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Dark Moon: The Inevitable Collapse of Luna
- nathias 4y agoWhatever your thougts on luna collapse, whoever says it was perfectly predictable and didn't in fact predict it and short it is a liar.
- giomasce 4y agoSo I'm a liar for predicting that eventually it will rain if I can't tell you precisely when?,
- nathias 4y agoif you claim you can perfectly predict it, yes
- baq 4y agoknowing it will fail is not the same as knowing when. sitting on a short position and hoping that it fails is not a reasonable investment strategy.
- ralfd 4y agoFrom the article: > Since late March, I have publicly warned our clients and the broader Bitcoin community about the impending collapse of the cryptocurrency Luna and its native stablecoin, TerraUSD (UST).
- nathias 4y agoyes this is what I mean, I really hate these "crisis predictors", that yell wolf all the time and are right once and then try to cash in on it ... at least it looks like that
- fortran77 4y agoIt's foolish to invest in any way, even a short, on something that is 100% a scam and doesn't follow any rules, isn't audited, and isn't transparent.
- AlexandrB 4y agoNo kidding. While LUNA was falling, the network was shut down several times with little warning. Imagine having a short and you can't buy because the project took their marbles and went home.
- low_tech_love 4y ago“Strangely, some of these whales felt the need to share this in their comments following the crash.” Why strangely? They’re advertising themselves as the smart guys who came out on top. In the world of crypto scammers, they are probably going to get a lot of congratulations and new investors.
- BuckRogers 4y agoThe Luna event has changed my view on cypto too. I don't believe ANY crypto, including BTC, is worth more than $1. I've owned ADA, a tiny bit of BTC, and bought some LUNA after the crash, but currently have no positions. I essentially made and lost nothing in all my adventures. I got out after realizing cryptos deadly swings were not for me and my stomach. For me, the 10 grand that I had in the market is a lot of money that I'm not willing to risk. The only position I'd take is the free stuff that Brave hands out, if I ever switch from Edge to Brave, which is pending how this MV3 debacle turns out... and I would buy a small bit of BTC for a fun investment on a hard crash. I agree with the author, the only one worth owning (if any) is BTC. From my former positions, I watched altcoins collapse with BTC, but did not always pick back up with the same fervor with BTC. Just crashed alongside it. For that reason, if I take a small position again, it'll be BTC.
- LBJsPNS 4y ago"Brown shirts, hula hoops, mood rings, and new age, The bait might change but the fish bite the same." - Fish Karma You can add crypto to that list right after Beanie Babies.
- SergeAx 4y agoAuthor gives two examples of Russian Rouble losing its peg. But rouble was never pegged to any currency, it is free float since 1990, loosely guided by Central Bank interventions (see "currency corridor"). Only with the last Russian-Ukrainian war outbreak at Feb 24 2022 some non-market measures are in effect. Source: I was living in USSR/Russia since my birth.
- yellow_postit 4y agoSeen a lot of retroactive victory laps but not a lot of articles on people that successfully shorted this algorithmic stablecoins tire fire. Wondering when the crypto “Big Short” book will inevitably arrive.
- xiphias2 4y agoAt this point professional trader groups are doing it. Sam Bankman Fried got super rich super fast (faster than if he just made an exchange without using the trading data that he’s getting from it), I wouldn’t be suprised if he would be behind a big short like this. Insider trading securities is illegal in US, but probably not in Bahamas, where FTX is located.
- 323 4y agoSam got super rich in valuation because he owns a large part of FTX. Like CZ from Binance. Sure, he also made a lot trading, but that's not how he became a billionaire. Also, US has a long arm, this is why foreign exchanges forbid US citizens. Insider trading has a very narrow scope, typically equities. To my surprise I learned that there is no such thing as insider trading in forex (from a legal point). But there are other laws that might apply to the client trading data you mentioned.
- Hendrikto 4y ago> I wouldn’t be suprised if he would be behind a big short like this. This event has enormous ripple effects across the whole ecosystem, and they will continue for quite some time. I do not think it would be in his interest to make 2 top 10 coins collapse spectacularly. He would have shot himself in the foot.
- xiphias2 4y agoJust look at the title. The peg had to break anyways, as it was a bad idea, so I support its breakdown as soon as possible before people really start to trust it. I'm a Bitcoin only person for a reason: the devs prioritize system security over adding new features.
- deleted 4y ago[deleted]
- benreesman 4y agoWhat continues to surprise me about the shitcoin-skepticism (which verges on shrill around here) is not that people are skeptical, who wouldn’t be? It’s that there’s nothing new here. Maybe I’m just old, but I remember the late 90s and the 2001 wipeout. Companies were doing big IPOs with what we would now call a token white paper, selling garbage to retail investors that promptly went to zero. Under the shining flashlight of any and every Ayn Rand asshole who backed Greenspan in stomping on Brooksley Born over it. But once the garbage collector ran and all the Luna, err, Pets.com garbage had been flushed out, there were a few real things. Google survived that, and in fact picked up all the leftover fiber and engineers and other infrastructure on the cheap. It’ll be the same this time. Most of its garbage, but there will be one or two real things that will make it.
- lmm 4y agoEh maybe. Sometimes the whole sector really is just bunk. When the Armenian Ponzi schemes fell apart there weren't one or two that really were raking in massive drug profits like they said they were, there was just a whole lot of nothing.
- benreesman 4y agoI could give a shit less about internet points, but I do love hearing contrary opinions. So downvote until you’re heart’s content, but do please comment if you disagree?
- kevinventullo 4y agoI didn’t downvote you, but I’m personally pretty skeptical that there is anything of value for me that will come out of cryptocurrencies. Even pets.com offered value for customers, it just wasn’t profitable. For the case of Google, it was always clear that search engines provided value, but Google figured out how to do it way better than its competitors. I’ll be honest, I just haven’t seen a use case for cryptocurrencies that I actually want in my life.
- benreesman 4y ago
- Barrera 4y agoThis is a very thorough and well-researched article that explains currency pegs in general and the UST collapse in particular. It's one thing to try an experiment and fail. It's quite another to mislead investors and not fulfill commitments. I imagine this paragraph will come back big time during the inevitable criminal and civil trials: > It was here that LFG stepped in by allegedly selling their Luna and Bitcoin reserves to buy up UST in an attempt to stop the bleeding. However, as the price of Luna and UST fell, so did the price of Bitcoin as the LFG allegedly sold tens of thousands of their bitcoin. (Note: It is still unknown if they actually sold the bitcoin).
- low_tech_love 4y agoIf they didn’t sell, would the short still have worked?
- TedShiller 4y agoTerraUSD is supposedly stable only when people want Luna. But who the hell wants Luna? The whole idea failed at its very premise from the beginning.
- dcolkitt 4y agoThe theory was that Luna would hold intrinsic value from demand for blockspace on the Luna blockchain. Analogous to how Ether is derives value from demand for Ethereum blockspace. So the idea was that the Luna token would stabilize the peg for the UST stablecoin. In turn the UST stablecoin would drive demand for Luna blockspace giving the Luna token its underlying value. To Terra’s credit they did make fairly serious efforts to spread a UST payments system. This got a fair bit of traction particularly in South Korea. The idea being that every time you paid for a cup of coffee from your UST wallet, the transaction fee would bid up Luna blockspace and help stabilize the peg.
- w_TF 4y agoLuna/UST was a completely degenerate & risky design; they were allowing 1:1 redemptions between the value of Luna in USD & the UST stablecoin. As the market cap of Luna skyrocketed it allowed for the minting of massive quantities of UST, and then as the price of Luna declined the value of the tokens backing UST was less than what was in circulation and contributed to the death spiral. No amount of demand for Luna block space was ever going to keep this thing pegged. The only thing defending it was open market moves from extremely well capitalized trading desks which is uh decidedly not "algorithmic" nor "decentralized". There's other stable coins with similar mechanisms like Synthetix / SUSD which are also risky, but AT LEAST in their case they require 400% overcollateralization in SNX to mint SUSD. What's shocking is how many people, who ostensibly should be in the top 1% in terms of finance IQ, (e.g., Mike Novogratz, Raoul Pal, etc.) were seemingly unaware of these risks and never examined how it worked while shilling it to retail investors.
- fjkdlsjflkds 4y ago> There's other stable coins with similar mechanisms like Synthetix / SUSD which are also risky, but AT LEAST in their case they require 400% overcollateralization in SNX to mint SUSD. Apples and oranges, really. There is no redemption mechanism in sUSD that results in uncontrolled printing (i.e. devaluing) of SNX (the underlying collateral), unlike UST/LUNA. sUSD is more akin to DAI (i.e., over-collateralized debt-based stablecoins) than to UST.
- nkrisc 4y agoI know it comes up every time something like this happens, but who _are_ these retail investors who are left holding the bag? Individuals who thought it was a good idea? People who have money in a fund and this was part of their “crypto” diversification? I understand why the whales get in: they’re sophisticated enough and rich enough to multiply their money in an obvious Ponzi scheme, but why would anyone else get involved?
- palcu 4y agoRest of world has a really good article about people from emerging markets that chose Luna because their home currency is unstable. https://restofworld.org/2022/argentina-nigeria-terra-crash/ https://restofworld.org/2022/argentina-nigeria-terra-crash/
- lupire 4y agoThat's just a fancy way of saying "dumb people got scammed"
- CTDOCodebases 4y agoI know one. He learnt about bitcoin in 2017 and bought one bitcoin at the top. He forgot he had it until bitcoin broke 20K in 2021. From there using simple trading strategies he managed to trade this one bitcoin into five before exiting after the price hit the most recent all time high. He got out at 50K exiting into USDT. While waiting for a re-entry into bitcoin he found out about staking stable coins. He didn't understand how the UST peg was kept but like a lot of complex things in life he didn't question it. He knew the yield was abnormally high but chalked that up to the investors pouring money into the project trying to gain traction. He expected the yield to be lowered over time to normal market levels as investor money ran out and adoption occured. He staked 250K and was earning approx $950 a week in yield. I spoke to him after the peg broke (0.33c) and he was confident that the peg was going to stabilise. I told him I didn't think that was going to occur and to exit on the bounce at a loss he was comfortable with. Suffice to say he ended up exiting UST at 0.10c. To answer your question people get involved because they see opportunity, have a high risk tolerance and/or just don't understand the risks.
- btilly 4y agoIs there an over/under on when the same thing happens (as I believe it inevitably will) to Tether?
- shawabawa3 4y agoThe "same" thing cannot happen to Tether A different but similar thing can happen. There's no death spiral mechanism in Tether. Either you can redeem it for $1 (for a limited definition of "you", their redemption requirements are nuts), or you can't Tether breaking the peg would look different, with the peg slowly dropping over weeks or months as people got less and less confident in Tether's reserves
- chalst 4y agoIt's true that USDT is not an algorithmic stablecoin, so it's different. Market sentiment, though, tends to change quite quickly: I would not expect a collapse, if and when it happens, to take weeks. It's not that different. There's also little reason to have confidence in Tether's reserves: Tether have refused to have traditional accounts produced, and they are known to have lied about the nature of the reserves, having initially claimed to be 100% backed by cash, but due to a leak we know the reserves include debts. Debts generally are illiquid, and you need highly liquid assets to defend a peg.
- graeme 4y agoTheir peg is still off and they’re redeeming. They may survive but they’re clearly struggling in a way they haven’t for a long while
- Grimburger 4y ago> they’re clearly struggling Currently at $0.999 USD. Is that really your definition of struggling? https://trade.kraken.com/charts/KRAKEN:USDT-USD https://trade.kraken.com/charts/KRAKEN:USDT-USD
- AlexandrB 4y ago
- olliej 4y agoThis is a really in depth and thorough article and I have a much better understanding of pegged currencies. What I still don’t understand is how the uncollatorized algorithmic doodads were meant to work, and also how they weren’t collatorized? It sounded like there was a lot of asset purchasing to support prices?
- barnabee 4y agoThey are, kind of, not really uncollateralised, but the collateralisation is ugly and not very good and I guess “algorithmic” sounds better. I’ll try to explain. Algorithmic “stable”coins like this generally work by issuing two coins: one pegged asset that’s meant to be worth $1 (UST) and one floating asset that’s free to have a price set by the market (LUNA). Your job as a “stable”coin algorithm is to keep the price at the peg (1 UST == $1) even when an imbalance of supply and demand pushes it above, or more likely, below that price, just by issuing and doing things with those 2 coins. On the plus side you can issue as many as you like. Assuming a liquid market (an AMM like Uniswap will do), you can always reduce the price of the pegged coin (UST) if it goes above the target by making and selling enough of them [1]. (This part is easy.) When the price goes below the peg, though, you need to create enough buying demand for the pegged asset (UST) at $1 (or whatever) to take all the sellers offering a discount out of the market. If you did a good job creating value (or at least a non-zero market price) for your floating asset (LUNA), perhaps by building a payments network on its underlying blockchain or pitching really well to a bunch of VCs (maybe both!), then a way to do this is to issue more LUNA and use them to buy UST. The problem is that just issuing more coins obviously does not create any additional value. It sometimes looks like it does, because markets aren’t perfectly rational or instant, or because of an expectation that the money raised issuing the tokens (/money/equity/bonds, whatever) will be spent wisely to create value. But if all else remains the same, doubling the number of the floating asset (LUNA) will halve the price. Put simply: issuing more tokens like this is not creating value, it is transferring it from existing holders to whoever holds the new tokens (often called “dilution”). The first observation here is that in the limit, if I print an infinite number of my floating coins and do nothing else, the most value I can get is the total value of all of them (their “market cap” [2]) before I started printing. The second observation is that if I’m able, on average, to increase the (perceived by the market) total value of the floating coins (LUNA) faster than I dilute their holders by issuing more (even if it’s just a rising tide lifting all boats), the price should go up and everything might just look like it works. But if the issuance needed to keep the peg is consistently above that growth rate (LUNA is diluted faster than it creates value), the price will go down. If this happens for long enough and nobody expects it to stop, people will start to sell, pushing the price down more. The lower the price, the more issuance is needed to do the same amount of stabilisation, and the more that will impact the price, etc. (This is the death spiral.) So I’d argue that UST was (is?) in fact collateralised by whatever fraction of the total network value (market cap) of LUNA can be successfully taken from its holders without initiating a death spiral. This was (clearly) not nearly enough. In fact, given the more volatile nature of a floating asset that’s at risk of dilution and is valued more like a startup than a treasury bill, one might wonder why anyone ever thought they could keep an algorithmic stablecoin stable indefinitely… Note: when things were looking better the LFG also bought a bunch of assets (bitcoin) as a kind of emergency fund. When everything started to go wrong they also used this in addition to newly minted LUNA to try to support the UST price (by buying it) but this was still just using value from the Terra ecosystem to support the price of UST. They did try to build reserves in good times to support in a crisis, which is sensible, but if doing that still doesn’t prevent you diluting faster than you create value you’re still going to be in trouble. [1] Generally it makes sense (as far as any of this makes sense) to sell them for the non-pegged asset (LUNA) to push its price up, and to burn (destroy/remove from circulation) them if possible, which might push the price up a bit more (but probably shouldn’t, if you can issue infinite of them anyway). [2] This is in reality more complex than just market cap, but it’s close enough to be illustrative of the fact that the market values the whole pie (network/protocol/company) at some amount, and that amount doesn’t change no matter how you re-slice it.
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- kristjansson 4y agoGreat piece wrt to the macro and monetary economics view. However, the “100k BTC short” story of the crash still seems unrealistic and over complicated, and is only sourced to a tweet thread of speculation at the time.
- manholio 4y agoJust like in the fiat case, the attacker of a currency peg has enormous upside if the attack succeeds and essentially zero risk if it fails: the peg can only go down, not up. So shorters pile on to the diseased currency like lions biting a dying antelope, it's not a question of IF it will go down, it's a question of WHEN and what is the most profitable and likely to fail peg you can pit your capital against. These days, there's a whole herd of them.
- SilasX 4y agoStablecoins can and do trade above the peg for short periods, which is relevant if your attack would be hurt by valuations above $1 (like via forced liquidation).
- scotty79 4y agoHow would death spiral on DAI look?
- cuteboy19 4y agoPeople would very loudly insist that DAI cannot possibly fail and that it's not like all those other stablecoins that failed and this time it will be totally different. Then the peg would break
- scotty79 4y agoI was hoping for more detailed, more technical scenario that takes into account the specifics of the protocol.
- AlexandrB 4y agoThere's a good comment in a previous crypto thread on this: https://news.ycombinator.com/item?id=31414217 https://news.ycombinator.com/item?id=31414217 Basically DAI might break peg if the backing assets became illiquid (no buyers).
- angio 4y agoDAI is not fully algorithmic but is backed (in part) by USDC. RAI is backed by ETH which is a currency that is not linked to RAI in the same way that UST and Luna were.
- shawabawa3 4y agoThere's not really a death spiral mechanism for DAI. DAI's reserves are all auditable and on-chain. Anyone can verify if it is or isn't overcollatoralised at any time. Theoretically a big enough crash could cause the collateral to drop faster than liquidations happened, and that could cause a run on DAI to cash out the collateral that's left before it runs out
- scotty79 4y agoWhat if ETH would start dropping towards 1$/ETH for some unrelated reason? Would DAI be able to defend peg or also fall and accelerate fall of ETH? People wanting to withdraw their ETH from collateral would need to get DAI on the market to pay back the collateralize DAI loan to get their ETH before it's liquidated. This should initially drive DAI over 1$ peg. Would liquidating loans drive down ETH further? What exactly happens to ETH form liquidate loans? Is it sold? Is it burned? Does it happen automatically or is decided by owners of Maker token?