The UST Luna crash isn’t as simple as you may think


It irks me when people parrot “I told you Terra/Luna was a Ponzi!”

Please explain to me how Luna is a Ponzi but Bitcoin isn't?

Investors who make high-risk plays love to gloat when they win

The truth is that either everything in Crypto is a Ponzi, or we need to stop slapping Ponzi labels on anything that isn’t going our way. Luna didn’t have a centralized agent behind the scenes collecting money from people and cashing out earlier investors with the proceeds. Nobody was lying about how much Luna is in circulation or the mechanism of the peg between UST and Luna. Stop oversimplifying.

I am not a LUNAtic, I do not like Do Kwon, and I did not even touch UST until March 2022, because I have seen too many algo stables fail before. I got partially rekt during the Iron Finance bank run 2021 and learned my lesson on algo stables… or so I thought. When I saw a $50B market cap for Luna and $15B of UST in circulation in March I capitulated. Instead of chasing stablecoin APYs across new chains which was becoming increasingly difficult, I parked my money in UST on Anchor and was able to use my time to research more meaningful things.

Not safe

Considering myself an experienced DeFi degen, I figured that if there is an issue with UST, I will figure it out before retail. I was entirely right. My Twitter feed was swarmed with warnings of UST depegging, and when I checked it was still at $0.994. “What depeg bro?”. It was Sunday and I thought it was fake news.

The next morning, UST was at $0.98ish. Wow. My entire Anchor deposit just got a 2% haircut. Why are people panicking? Twitter was a hot mess. Posts of people buying $50M worth of UST for a quick 2% arbitrage. Posts of people saying “It’s happening, Luna is dying!”. It was unprecedented chaos, and nobody wanted to be on the wrong side of this collapse.

I tell people “Do your own research” all the time, but the truth is I didn’t do my own research on UST. I knew it was an unbacked stablecoin, but somehow I accepted at face value that the Luna-UST mechanism and the L1 solution are different from every previous unbacked stablecoin that failed. I went for lunch, and by the time I came back, we were sitting at 0.92 UST. That’s 8% of my “safe haven funds” in crypto gone. The most devastating part of this was that I assumed UST to be almost completely free from risk, as have many others. I can handle a 90% downswing on my ETH, because 1 ETH = 1 ETH, but the same logic does not apply to UST. I want my 1 UST to be worth 1 USD. Now it’s not. It’s as if wrapped Ether suddenly dropped to 0.7 ETH. I was not prepared for this and felt angry.

The panic sets in

Time for action. I move my UST to mainnet Ethereum, which in itself gave me a mini heart attack as my transaction was lost and funds make it across the wormhole bridge for over an hour. I began to appreciate anew Ethereum’s transparency and decentralization. I ignored the lack thereof on Terra, because of the comfort in the giant size of Luna. Every bridge is centralized to a degree and comes with risk, period. Luckily my funds show up in about an hour and a half. I start to check the liquidity and exchange rate on Curve minute by minute.

I also check Do Kwon and Terra’s Twitter accounts incessantly. Silence since the “Deploying more capital lads” tweet. This isn’t good. Hopefully, they are working hard to come up with a solution to this. They do have $1.5B of bitcoin… surely, liquidity is coming to the curve pool, let’s not be a part of the first wave of panicked sellers here. I got more diamond hands than that.

I go for a walk and clear my head. I come home with a better attitude which is immediately shattered by UST price of 0.68. I get lightheaded. How could I have been so stupid? Several hours ago I could have just taken a 2% haircut. I knew what happens to stablecoins once the death spiral begins… Nothing from Do Kwon. What did I expect? The tool has some robot NFT as his profile picture. Why do I not learn?

I am in full panic mode now. I see liquidity flowing back into the pool. YES, the bitcoin money is coming! 0.70… 0.75… 0.80… 0.85… 0.88… I panicked for nothing. I knew the peg would return. I sit back in my chair, everything will be alright, I am the smartest person in the room again.

0.87. 0.86. 0.85. No. I put the transaction through to sell all of my UST for USDC on Curve. It fails. I increase slippage and gas limit. 0.83. My transaction gets picked up by the next block, and it’s over. I just took a 17% haircut on my stablecoins. I never felt so much despair and relief at the same time.

Let’s find someone to blame

The next morning, the peg is at 0.90. Why did I sell? The following morning, 0.70. As of this writing, it’s somewhere near 0.10. It’s time to reflect. The truth is this is all my fault. I have used dozens of bridges, arbitraged things between chains and between CEXes and DEXes. I carefully watched and benefited from the Iron bank collapse. I know how Curve works. It’s on ME. I thought Terra was too big to fail and ignored everything I learned in DeFi.

OK but what about the LUNAtics? Their greed caused this! Again, please explain to me how their “greed” is different from Bitcoiners, Shibaers, or any other group that praises their own “community” and “project” and gloats when they are up big. The Terra blockchain, Terra Station and Anchor worked beautifully and there were reasons to be excited (for example, Alice). I never had such an easy time connecting my ledger to a blockchain either. Lunatics found something they liked and they blindly echo chambered themselves on Twitter. That’s on them, they didn’t force anyone to get exposure to UST or Luna.

Another common take on the situation is that Anchor had “Crazy yields”. I don’t get this point either. Curve pools last year were yielding 30%+ on stables, and while that’s much harder to find today, 15%-25% yields on stablecoins still exist on Fantom and Polygon. US government i-bonds are yielding something around 10% now. Inflation is real, and 18% on a stables deposit (where you are clearly absorbing a ton of risk..) is not “crazy yields”. Don’t compare on-chain defi yields (Anchor) to custodial solutions (blockfi, gemini etc.)

Don't blame the Luna team either. They built a wide array of products for DeFi users. They wanted to give the retail investors high yields and allow them to benefit from the value driven to the Luna token. Do Kwon’s arrogance can be annoying but is no excuse for destroying Luna. Maybe Do Kwon’s taunts caused the project to fail at $50B instead of $500B? Ultimately, if Luna was going to fail, I prefer it failed now. It was only going to get bigger and the fallout would only get worse.

We should really blame the bad actor that orchestrated the attack. Someone with $1B, a billionaire, a very wealthy individual, destroyed a thriving ecosystem for their personal gain. That is the culprit and we should press those who may have the answers to investigate and help put them in the spotlight.

Meanwhile, if there is money left in the LFG fund, it should be used to make the smallest investors whole before anything else. Let’s continue to educate and drive meaningful regulation. Let’s also learn from our mistakes. Perhaps the next iteration of the algo stablecoin will work much better, but if I learned one thing it’s that once an unbacked currency starts the death spiral, it is sudden and catastrophic. We are still in the wild wild west. Never invest more than you can afford to lose.