Researcher: Xu Xiaopeng

Researcher: Xu Xiaopeng

Luna, whose market value has risen like a rocket this year, has recently become the focus of the industry again. Terra’s co-founder and CEO DO kwon and encryption KOL Sensei Algod asked whether Luna’s price can stand above $88 in a year’s time. Dollar bet (later DO kwon called for a raise to $10 million).

As one of the public chains with the strongest rising potential this year, Terra has high research and discussion value.Mint Ventures also released its first research report on Terra in early August 2021"Terra: The Rise of the Stablecoin Legion"

. Since then, we have been following the development of the Terra ecosystem.

Our Twitter: https://twitter.com/mintventures2

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opinion summary

● Despite the shadow of Ponzi, Terra is not a Ponzi scheme in the traditional sense at present.

● The real difference between the market and Terra lies in the rationality of its public chain development model. Supporters believe that Terra's high-interest deposits are similar to customer acquisition and retention subsidies in the Internet field. Although there are huge losses in the early stage, from the perspective of the overall life cycle of users, the current subsidy money will be detoured from the long-term ecological prosperity in the future. Earn back; Opponents believe that Terra’s development model of subsidies + public chain tokens & stablecoins is difficult to form a stable state, and will eventually die in a negative spiral of a certain Luna price drop.

● One of Terra's challenges is that its token Luna has insufficient "economic bandwidth", which makes UST more vulnerable than DAI.

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Before debating whether Terra is a Ponzi scheme, we need to reach a consensus: What is a Ponzi scheme?

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Section 1 What is Ponzi?

Ponzi is a financial model in which new investors' money is used to pay old investors' income. Its name comes from the investment scam set up by Italian-American immigrant Charles Ponzi. It made up an investment project, that is, it can use the funds raised to buy European stamps (very cheap locally) and sell them in the United States for arbitrage (very expensive in the United States) to obtain income. Under the promise of high investment returns (40% return in three months), it developed more than 40,000 investors in about a year, and finally the scam was exposed, and Charles Ponzi went to jail.

1.1. The form of Ponzi scheme

Not all the behaviors that eventually fail after raising funds and cause investors to lose money are all Ponzi schemes. Even with the support of external funds, entrepreneurial failure is still a high probability event in the business world.

Most Ponzi schemes can be classified into two types:

1. A Ponzi scheme with the purpose of defrauding at the beginning

This subjective purpose is often reflected in follow-up actions. The most important point is that the project party did not put money into the commercial project or actual operation it claimed. For example, Charles Ponzi did not really use the money to buy European stamps, and the well-known domestic fraud project Plustoken did not Use the raised BTC and ETH for so-called arbitrage. Because this type of Ponzi fraud is not for the purpose of running a business, using money to do these things will only increase the operating cost of the project for no reason. Even if the actual business is occasionally operated, it is mostly just a pretense.

2. Initially a serious business plan, followed by Ponzi fraud

In such cases, the project party did not raise funds for the purpose of fraud at the beginning, but the problems and failures of the business model pushed it to gradually embark on the road of Ponzi fraud. For example, P2P, which was once popular, and long-term rental apartment projects that have experienced frequent thunderstorms in recent years, most of the founders of the projects did not intend to defraud at the beginning, and the investment funds and rent received by the project were indeed invested in the operation, such as investing in It can be used for normal supply chain financial projects, or for the acquisition of moderately priced urban housing rental rights. However, due to a variety of internal and external reasons, such as fierce competition, defects in its own business model, and deviations in the operating model, the project side began to actively or passively move towards fraud, and it is unsustainable to invest investors and users’ money in the long run. model, or simply build a pool of funds and implement the typical Ponzi model of returning the old with the new to further absorb more public funds. In the end, if the project party cannot reverse this situation and return the project to a healthy business model, Ponzi cannot avoid the fate of collapse due to insufficient cash inflow.Regarding the complete life cycle deduction of Ponzi finance, interested readers can read the official account "Daiguan" author Alan。

"One article takes you to deduce the development and life cycle of the Ponzi scheme"

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Section 2 Is Terra a Ponzi scheme?

The author's current conclusion is: Terra ecology has the shadow of Ponzi, but I think it is too early to characterize it as a "Ponzi scheme".

It is said that Terra has the shadow of Ponzi because it uses Ponzi's classic behavior: absorbing public deposits at high interest rates.

2.1. How much is Terra’s deposit subsidy on UST?

In the Terra ecology, the lending agreement Anchor, as a "state-owned bank", promises an ultra-high current rate of return of 19%-20%, in order to absorb public deposits (in the form of UST). According to Coingecko data, the current total circulation of UST is 15 billion US dollars, the community pool of official funds has 2.1 billion UST, and the UST deposited in Anchor is 10.4 billion, accounting for 80.6% of the total market value of UST after deducting official funds. Most of the UST comes to obtain the high interest rate of Anchor.

So how much does Anchor need to spend each year in order to maintain a 19%+ current deposit income? We can perform a simple calculation:

The main income of Anchor includes: borrowing interest + PoS reward income of borrowing collateral (currently bLUNA and bETH) + liquidation penalty

Anchor's main expenses include: deposit interest

Deposit, loan and interest rate data of the Anchor protocol, source: anchorprotoco 2022.3.17

Anchor's annual net expenditure is: total income - total expenditure = (25.7611.77%) + (42.737.15%) 1 + (10.474.8%) 2 -104.0519.5% 4 = -13.7 (billion dollars)

1 For Anchor borrowing interest, please refer to https://app.anchorprotocol.com/ for APR 2 For bLUNA’s Staking income, please refer to Terrastaion for APR 3 For bETH’s Staking income, please refer to https://launchpad.ethereum.org/en/ for APR 4 Anchor deposit interest, APR please refer to https://app.anchorprotocol.com/

It should be noted that, considering that Anchor itself provides borrowers with high ANC token subsidies, and Anchor is in a state of loss as a whole, in order to maintain the ANC token price, Anchor also faces additional ANC token price maintenance costs, That is, to solve the selling pressure problem of ANC tokens.

In other words, Anchor needs to bear an annual expenditure of about 1.37 billion U.S. dollars without considering the income from liquidation, the cost of maintaining the price of ANC tokens, and the salaries of team members.

Anchor alone obviously cannot afford this expense.

Just in February this year, when Anchor's reserve pool was about to bottom out, Terra's ecological fund LFG (Luna Foundation Guard) announced that it would allocate 450 million UST to Anchor to enrich its reserve pool.

This confirms one point: Anchor is different from other lending agreements. Its essence is an integral part of Terra's planned economy. Its current business operation is not for the pursuit of profit, but a subsidy for the scale expansion of UST provided by Terra officials. The product.

2.2. The key point of the Terra dispute: whether the two-wheel model of stable currency + public chain can succeed

But just because "Terra is absorbing deposits with high subsidies", it seems that Terra is a Ponzi fraud, which seems to be untenable.

Although the subsidy scale of 1.37 billion US dollars is huge, judging from Terra's current market value of 30 billion+, the ecological fund's short-term reserves of more than 3 billion US dollars, and the explicit or covert support of institutions and consortiums behind it, this expenditure will be paid in the short term. Not unbearable.

As mentioned in the previous "Form of Ponzi scheme", to constitute a Ponzi scheme, either the purpose of fraud is initially subjective, and the funds raised by it are basically not invested in the commercial project it claims; Intent, but in the case that its business model has obvious fatal flaws, it still keeps investing and publicizing, and attracts the public to invest in its projects or pay for its services.

Let's first assume that Terra Labs and its real-name team behind the Terra ecology have no malicious intentions of subjective fraud. Unlike Bitconnect and other pure encryption Ponzi scheme projects, the reason why we can make this assumption is mainly due to:

● Core team members adopt real names

● The project ecology has visible growth and investment

● The project operates based on the public chain, and the fund information is relatively transparent and checkable (although there is still a big gap between the transparency of Terra's on-chain data and Ethereum, BnB chain, etc.)

● From its inception to the present, the project has received continuous attention and capital injection from world-renowned funds

Of course, the above conditions still do not fully prove that the Terra team has no intention of constructing a Ponzi scheme subjectively, but only greatly compresses this possibility.

If Terra is not a subjective Ponzi scheme, then does it comply with the second article of the Ponzi scheme: to keep investing and publicizing its business model even though its business model has obvious fatal flaws, and to attract the public to invest in its projects or pay for its services? ?

We believe that this is the key point of the current controversy. Everyone has differences on Terra's public chain development model.

Supporters believe that Terra's high-interest deposits are similar to customer acquisition and retention subsidies in the Internet field. Although there are huge losses in the early stage, from the perspective of the overall life cycle of users, the current subsidy money will be detoured from long-term ecological prosperity in the future Opponents believe that Terra’s subsidy + public chain token & stablecoin-linked development model is difficult to form a stable state, and will eventually die in a negative spiral of a certain Luna price drop.

This is actually the core point of Terra founder DO kwon and encryption KOL Sensei Algod on whether Luna's price can stand above $88 a year later.

So, what is Terra's business logic?

To put it simply, Terra is a public chain ecosystem built around stablecoins, and its business goals can be summarized into two points:

● Promote the large-scale adoption of stablecoins represented by UST, replacing centralized stablecoins such as USDT and USDC

● Promote the prosperity of the Terra public chain, and provide a platform for the development of Web3 economy for open finance and other applications

Whether it is a stablecoin or a public chain, the project party can benefit from its development and indirect tax collection (rent-seeking), which is why stablecoins and public chains are always the most popular track for entrepreneurship in the encrypted business field.

However, unlike most independent stablecoin projects and independent public chain projects, Terra deeply binds its own stablecoin and public chain business, specifically, it is reflected in:

● Terra's public chain ecology provides an initial application scenario for stablecoins, and solves the biggest problem of stablecoins - cold start

● Stablecoins such as UST need to be minted by destroying Terra’s token Luna. The larger the stablecoin issuance scale, the greater the Luna deflation scale and the smaller the total supply. On the contrary, when UST is reversely redeemed into Luna, the Luna supply will increase Increase

● Luna is essentially an invisible collateral for stablecoins such as UST. The higher the market value of Luna relative to stablecoins and the better the transaction depth, the more sufficient the collateral, the smaller the risk of unanchoring of stablecoins, and the lower the cost of maintaining consensus. lower and vice versa

Based on the above three points, we can draw a conclusion: UST is the engine of Luna, and Luna is the stabilizer of UST. The two interact with each other. When the trend is good, it is easy to form a positive spiral, otherwise it is easy to fall into a death spiral.

2.2.1. Luna's vulnerability: Insufficient economic bandwidth

The robustness of Luna as a stabilizer of the Terra stablecoin system is determined by its "economic bandwidth".

Economic bandwidth is a concept proposed by Bankless founder Ryan Sean Adams. This concept emphasizes that the key to public chain competition is not "TPS", but economic bandwidth. The economic bandwidth is determined by the circulation market value, transaction depth and degree of decentralization of public chain tokens. The higher the circulation market value, the better the transaction depth, and the higher the degree of decentralization, the higher the economic bandwidth of public chain tokens. Ability to carry a larger economic ecology to run on it.

We can compare the economic bandwidth of the top public chains with the largest market capitalization:

Judging from the above table, Luna has already ranked among the forefront of encrypted assets in terms of total market capitalization and trading depth. Its recent trading depth has even surpassed that of BNB, whose market capitalization is twice as high.

So, how does the above economic bandwidth compare to Terra's UST issuance scale of US$15 billion?

We can compare DAI, which is second only to UST in terms of issuance scale, with UST:

We found that in terms of the stablecoin/collateral ratio, although UST's 0.463 is 16.4% lower than DAI's 0.627, it seems that the LTV (loan rate) is lower and safer, but combined with the concept of economic bandwidth we mentioned above, DAI The economic bandwidth of the main collateral assets of UST is much better than that of UST's mortgage assets.

DAI’s collateral composition, source: Daistats

DAI's comprehensive collateral assets composed of ETH+WBTC+USDC and other stablecoins, its economic bandwidth (total market value of assets and transaction depth) is much higher than that of Luna. From this perspective, the security of UST is indeed not as good as DAI.

But the problem with DAI is that the assets controlled by centralized institutions account for a relatively high proportion of its collateral. Whether it is USDC or WBTC, the encapsulation asset of BTC, it is guaranteed and controlled by centralized institutions. Obvious vulnerability.

However, if regulatory factors are excluded and only considering the ability of stablecoins to resist unanchoring under huge market fluctuations, UST is obviously inferior to DAI at present. The fundamental reason is that Luna's economic bandwidth is insufficient.

2.2.2. Improving Economic Bandwidth: Stable Coin + Public Chain Business Cycle

So, how can Luna improve its economic bandwidth?

In my opinion, Terra and its token Luna, like most public chains, determine its total market value and transaction depth based on the breadth and depth of its consensus, and the breadth and depth of consensus are driven by narrative, which is based on the following Layer construction:

● Narrative at the quantitative level—core business data: TVL, number of active and non-zero asset addresses on the chain, number of transfers and value, number of web3 projects, and number of developers. These objective data build the basic disk of the narrative and are easy to horizontal Compare.

● Narrative at the qualitative level - various stories and logical reasoning: For example, with the development of the Comos ecology, Terra’s stable currency is easier to be applied in the big ecology; for example, UST entered the Aave lending market, resulting in more financial scenarios, etc. wait.

In order to promote the narrative and build stronger economic bandwidth, Terra has built a set of self-reinforcing business models based on its two-wheel model of stable currency + public chain. The order is as follows:

1. First create DeFi scenarios in the public chain and provide subsidies (represented by Anchor), which shapes the demand for stablecoins

2. Demand drives the casting scale of UST, and users begin to be introduced

4. The boost in indicators strengthens the appeal of Luna’s narrative

5. Based on the improvement of consensus and fundamentals, it can promote cooperation with more leading projects

5. Based on the improvement of consensus and fundamentals, it can promote cooperation with more leading projects

6. The enhancement of narrative and consensus has improved Luna's transaction breadth (the number of investors and regions) and transaction depth, and gradually pushed up the price

7. The actual controller obtains funds by cashing out or destroying Luna

8. Continue to subsidize [link 1] with cashed out funds to promote the above cycle

In this cycle, the main expenditure link of this business model is [link 1], and the main income link is [link 7]. As long as the income of [link 7] is sufficient to support [link 1], this cycle can continue and help Terra Towards its two main business goals:

● Promote the large-scale adoption of stablecoins represented by UST, replacing centralized stablecoins such as USDT and USDC

● Promote the prosperity of the Terra public chain, and provide a platform for the development of Web3 economy for open finance and other applications

The better the completion of these two goals, the lower the cost of maintaining the above cycle, which is reflected in the increase of external third-party scenarios for stablecoins, and the expansion of acceptance; more native Web3 projects and developers flood into the Terra ecosystem and build spontaneously More apps, more users.

The main challenge in maintaining Terra’s business cycle is that there are problems in the narrative construction process of links 3-6, that is, the maintenance cost of the Luna token price is getting higher and higher, resulting in insufficient income and funds for [link 7] to support [link 1] subsidy.

Possible factors causing this problem include:

Possible factors causing this problem include:

● The price of encrypted assets collapsed. The narrative value and valuation of all track projects have been hit hard, and the stable currency and public chain where Terra is located have not been spared.

● Unexpected events within the project (eg Abracadabra affected by scandal). The incident led to a sharp drop in the price of Luna tokens and loss of liquidity, which in turn triggered insufficient collateralization of UST, leading to a death spiral, and the team was powerless to do anything about it.

● Regulatory shocks. Regulation restricts Terra from obtaining more financial means to maintain the operation of the project and respond to unexpected situations, or regulation itself is an emergency.

● The above business cycle has not actually attracted enough developers and users to enter the Terra ecology, the market's narrative view of Terra has turned negative, or the current public chain value evaluation framework has undergone major changes.

If you are an investor in Luna or a holder of UST, you need to be very vigilant about the above situations.

2.2.4 Terra's Response: Launch the Protector Fund and Increase Non-Luna Reserve Assets

If we make a summary of the current core issues of Terra, there are mainly two:

● As the collateral of the ecological stablecoin UST, Luna is relatively fragile compared to the current UST total market value of 15 billion and still growing, its economic bandwidth is insufficient

● Both the stablecoin and the Terra public chain ecology rely on its business cycle of “stablecoin subsidy—strengthening narrative and consensus—price boost—cash out\minting profit—continue to subsidize”, but this cycle may will be interrupted by various unexpected situations

Terra obviously also has a deep understanding of the above problems, and has already started a series of actions, such as:

1. Established the Luna Foundation Guard (LFG)

In January of this year, Terra established the Luna Foundation Guard (LFG), namely the "Luna Protector Fund". , Republic Capital, GSR, Tribe Capital, and DeFiance Capital are financing, with a financing amount of US$1 billion. According to the news released by LFG on March 15 this year, its existing reserve assets include 2.2 billion US dollars of non-Luna assets and 8 million pieces of Luna, with an estimated total value of about 3 billion US dollars. The main goal of LFG is to expand the Luna ecosystem and maintain the anchoring of stablecoins such as UST. We can understand the ecological fund as a more flexible special fund account, and Terra can use it more flexibly to deal with various business problems.

2. Start to include more diverse asset classes for stablecoins to alleviate the problem of insufficient Luna economic bandwidth

Through the LFG mentioned above, Terra began to add assets other than Luna to the reserve pool. For example, the 1 billion US dollars in financing received by LFG in February this year will allocate reserves denominated in BTC. Subsequently, on March 5, LFG announced that it would burn and mint 5 million Luna in the reserve fund into UST worth 4.5 US dollars, which would be used to buy BTC as a reserve. Only 10 days later, LFG stated that its fund committee voted to destroy another 4 million Luna minted UST for the purchase of exogenous reserve assets. In addition to LFG, Terra's founder and CEO Do Kwon has been expressing that he will continue to increase his holdings of BTC, making Terra one of the largest holders of BTC. He said on March 14 that he would provide UST with more than 10 billion The value of BTC reserves. On March 17, the encrypted media Cointelegraph further verified the matter with Do Kwon, asking about the use of this part of the BTC reserve. Do Kwon said that it will be used to "response to short-term redemption of UST and as a more decentralized asset reserve." .” Clearly, incorporating BTC into UST’s reserves and redemptions will alleviate Luna’s lack of economic bandwidth.

Of course, as a participant and investor of the Terra ecology, as well as a holder of UST, you may also need to pay attention to:

In addition to the simple work of making a reserve fund for Anchor, the establishment of LFG can actually deal with more unexpected and complicated situations?

All this still needs to continue to be observed.

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Section III Summary

In my opinion, Terra is not a subjective Ponzi scheme, but an ecological adventure of a group of radical and daring experimenters. The sustainability of Terra's development model is the focus of our attention and discussion.

With the new model of stablecoin + public chain, Terra has opened a business cycle of "stablecoin subsidy - narrative and consensus strengthening - price boost - cash out \minting profit - continue to subsidize". In the bull market, this cycle worked well, making it the seventh largest encrypted asset in the world in just one year, and its stablecoin UST also surpassed DAI to become the largest decentralized stablecoin by market value.

But despite this, compared to DAI’s collateral, Luna’s total market value, transaction depth, and economic bandwidth corresponding to the degree of decentralization are still insufficient, which is particularly dangerous and vulnerable in a bear market with liquidity shortages and depressed market sentiment .

Therefore, investors in Luna and UST, in addition to the overall price of the encryption market, should also focus on changes in UST reserve assets and redemption assets. At present, the Terra team has begun to include BTC and other encrypted assets with higher economic bandwidth. Stablecoin reserves, but implementation details have not been disclosed.

In addition, we also need to pay close attention to the action of supervision on the Terra ecology, and the introduction of Terra's business cycle to real users and developers. If the above problems are not properly dealt with, Terra may still face the interruption of the current business cycle and the possibility of entering a negative spiral in the face of huge market fluctuations or other unexpected situations, and will eventually be labeled as a "new encryption giant". Chapter of the Scam".

Just like when everyone was discussing Luna in a group, I saw a group member say: "Fake it, until you make it".

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Ryan Sean Adams：ETH and BTC are Economic Bandwidth

Section 4 References

Generation View: Ponzi Research Series Articles, by Alan

Analysis of the principles of model currency and guidelines for prevention | Ponzi Research

This article takes you to deduce the development and life cycle of the Ponzi scheme | Ponzi Research

Ponzi Financing, Negative Rates, and Bitcoin | Token Watch