The LUNA storm has continued to this day, and Do Kwon, the founder of the Terra blockchain, has also been pushed to the forefront of public opinion. Many people think that Do Kwon has deceived the public, and the foreign media CoinDesk article even compares Do Kwon to Elizabeth Holmes of the Silicon Valley unicorn scam "Bad Blood". In response to this, FTX founder SBF has something to say.

"Not all bad things are the same bad things" (not all bad things can be generalized)

Elizabeth Holmes is the founder of the blood testing company Theranos, which claims to provide "fingertip blood" to detect diseases, whether it is cancer, cholesterol, diabetes, can use its patented blood collection device, blood diagnostic testing system (miniLab) in half an hour diagnosed within.

This world-shattering technology has attracted countless venture capital funds. In 2014, Theranos was once valued at $9 billion, making it the most high-profile unicorn company. But only a year later, the blood testing company was proven to be a scam. In 2018 the company was dissolved, and in 2021 Elizabeth Holmes went to jail.

CoinDesk columnist David Z MorristhinkDo Kwon, who launched TerraUSD (hereinafter referred to as UST), is the blockchain version of "Bad Blood"¹, also promising investors very cool things (meaning decentralized stablecoins), but without innovative and practical methods.

[Note*1]: "Bad Blood" was published in 2018 by John Carreyrou, describing the unicorn scam of blood testing company Theranos

SBF: UST is bad, but not the blockchain version of bad blood

FTX Founder Sam Bankman-FriedthinkLUNA/UST (meaning TerraUSD) is a very bad thing, and the ending is also very bad.

But as bad as it is, Elizabeth Holmes' Theranos is different because the mechanism of LUNA/UST is quite transparent.

SBF believes that LUNA/UST is terrible, the ending is a failure, and it is also very unbearable. But the main criticism of Elizabeth Holmes isn't that Theranos failed, it's that she lied.

In particular, Elizabeth Holmes keeps saying that Thearanos is revolutionizing technology, but in fact it is not. Elizabeth Holmes is a fraud, cheating investors with fake reports, but LUNA is different.

SBF believes that Do Kwon did not distort the LUNA/UST mechanism to the public, and he did not claim that UST has a 1:1 USD reserve. On the contrary, Do Kwon clearly stated that the reserves behind UST are some "unstable assets".

Do Kwon did not tell everyone that UST is a 1:1 support. On the contrary, he made it clear that UST reserves are some unstable assets. Obviously, these assets are likely to fall in price, and once the asset falls, other consequences follow.

Again, I am not exonerating UST, I think they are wrong, but UST is not the same as Theranos.

Many people will say that this UST incident has expanded into "blockchains are all frauds." SBF believes that there are indeed some Ponzi schemes on the blockchain, just like Plus Token, but UST is not a scam. To put it bluntly, SBF believes that the marketing of LUNA/UST has failed because there is no way to convey the correct mechanism and risks to the public.

Most bad investments are not Ponzi schemes. Some losses are due to being scammed, some to bad luck, and some to both.

Here are the investments that are down more than 50% since the beginning of the year: 1) NFLX2) LUNA3) AMC 4) ARKK.

1) Not all bad things are the same bad thing

— SBF (@SBF_FTX)May 14, 2022

FTX community partner Benson Sun: LUNA's debt ceiling is a problem

For the blockchain industry, UST is a very interesting experiment. From the perspective of after-the-fact review, what went wrong with the UST mechanism?

FTX community partner Benson believes that there is a problem with the setting of the "debt ceiling".

He took Maker's stablecoin DAI as an example, saying that DAI has a designed debt ceiling, because Maker understands that once a large-scale liquidation occurs, the stability of the system still depends on the liquidity of the collateral, so it sets a limit for each collateral. For example, the liquidity of Ethereum (ETH) is better, and its debt ceiling is higher.

He believes that even after experiencing large-scale liquidation events such as 312 and 519, DAI was safe in the end, and Maker's risk management and control mechanism is undoubtedly successful.

But LUNA is different.

LUNA does not set a ceiling on system debt, but instead has a flywheel effect². This flywheel effect comes from the mechanism of UST. If there is a demand for UST in the market, LUNA will be purchased and destroyed to generate UST. Terra uses Anchor's 20% annualized interest rate to continuously attract external funds into the system, causing the issuance of UST to skyrocket along with the price of LUNA. However, when the issuance of UST is too large, the buyer's liquidity of LUNA is not enough to support its price anchoring mechanism , will eventually lead to destruction.

In contrast, Maker can accept a variety of assets as collateral when minting DAI. The liquidity of the overall system does not depend solely on the coins within the system, and the security is much higher.

Benson compared LUNA to a company’s assets, while UST is a liability. Obviously, the official did not limit the debt ceiling, resulting in an excessively high asset-liability ratio.

At its peak, LUNA's market capitalization was approximately US$41 billion, UST's market capitalization was approximately US$18 billion, and debts accounted for approximately 40% of assets. In addition, there is a big gap between the market value of the currency circle and the liquidity of the buyer. It is obvious that the liquidity of LUNA is not enough to cope with such a debt ratio.

[Note*2]: The flywheel effect means that after reaching a certain critical point, the gravity and momentum of the flywheel will become part of the driving force. At this time, you don't need to exert more effort, the flywheel will still rotate quickly

He pointed out that Terra officials also realized that UST is too dependent on LUNA, so they also began to introduce external liquidity and reserve assets to improve UST’s risk resistance, including buying Bitcoin as a reserve and building a liquidity pool on Curve Finance , but unfortunately, eventually lost to the debt ceiling without limit:

In a way, Terra is like skydiving. He has a parachute on his back, and this parachute is the application and protection mechanism of the UST. Before falling to his death, Terra had to complete the parachute. Unfortunately, the parachute landed without opening.

If Terra is willing, they can link the upper limit of debt (UST issuance) to the market value of LUNA (for example, 1/10), sacrificing the room for market value growth in exchange for a greater safety factor, so that the entire system can be sustainable. Opportunity to open the parachute before a hard landing.

In addition, Benson also gave his opinion on the recent LUNA chaos.

He believes that there is no need for the media or Internet celebrities and KOL (opinion leaders) to spread cases of getting rich in the LUNA crisis. Most of these cases cannot be replicated and have a lot of luck.

It is undeniable that every major event has a case of getting rich. The LUNA incident has evaporated the market value of tens of billions of dollars in the entire currency circle. There must be more people who lose money than those who make money. When losing everything, it only increases market anxiety.

There is absolutely no need to pay attention to the post of $LUNA getting rich, it just increases anxiety. During the decline of $LUNA, how many people think that $10, $1, $0.1, $0.01 are cheap enough to rush in and be buried, and those who buy $LUNA lose money There are definitely more people than those who make money. There are those who go long and liquidate their positions, and those who open the grid and return to zero. These people have become the escape exits of $UST.

Finally, he also reminded investors to pay attention to the "risk factor" of investment.

Before the UST death spiral occurred, many KOLs were promoting the fixed annualized compensation of UST. Regarding this matter, Benson believes that although many people have explained the risks, they have reservations about whether these explanations are complete enough and clearly remind investors when to enter the market.

He said that he has not promoted UST, because it is too difficult for ordinary people to understand its system risk and monitor UST-related data in real time.

As for how ordinary investors should identify investment products?

At the very least, Benson recommends knowing the average interest rates offered by the industry and being wary of those excess rates.

For investors in the currency circle, an unreasonable average interest rate that exceeds the market must be accompanied by restrictions.

For example, assuming that the average annualized return in the current market is 5%, but the annualized rate of some exchanges is 12-15%, but the deposit limit is $2,000, the intention behind it is to attract new users.

So if there is a product with a 20% annualized return today but no upper limit on deposits, then you must understand the risks behind it.