How did the Anchor protocol help sink Terra?

If it wasn’t for Do Kwon, someone would have to invent it. For example, they have bets worth a total of $11 million held in escrow by Crypto Twitter phenom Cobie, that his token Luna will be worth more in a year than it was in March 2022.continue in poverty”“are you still poor,” and “I don’t discuss the poor on TwitterKwon is the noisy, belligerent co-founder of Terraform Labs, best known for the ongoing disaster, Terra/Luna.

As of this writing, Luna is worth less than a penny, and its sister token Terra, which is intended to be pegged to a dollar as stablecoin, is worth 6 cents. An investor from Yonhap News Agency, who told reporters he lost 2 to 3 billion won (around $2.3 million), has been arrested for trespassing after entering Kwon’s apartment complex in search of the stablecoin master. Kwon’s wife sought protection from the police after the incident.

On the Washington Nationals ballpark, Terra’s logo can be seen on the seats behind the home plate – and the stadium’s luxury dining hall is named Terra Club. CoinDesk. Terra paid $38.5 million for this ad, which looks like it will outlast the protocol.

This isn’t actually Kwon’s first failed stablecoin. This would also be Basis Cash, which should have been worth $1 and also capsized. It also survived two Securities and Exchange Commission subpoenas.

While Kwon’s obnoxious Twitter personality has lured a number of retail investors to Luna, they’re not the only ones taken. Jump Crypto and Three Arrows Capital acquired Luna; Coinbase Ventures, Lightspeed Venture Partners, Galaxy Digital and Pantera Capital are backed by Terraform Labs. Mike Novogratz, president of Galaxy Digital, even got a Luna tattoo, which he now says will be “a constant reminder that investing requires humility.” Kwon will also have his own permanent reminder: named her daughter Luna.

Kwon’s rise and fall was quite rapid, even by cryptocurrency standards. Luna emerged as a bright spot in the markets in December and peaked above $116 in April; Luna’s total value was more than $40 billion. During this time, many cryptocurrencies were slipping, including Bitcoin and Ethereum. Luna’s popularity was due to Anchor, a lending program that promised an almost 20 percent — obscenely high — annualized return (APY).

Here’s how the Anchor protocol worked, according to its whitepaper:

Let’s say I wanted a higher rate of return than I could get in a regular savings account or (for example) buying government bonds. So I deposited $10,000 worth of Terra, a dollar-pegged coin into the system. Anchor then turns around and lends my deposit to another investor, whom we will call Lars. But to make sure he’s good for the loan, he has to put up some of his own assets as collateral. Some of the proceeds from Lars’ collateral and some of his interests go back to me. It is important to deposit and The interest is in Terra.

It’s not particularly revolutionary, and also, that’s why I don’t understand the 20 percent interest rate because borrowers have low interest rates. also rewarded for borrowing. Where did the money come from? In January, people were already warning that Anchor was unsustainable because it didn’t have enough debt.

Perhaps the most benevolent thing you can say about this 20 percent is that it’s an acquisition strategy and the APY will be revised later. Others said other things. For example, some said it looked like an obvious Ponzi scheme, in which money from later investors was paid as “interest” to earlier investors. I sympathize with this argument, as even Bernie Madoff doesn’t consistently give his investors 20 percent interest rates.

Regardless, a lot of Terra has been accumulated on Anchor – as much as 72 percent of Terra. decrypt. Anchor has created demand for Terra. Unlike stablecoins like Tether and USDC, Terra was not directly backed by reserves. Instead, it was known as the “algorithmic stablecoin” trying to stay at $1 through an arbitrage process with its sister token Luna.

Here’s how arbitrage works: Let’s say I notice Terra is trading at 99 cents. Oh hell yeah! I then burn my coins, take them out of circulation and turn them into Luna. By reducing Terra’s supply, I’m raising the price. Let’s say I got very excited and the price is now $1.01. Lars arrives and burns his Luna to get an equivalent amount of Terra, reducing the price to $1.

The problem with algorithmic stablecoins is that they fail. They fail because they rely on things they cannot control: investor demand; Persons who will make stabilized arbitrage; and reliable pricing information. In Terra’s particular case, it’s probably a unusually large retreat upset the balance of the system. There was a death spiral after that – just like Kwon’s other project, Basis. Similarly, non-Kwon-related algorithmic stablecoins such as Iron and Neutrino have also been deposited in the past. If there’s one thing I’ve learned about cryptocurrency over the years, it’s that no one is particularly interested in history, or even very recent history.

Anchor weighed investors this way: When Terra failed, the people who deposited couldn’t handle the money.

Those who knew better—even those who saw the warning signs—have done little to deter naive investors. Sam Bankman-Fried, founder of FTX, listed Luna and Terra on his exchange even though he had a pretty good idea of ​​what was to come. Here he is discussing one lot digital audio file:

If you walk away, you’re right and say ‘This is a stable coin backed by floating assets, what would happen in a big market move’. TRUE? Like, you know how this is.

Unfortunately, many people did not know how this was going to happen! Take, for example, investors who are unwise enough to invest in Stablegains, a Y Combinator-backed startup that promises to “earn simple and secure with DeFi for both consumers and businesses.” It had promised a 15 percent yield in August 2021 due to its relationship with Anchor. to tweet“Users can continue to hold UST on Anchor through Stablegains. Please note that UST may depreciate further and continued access will depend on the Terra blockchain and the Anchor Protocol being up and running.”

One lawsuit says Stablegains lost $44 million in investors’ money. Stablegains are not alone; investor Delphi Digital says it has concerns about Luna but still invested. He lost 10 million dollars. A South Korean venture fund lost $3.5 billion CoinDesk. Binance, another Terraform Labs investor, bought it for $3 million and its holdings are currently worth $3,000. New York Times.

But there were winners, and those winners were inside. Pantera Capital, for example, raised $170 million on an investment of $1.7 million, New York Times reported. Another investor, Hack VC, split from Luna in December. Venture company CMCC Global was sold in March.

People are not wrong to be angry with Kwon. Kwon voluntarily took on the persona of a villain because, like reality star Spencer Pratt, he understood that being the villain guaranteed you more attention. But as Pratt eventually discovered, once you’re the bad guy, it’s nearly impossible to break the typing. That means Kwon will take most of the blame, while Y Combinator, Stablegains, Bankman-Fried and others can walk away without a scratch.

On May 13, Kwon tweeted what seemed like a sudden change of tone: “My heart is broken by the pain my discovery has caused all of you. Since then, it has almost faltered. It wants to get the “ecosystem” back on its feet. He even came up with a new proposal to do so.

This suggestion was rejected by the Lunatics community. I guess they weren’t crazy about it.

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