment…
- 4y ago

codedokode 4y ago

But do you need regulation? Promises to produce 20% interest out of thin air when banks don't offer a single percent are suspicious enough in my opinion. It doesn't make sense. If there was a risk-free way to get 20% income without doing anything then people could stop working and live just from their savings.

vmception 4y ago
Agreed! I would emphasize (and empathize) that there are muuuuuuch higher yields in the crypto space, so, many of these people felt like they were being responsible in a happy medium. (The other yields are not fixed yields and very temporary, but it is easy to come out ahead. Not for passive investment chasers) Regardless it was still up to them to be more discerning. Amazing it got that big.
Fargoan 4y ago
About half the yield came from loan interest. The other half was from Luna Foundation dumping money into Anchor's reserves. Users could take out collateralized loans against Luna, Ethereum, Atom, Avalanche, and Solana tokens. Anchor isn't what brought down Terra. The way UST was supposed to remain stable is what killed the whole thing when it backfired.
- codedokode 4y ago
  As I understood, people were taking loans at exorbitant interest rates because they could invest it back into some Anchor or UST related tokens and get even more profit. This is not a realistic business model. Here is a quote from a random article: > A popular strategy that many have used was the recursive lending strategy, this involved: > 1. Depositing bLUNA as collateral on Anchor > 2. Borrowing UST to buy LUNA > 3. Swap LUNA to bLUNA to repeat Step 1 Regarding this: > The other half was from Luna Foundation dumping money into Anchor's reserves. And where do those money ultimately come from? I guess from unlucky investors who bought UST/LUNA and were left with useless tokens? Then this resembles a classic Ponzi scheme. [1] https://medium.com/qi-capital/lessons-learned-from-the-may-crash-anchor-protocol-f06fc282a488 https://medium.com/qi-capital/lessons-learned-from-the-may-c...

javert 4y ago

> But without some form of regulation, either by the broader crypto community itself or by governments around the world, situations like the LUNA/UST collapse will keep happening. That's right, and that's OK. Capitalism allows failure. A free society allows failure. This is healthy. Luna was not a systemic risk. There has been no contagion. Nobody has lost their house or their job. When you don't allow failure, you get Lehman and the 2008 crisis. You get the Fed inflating assets to the point that it's actually dangerous, because they won't let the stock market fall.

jeromegv 4y ago
People definitely have lost their house on crypto. There’s allowing failure and there’s allowing Ponzi schemes. I don’t want to live in a society where those are legal.
- javert 4y ago
  Then you don't want to live in a society, you want to live in the Soviet Union. Because nobody can tell you if a business is a fraud in advance. There is no all-seeing, all-knowing bureaucrat that can detect Ponzi schemes. You just have to take away people's permission to do stuff. Which is ridiculous---Ponzi schemes only hurt people who are reckless. Why punish and impede all of us for the sake of reckless people? Your viewpoint is literally uncivilized.
  - I-M-S 4y ago
    The totality of my life experience has shown me it's precisely the other way around - it's the reckless people who punish and impede us all for their sake. Just like there are no all-knowing bureaucrats who can detect Ponzi schemes, there are none who can detect systemic risks either.
  - stale2002 4y ago
    > Then you don't want to live in a society, you want to live in the Soviet Union I think that there are many in between states for society, between the two extreme points of "allow ponzi scheme investments to be sold to uninformed investors" and "Communist dictatorship". Instead of either of those two extremes, we could choose a middle ground of "Liberal democracy, where people running ponzi schemes are prosecuted". > There is no all-seeing, all-knowing bureaucrat that can detect Ponzi schemes Nothing is perfect. But it doesn't have to be. The government can just go after the obvious ones, at a very minimum, and get it mostly correct.

lampshades 4y ago

mensetmanusman 4y ago
Because the winners gain real money/weapons/power to continue to exploit the low-IQ and eventually the crime spills over into your safe world.
ProjectArcturis 4y ago
Same reason we have laws against Ponzi schemes and other fraud.