The Chopping Block: Kevin Zhou on Why He Knew Terra Would Crash - Ep.353

Transcript

Hey everybody, welcome to the Chopping Block. Every couple weeks, the usually four, but currently three of us get together and give the industry insiders perspective on the crypto topics of the day. So, quick intros. First up, we got Tom, the DeFi maven and master of memes. Next, we've got Tarun, the gigabrain and grand poobah at Gauntlet. There's me, Haseeb. I'm head hype man at Dragonfly. And special guest, today we have joining us Kevin Zhou, king of the shorts, and co-founder of Galois Capital. Welcome, Kevin. Glad to have you. Yeah, glad to be here. And I you know, I'm I'm actually uh pretty happy that you got me a nickname, too. You know, I feel like this is like this is like the crypto version of like the All-In podcast or something, you know, everybody got a nickname, you know. It's great.

We're we're we're aiming for that. We're We're aiming for the All-In podcast to be the the normie version of the Chopping Block. Oh, that's good. That's awesome. we don't have the crazy rhymes that have been happening on the All-In podcast. I randomly listened to it recently, and they have these like haikus now for everyone. It's like they went from just like nicknames to like these like long haikus. How does Jason come up with all this stuff? I mean, his staff is uh hard at work or something, huh? His staff is working hard, like he must just be hiring like people from like comedy shows. what our staff is doing. They should be They should be writing intros for me. Why aren't you at the All-In Summit? You know, I thought you were going to be taking notes and catching up with Jason and uh asking him for some feedback on

the show, but you're missing out. I I've been too busy with permissionless, man. I couldn't uh couldn't split my time and attention. Kevin, just as a uh for if there's ever a Chopping Block Summit, of course you know, all guests have Oh, that's wonderful. We'll definitely be there. I'm speaking on behalf of Haseeb, who probably never even thought about this concept until Well, obviously Tarun is going to be organizing it, so I I appreciate you being the one to bring it up. Uh so, just quick caveat, the four of us uh well, the three of us are early-stage investors in crypto. Kevin is not quite as early as we are. He tends to do more of the public market stuff, but I want to caveat that nothing we say here is investment advice or legal advice or even life advice.

So, uh holy [ __ ] Kevin, you are now the uh the soothsayer of crypto. I saw that your your story on Bloomberg. You're You're covered in odd lots. And your story on Bloomberg I saw as of uh this morning was the most viewed story on Bloomberg. The man who called the Terra USD downfall or something like that. Yeah, no, I I I definitely appreciated uh the the time that they uh gave me on on the podcast, but I mean, you know, those are some big shoes to fill. I mean, it's a bit sensationalist, so um maybe we can get into all that, but uh you know, it's been It's been good.

Thank you. sensational, yeah. Okay. Well, I I think you've managed to do a good job of building the sensationalism yourself. I have a theory that you were featured in all the media because you're the only non-anon who is like really loud about this. Yeah, I think that's the case. It'd be hard to have like the picture of like some anime picture, you know, just uh some VTuber model you know, on Bloomberg, you know, like the you know, the folks on Wall Street they they're not not going to make heads or tails of that, you know, it's going to be uh too confusing for them. Yeah. Yeah. So, for those who have been uh asleep at the wheel for the last couple weeks, we should probably give a recap of what happened. The big news of the week has been the collapse of Terra.

Terra, for those who are unaware, it's a layer-one blockchain built on Cosmos. And the core the core asset of Terra is a stablecoin called UST. And uh essentially on I think it was May 9th, over the weekend and kind of going into Monday, the Terra UST stablecoin's peg broke. The market was more broadly declining due to some uh uh macro events that were going on, uh fear about interest rates. And as the the price of Terra started declining, so the price of Luna, which is the kind of core layer-one asset that backs UST, started declining in price, uh the UST peg broke.

And one thing led to another, the there was a basically what we call a death spiral, meaning that uh as the peg lowered, the confidence in the system lowered even further. There was more and more algorithmic minting of Luna and expansion in supply of Luna, which resulted eventually in Luna hyperinflation. Over the period of that time, uh Luna ended up uh expanding its supply by 18,000 times. It basically underwent a Zimbabwe-style hyperinflation event. UST ended up cratering to something on like 20 cents or less on the peg. Um I don't know what it's trading at now. It and we saw within the course of a week, the first time I've ever seen this in crypto, an asset dropped 100.0%

on in terms of the unit price on CoinMarketCap. Literally, the the price of went so low that from the high of $60 before the unwind, Terra ended up cratering to fractions of a penny, such that um it had to get delisted from all of the major exchanges. Nobody None of the major exchanges anymore trade Terra. Um Terra is now considering rebooting the blockchain, finding some way to create what they call, you know, what's now been called Terra 2 or some some new version of Terra, such that the old version could be called Terra Classic, and there'll be a new version.

Uh uh Do Kwon has has claimed that this is going to be um the a way to revive the community even if the stablecoin itself is no longer viable, the community that's been building on Luna um can still be salvaged. So, it's been a catastrophic event for crypto. It caused a a broader decline in crypto prices, and um is is one of the most catastrophic events that we have seen in a single crypto asset since maybe BitConnect, which was uh you know, a Ponzi scheme that unwound in in 2018. There's been a lot said already about this, but you know, obviously Kevin, part of the reason why we're bringing you on is that you were one of the early folks warning about the insolvency of UST, and that the perception at the time, so just to give give people a

sense of what was going on at that time, uh Terra before going into all this um going into its its calamitous collapse, before that point, UST was collateralized by Luna. And Luna, the market cap of Luna was at the height about 30 billion. Um at the time of the market downturn, it was maybe on the order of about 20 billion. And the total supply of UST was, you know, on the order of about, you know, I think 14 billion total UST. And so, the perception was And the other thing is that uh or so, Terraform Labs spun up a foundation called uh the Luna Foundation Guard, which was tasked with buying up a bunch of Bitcoin to use it to defend the peg. So, there were billions of dollars, about 3 billion dollars worth of Bitcoin at that time that was supposed to be earmarked

to defend the peg. So, the perception from the Terra community was that this thing was ironclad. And you, under your um your firm's name, Galois Capital, have been basically the gadfly for Crypto Twitter, uh one of a few gadflies, who are out there saying, "This thing is is already insolvent. This thing in the moment of a downturn, this thing is going to totally collapse." Um so, I'd love to hear from you. Give us your perception of of of the story, like what the the preamble, what it was like for you seeing this thing trade down, and your your reflections on uh the whole event.

Mhm. Yeah, definitely. Um so, you know, I think you know, when I guess to start, uh we first came across Terra in the like the very early days when they were just like, you know, raising seed funding and, you know, Series A, and they were just building the project. And, you know, I thought it was just going to be one of these uh you know, stablecoins that, you know, probably didn't work, but probably would have a quick death and, you know, peter out at some point. Um and then, you know, sometime around uh really late uh last year, uh you know, December and then early Jan uh of this year, you know, just kind of dawned on me that wait a second, like this thing's like a top 10 coin. Like why did this thing not uh already unwind, right? So, then I started looking more heavily into it uh

along with the team here, um you know, like Galois. And, you know, I thought, you know, maybe there was something that we overlooked. Uh maybe they're they made some changes to it. Maybe it actually does work, right? So, you know, we looked into the mechanics, and it was basically exactly as as we thought it was. And uh you know, I just didn't think that it was solvent. And I thought that, you know, it's crazy that it got to this kind of size because, you know, this was kind of on the back of the collapse of uh Wonderland time, right? Because of the whole Seafood drama. And that already had some minor contagion. I mean, the space generally survived out of it. It wasn't that bad. Uh but, you know, at the end of the day, there was some, you know, contagion over to like Spell and MIM, and even a tiny bit of

contagion over to like Anchor, uh UST, and Luna, right? And then I looked at this thing, and I thought, "Well, this thing is like, you know, an order of magnitude bigger, um maybe even bigger than that. And uh you know, this could cause some serious damage." So, I went on Twitter. I started trying to sound the alarm. Uh met with a lot of uh negativity, you know, all the all these lunatics um who were in support of it. You know, I was You know, what's funny, I was trying to help them. I was trying to tell them, you know, "Beware." And then they're just ragging on me constantly. Yeah. To be clear, lunatic is the moniker of people in the Luna community. Uh yeah, exactly. And I and I got to give them credit for it. I think it's great marketing because if you gave give

a name to your army, right? Which I think maybe they learned from the K-pop groups, right? So, you know, you got your you got your uh BTS army, you got your Blinks, right? And now, you know, it's bleeding over into crypto. You got your Link Marines, uh XRP army, and the lunatics. I think it's really smart for them to have done that. Uh but that being said, you know, they they do start to display some kind of mob and uh cult-like behavior. And I'm basically just getting, you know, just completely yelled at and, you know, flamed on Twitter. But, you know, fortunately for me, I come from a a competitive gaming background, so I've literally been called a [ __ ] uh probably tens of thousands, maybe hundreds of thousands of times, so uh doesn't really affect me. So, you know, I just kept sounding

the alarm, met with a lot of resistance. Uh but I think, you know, over time, uh there were a few minds that were changed. Uh maybe not too many, but there were a few. And there were also others, you know, on Twitter that were also sounding the alarm. And I think over time, I think our faction grew, and I think everybody when they really carefully studied the mechanics, I think they came to the same conclusions that we did. And I think you could arrive at that conclusion from many different ways. You can, you know, look at the actual mechanics. You can reason by uh you know, uh deduction, right? You can uh look at history. I mean, there's so many ways to kind of arrive at the same result. And I think that's kind of what happened. So, that finally when there was this kind of situation where there

was, you know, this exogenous shock of the equity markets just tanking and, you know, crypto being correlated with equities, then everybody was kind of trigger-ready, I think, to make that move. And, you know, I think some of it, I mean, maybe the trigger itself, you know, this this selling of 85 million into into three pool UST, maybe that might have even been an accident, right? Maybe it was just that everybody was already kind of skittish and then somebody didn't know that the liquidity migration was going to happen between three pool and four pool. So, you know, they saw liquidity evaporate and they were like, "We don't know what's going on." So, like, "Oh, let's just get rid of it." And then that just caused a stampede. You know, I think there's a lot of conspiracy theories out there right now about like BlackRock or Citadel or this was an attack. I mean, I

don't know if it's an attack. It could have just been a mistake or could have been an accident. For whatever reason, there was some initial trigger of fear and then there was like a fear cascade and and sort of like this, you know, the fear just kind of spread out and then it just it was all over for them, basically. Yeah, it's it's been disappointing to see, I mean, not surprising but disappointing to see the amount of conspiratorial thinking that's gone into trying to explain what happened with UST, right? At the end of the day, we know what happened, which is exactly what you described, which is that people got scared and a reflexive death loop started. And, you know, what is the particular catalyst? I mean, you know, we were talking about this internally that like it doesn't really matter who started it. Doesn't matter

who shot the first bullet. You know, what matters is that this thing was going to break out into violence and the the responsibility of making sure that that doesn't happen falls to the protocol. And ultimately, whoever it was, and, you know, maybe it was a group of people, maybe it was a fund, maybe it wasn't. It was almost certainly not BlackRock or Citadel. I mean, that's ridiculous. You know, like it's it's all it's it's never going to be like an obvious villain that you can name and identify. And the whole point of crypto is it doesn't matter who it was. The whole point of crypto is that we should admire whoever had the insight to realize that this thing was ready to blow and they were the ones who who got ahead of it, right? The whole point of making this stuff open source and easy to understand is that if

something is not secure, it's going to be broken. That is the whole point of crypto. That is the argument that we are making of why we're creating a more robust system. And so then turn around and say, "Oh, it was somebody evil must have done this and it was a it was you know, it was one of these evil tradfi firms that didn't want us to be having any fun." I just think is is against the whole spirit of crypto. Yeah, it's a lot of the same logic people also use when they try to say, "Oh, we should ban flash loans or something like that." And like they're used in all these different attacks. I mean, this is literally like the I think Bloomberg had an article or the Journal had an article out this week talking about how dangerous flash loans are. And it's like, "No, they're just a tool it's

a tool that is is used to sort of accelerate, you know, the inevitable." Otherwise, only wealthy people are going to be able to like perform these kinds of attacks. It's similar argument for for, you know, Terra and sort of what happened here. Well, it's it's the censorious instinct, right? Like whenever markets go down, there are calls to ban short selling, you know, it doesn't matter where you are. Even in the US, people have banned short selling. Kevin, you're I mean, part of what you're well-known for is having called it out but I presume also to having traded on the downfall of Luna. I don't know how much you're comfortable sharing but I'd love to know how you played it. Yeah, so, you know, I I think at this point what I can say cuz I don't want to give out the exact positions until all

of this is over and we still do have some positions open. But what I what I will say is that we were short pretty early on but maybe this was May 6th, I would say. And this is also right after we pulled all of our UST from Anchor. So, we were basically farming it down to the last day and then when it when it depegged to 0.997, we paid up 30 bips, got out of our UST position and then just started shorting Luna. Now, that being said, in between, there was a lot of activity and there were even moments that we were long on local bottoms. And overall, we actually played that pretty well. Though I'd like to joke with the traders that what's funny is that because we, you know, we did all of some of these swing

trades, you know, just based on sort of like the flows and the short-term supply and demand imbalances, if we had just held the thing from where we started to where we ended, we probably would have made about the same. So, it wasn't that we did worse but we just caused extra work for ourselves to like sometimes miss out on parts of the down move and then sometimes just actually, you know, get randomly some parts of the up move. Now, that being said, like most of it was on the short side and we actually did play both Luna and UST and there were also some other structural plays that are related tangentially which were also very lucrative, too. I'm curious on the UST part how you played that cuz I think that was other one of the common refrains you hear from traders in the market, which

is there's an actually a way to trade you know, the UST peg and to sort of, you know, short UST effectively. I actually like asked Do about this when he came on, which was like, "Why aren't you taking a bet against UST?" And it's like, "Oh, there's there's no way to hedge it." I'm curious if you if you don't mind sharing how you guys thought about thought about playing UST or is it just sort of this this Anchor, you know, trade that you mentioned? Yeah, I mean, there are actually ways to trade UST. I mean, there are certain books out there with with a few exchanges where you can trade UST against other stable coins or, you know, against UST itself. So, you could short it. What what I would say is that when the depegging is first happening, it doesn't really make sense to short UST because they still have a

lot of firepower on the reserve that they're going to burn through to defend the peg. So, you really only want to put on the UST short after two things. The first is that they run out of money to defend it or they just actually give up and want to save the rest of it. That's a little bit harder to tell. And then the second thing is that you have to pay attention to the redemption and then as long as the outflows of UST to Luna is less than that, then UST should not depeg. And UST would only depeg if it exceeds that kind of demand for swapping between the two. Now, later on, they started releasing this gate, right?

And they said, "Okay, now we can do a million units of Luna per minute." And then eventually, they released that entirely and just let it go into hyper hyperinflation. There was no gate whatsoever. All of those things matter and, you know, one of the things that I felt like we were a bit disadvantaged on, you know, even though we traded this well, is that we don't know when these kinds of decisions will be made, right? It's all up to TFL and LFG and their inside war room to decide, "Oh, now we're going to change, you know, the limits on the redemption mint mechanism." Well, that completely affects whether or not you actually want to short Luna or UST. Now, I I don't want to also spin any conspiracy theories but what I would say is that there's at least the possibility that there were times where they were short

their own asset, either UST or on the Luna side, based on the decisions that they were going to make. Like if they knew that they were going to release the gate, then Luna's definitely going to spiral and UST is at least going to be somewhat preserved from the all the losses going to the hyperinflation of Luna, right? So, in that sense, they could have just long UST and shorted Luna and just made that kind of relative value play right before making the announcement, make the announcement, you know, everything rips or or or drops and then just close out, right? So, I think there was a lot of information asymmetry, not just for us that, you know, we were disadvantaged a bit, but on top of that, the the general public, right? Like whoever was not an investor, who was not part of the inside team, didn't know

when all of these arbitrary decisions would be made. Like we didn't we didn't know when they were going to start defending and when they were going to stop defending with the reserves, either, right? And you can see that in within, you know, sort of on the price chart, you can see where they actually spent money to defend and where they didn't. You know, you can see that on the first depeg, okay, they, you know, they put it back to peg or, you know, very close to it and then they let it drop and then they start defending again. You know, all this kind of stop-and-go execution for the selling of Bitcoin and the reserves to defend the peg. I mean, whoever had inside knowledge of when that was going to happen very easily could have gotten out of their own UST position. They just need to just need to

know when that's going to happen, dump the UST and when it's not happening, you know, they could even buy UST. They could even go long UST to dump it later once the peg defense comes back. So, I just feel like this whole thing was just not very transparent and I think at the end of the day, it's the insiders that benefited and it's the general public and I guess people on the other side like me that were disadvantaged. So, I've I've heard from someone who's very close to LFG that basically it was all Do pulling the levers and that, you know, the folks who were around him were also in the dark. Nobody actually really knew what was happening that day. I again, I don't I don't I don't have a ton of details and right now there's a lot of drama and fingers being pointed

about how LFG actually spent the funds and whether or not the funds were actually used to how much of the funds were used to defend the peg in the market versus, as you sort of insinuated, bailing out insiders who had, you know, their their UST impaired. But we don't know and it seems like a clear picture hasn't really emerged yet but it is clear that LFG no longer has the Bitcoin. They now have, I think, about 70 million out of the 3 billion that they previously had on hand. They definitely don't have it anymore but how it was spent, there there are a lot of questions being asked now. I'm pretty sure that they did spend it. You know, I think they did, you know, what they were supposed to do with the money. It's just that the timing was just very arbitrary. So, you know,

whoever the market maker was that they did, you know, these two market makers that they did this deal with and Do himself had access to privileged information. Who's to say the market maker, you know, I wouldn't say that they just, you know, OTC'd it to themselves, you know, to get out of UST at at the peg. I mean, I don't think they would be that egregious, right? But they could still just put it through push through the books, right? And then, you know, you just know that in this minute, there's just going to be a giant bid wall and then you just dump your UST into it. You pay up a little bit on the exchange side but you mask a little bit of that activity. And it's a little bit of like self-trading right there, right? So, like that I wouldn't preclude. Now, I don't want to accuse them of doing

something that I don't have evidence of but I would like to see the war the war room chat logs. I would like to see, you know, some of these things. And now, you know, we don't have a right to that, you know, but at the same time, I think for, you know, for the sake of the space, I think, and for the sake of the reputation, I think it would be nice for them to voluntarily give this up and be willing to to show the public that what what had happened. Yeah, so speaking of the space and of reputations. So, I also I don't I don't want this conversation to be too reductive, although it's fascinating the way that you sort of yeah, the play-by-play of exactly what happened that day. I have to ask Kevin one question. What's the highest funding rate you paid? Uh so, um

so I'll say that uh that would kind of give away whether or not we were playing during the hyperinflation period. And and and we were um but we were very also very cognizant of the funding rate. And I think at some point it hit like uh quadruple or quintuple digits. Um so would be very expensive. Now, that being said, the hyperinflation rate itself, I think at the very peak was a doubling of the supply every 18 minutes. So, you know, you can imagine that even extreme amounts of funding probably don't don't, you know, relatively still rounding error to just how bad the hyperinflation was. Um so, yeah, I don't I don't really want to give away exactly what we're doing during the hyperinflation period, but we were definitely active in the market.

Fair enough. Yeah, I mean, look, obviously from the perspective of a trade, it sounds like you guys absolutely nailed it. But of course, you know, Terra has had much broader consequences through its collapse. So, I mean, not just is it obviously a catastrophic wipeout of a lot of paper wealth that has existed in crypto. Um it was of course a a very attractive investment for a lot of retail investors. And there've been a lot of really awful stories about folks who completely lost their net worth, especially people in the Terra community. And even folks who have committed suicide or or threatened to commit suicide or who lost, you know, lost more than they could afford to lose.

So, anytime that something like that happens, obviously there's a lot of tragedies underneath the headline of the economic wipeout. Um but of course, the other thing that this has done is it's put crypto and DeFi absolutely center stage uh globally. So, everybody in the world was talking about this. It was the front page of the Wall Street Journal, front page of uh of Bloomberg. There were there were hearings in in uh Congress. South Korea is now talking about also hosting uh holding hearings about what happened with Terra. And it's pretty clear now that it's going to accelerate a response, most likely a regulatory one against stablecoins.

Um so, how how are you guys seeing the overall reaction to the downfall of Terra? Um I guess I can start. I mean, I think, you know, I think this was kind of expected. You know, whenever you have something like this uh where, you know, 40, 50 billion just gets evaporated, you know, there's going to be uh some people on the losing end uh where, you know, it's going to be devastating for them because maybe they they put in more money than they could have afforded to lose. Um I would just say that, you know, at the very least that it happened now rather than later. You know, if it was um you know, 100 billion uh market cap with 90 billion of bad debt, I mean, it would have been even more devastating, probably more lives uh would be lost. Uh and that being said, I would also say that, you

know, there's always some kind of psyops that is going on. I have no doubt that there would be people who um you know, end their lives because of this. Uh but, you know, maybe not to the extent that it's made out to be because I think there's also a narrative that's been driven, you know, by uh you know, the TFL and and LFG in that they just want a little bit less pressure uh from, you know, the shorts. They want a little bit less from, you know, the people who are who are against them. So, you know, they they're trying to spin this narrative that, you know, they should be, you know, they should people should take it easy. You know, I think, you know, there's some there. And then I think on the regulatory side, I think this was bound to happen. Um you know, I think

Yellen was first saying that she doesn't think that stablecoins possess, you know, some kind of systemic risk to, you know, the system. But then now, you know, like the UK regulator is coming out and saying that they got to regulate this thing more heavily because of what had transpired. So, I think the the response has been a bit mixed, but I think it's to be expected. I mean, this happens with every kind of financial crash in every market. Um there's always this sense of why wasn't there regulation to protect us. And I think really for us to be a self-regulating industry, I think that entire mindset has to change. It really it really comes down to the people who end up on the losing side to stand up and say that actually, I want to take accountability for my own financial actions. It, you know, it's not about the regulation that

I'm taking personal responsibility, right? So, like if if the people on that side can do that, then I think we would all benefit, right? But I think really I think the the puck is with them now um and less with us, right? And we have to see what kind of fallout um comes from this. Um I imagine there would be more regulation, but um I'm hoping that that's not the case. Yeah, this does feel like a very weird scenario in that it was treated or Terra was so legitimized, you had big-name VCs backing it up. Um the product that produced the stablecoin was extremely attractive to a number of different or a very large number of retail investors as opposed to

being concentrated in a small number of people, even institutions. We were talking about this these like Terra SPVs, the Anchor SPVs that were floating around. Arrington had like a uh Anchor Anchor Fund. It was just so um pervasive. And I think also the end product was supposed to be this stablecoin. It wasn't like you were speculating on, you know, uh Shiba Inu or something like that. Um it was like supposed to be this really investable product that just ended up, you know, blowing up. Um and so in my mind, it's very different than a lot of the other crazy uh pumps and you know, crazy speculation that happens in crypto. Um in that it was so legitimized and it was supposed to be so, you know, reputable. I think the other the thing that in my mind though is that I I think, you know,

generally when we talk about, you know, regulation, it's because of um fraud, right? Somebody, you know, claims they're going to do something, they're they're lying about it, and then we we got to them and we're trying to make sure that that kind of fraud doesn't happen again. In this scenario, you know, everything was very transparent. It was very obvious on chain what was happening with respect to Anchor, UST, how the system worked. It's not like the LFG said they had billions of dollars in Bitcoin and they didn't, they did. You know, maybe they could have been more transparent about how they used it, but they were uh you know, honest about what they did. And and so it's it's to an extent it is like how free do you want the the market to be? I think it would be obviously a huge step backwards

if we banned all experimentation around, you know, um different types of financial primitives. Um and and there was, you know, transparency in the scenario. But I I don't quite know like how you can design a regulation that protects your retail investors here while also sort of enabling experimentation to happen that is still transparent and open. Yeah, I definitely agree with that point. Yeah. Yeah, it's a really it's a really good point. You know, going into the collapse of Terra, so, you know, Dragonfly, I think we've mentioned this before, but we were seed investors into Anchor. And this was kind of before Anchor became what it is or what it was um before the collapse of Terra, right? So, like Anchor, just for just for a quick way of background, Anchor was um kind of the the principal sink where almost all the UST in existence lived. And maybe

it's worth doing a bit of exposition just to understand like the build-up to the the UST collapse. So, Anchor um got its start as basically a cross-chain staking yield protocol. Like that's the way that it was pitched. Is that it's kind of it's like Lido-ish, um but it also has like this sort of money market component, so you can put in uh yield-bearing assets and you get a yield, and the yield gets juiced by um ANC token on the um on the borrower side, and the depositors are paid out of a yield reserve, right? That's the idea. It's it's like you know, it's like it's not it's not rocket science, not, you know, the next um you know, it's not the next MakerDAO, but it's something, okay?

It was a protocol, we put in a little bit of money. And at the time, DeFi yields were very high. So, the idea of a protocol that paid 20% yield, you know, this was in the days of 100% APY, you know, 75% APY. So, having 20% guaranteed APY was reasonable, right? In the early days, Terra was, you know, Anchor was not growing like gangbusters. But then, DeFi APYs declined, obviously very significantly. DeFi APYs on stablecoins are now sitting south of 2%. As this was happening, we saw broader decline interest rates. Terra stood still.

Anchor decided to maintain the exact same interest rate regardless of the broader market environment. And what that ended up doing was it made Anchor more and more attractive on a relative basis compared to the sort of the risk-free rate. And that caused UST demand to balloon. Almost all the UST in existence lived in Anchor. And so, Anchor, I wrote an article kind of summarizing what happened in the Terra episode. And the way I described it is that Anchor was the cancer at the heart of Terra. Um were it not for Anchor and its 20% APY, Terra would not have blown up in such a catastrophic way. It wouldn't have grown so large. It would it could have at least mediated its own growth in a more in a more market-oriented way such that at least people would have they wouldn't have warped incentives to try to ride

this thing as close to the threshold as they possibly could. Um and that's ultimately what Anchor's incentivized growth I think did. The thing that I have been reflecting on this last week is that um so, you know, on the chopping block before, we've talked a lot about Terra and Anchor. And we've we've intimated a bunch of times that we thought it wasn't sustainable, that we were worried, and that whatever. Um but we also, you know, we brought Do on the show, and we kind of, you know, we were we were very respectful to him. And and, you know, I we've invested into other things on Terra. We've made three investments uh onto the Terra platform in our in our Fund III. And kind of the or the view as VCs, and I actually I I talked to some other, you know, kind of marquee VCs

who've told me in the past like, "Dude, the risk-reward for saying bad things about layer ones or about, you know, big communities is just not in your favor." Like as an investor, your job is to make great investments, find great founders, um and if you speak negatively about something that you see that you think is not sustainable or is not going to work, one, you might be wrong, which, I mean, everybody in crypto has had that experience of thinking something wasn't going to work and you were totally wrong. And then second is that even if you're right, what's the upside? Right? Even if you're right, like, okay, maybe you get celebrated, maybe you get pulled on some podcasts, but mostly you just alienate a bunch of people um for the the things that don't break or that for the two years until UST actually explodes, uh you end up looking like an

[ __ ] and just pissing off a bunch of people and getting, you know, flamed. And so, you know, it got me thinking a lot because as a you know, I think about somebody like uh like Eric Wall or somebody like Hasu or somebody like yourself who, you know, you you guys are not VCs. And as a result, you can kind of be more transparent, right? If you you see something you think is [ __ ] your incentives are just like, "Hey, why Why Just say that it's [ __ ] I I I I Eric Eric is a VC. I'm sorry. To be clear, Eric, you you you you also do make uh early-stage VC investments, but your most of your trade is not um simping entrepreneurs the way it is for, you know, a lot of a lot of the rest of us. And so the the the question that I

keep thinking about is like what could and should we have done differently? Cuz in private, we talked all sorts of [ __ ] about UST, you know, and and when we when we look at what we want to invest into and we are you know, we get pitches all the time for things that are built on Terra and things that are that have touched UST. Pretty much everybody internally at Dragonfly, our our internal conversations have always been that this thing is not this thing is going to collapse. This thing is not sustainable. We didn't go out picking fights, tweeting at people, claiming that Do is And you know, obviously Do didn't make it easy because of how aggressive he was toward anybody who would impute him on on Twitter.

Don't forget though, this show did did come up with the moniker that tied stablecoins to Ted Kaczynski. So. We did. We did. We talked a lot of [ __ ] about No, we did. We talked about algorithmic stablecoins. I think I talked about Basis in particular, which is of course the the granddaddy of senior shares. Wait, we didn't talk about the fact that Do invented Basis or ran Basis Cash. How much Kevin how much do you believe how much do you believe this or do you think that's like sort of circumstantial reporting? Cuz I I do think the evidence I think it's Yeah, I I've heard I've heard from employees within I've heard from employees within TFL, yeah. And I also want to say that I think it was on this podcast that I first heard the term that Tarun used to say about, you know, some of these

algo stablecoins, they're just like PID controllers, you know, and I've never used that analogy before, but I've adopted it into my own vocabulary. And I think it was on this show. Yeah. Yeah, that was the same episode I was I was drunk and and decided to call everyone who makes an algorithmic stablecoin a Theodore Kaczynski, like uh Yeah, so it just shows that you know, in order to overcome the disadvantages of being undiplomatic in the space, we just need more alcohol, you know, and then have these podcasts where you get all the VCs drunk and let's hear what they really have to think about some of these portfolio projects of their own and of other you know, of other VCs, too. For the record, being a VC is my second job.

I just kind of That's why I can be more blunt. I can be more blunt. That's true. That's true. Well, well, we we will be your mouthpiece then, Haseeb. You know, just whisper me their name and I'll I'll let people know, you know, just whisper me their name. from now on, everybody knows Galois Capital is saying what I really think, so let that be known. No, I'm just kidding. I'm just kidding. I wouldn't do that. I think I think one one piece of public service is enough. I don't want the heat anymore myself. And like you know, like you said, you know, I think you don't make any friends being on the short side. And if you look at all of our plays from before, all of our major plays, they were all on the long side.

So I think someone else should do it. I think I've done my service. I think that should be enough. Hopefully people are not too mad at me, you know, cuz it was the who's who of of investors on that cap table. So hopefully people are not too mad. I tried to save everybody money. I did I did the best that I could. But there was too much of an echo chamber. What can you do? What What was your favorite dunk that you read over the entire thing that turned out to be obviously maybe false? Like like like of all the dunks in the world, right? Cuz like you know, I would say March through May was Twitter filled with people on both sides dunking on each other non-stop.

I'm sure you were the recipient of 50% of those. So like I'm curious like what were your favorite What were your highlights from Twitter? I I just got dunked on so much by these shill accounts. And then you know, their strategy was so good, too, because they would never respond with their main accounts and they would just straight up astroturf with these accounts with like such few followers that I wouldn't get the engagement, you know what I mean? So they're just like on one hand flaming me and flooding my comments with negativity and the same time not even giving me the engagement for it. So, you know, there was a lot of that. I mean, there were some people who were saying like oh, you know, like you guys really think you guys really think you guys really think there could be like a death spiral? Like

how stupid, you know? And oh well, there were there were there was. It was a death spiral after all. So, you know, it was like stuff like that, you know. Yeah, I mean, to to Haseeb's point of being on the short side, too, stuff does change over time, right? Like you can sort of I'll look at the LFG and say, oh, well, they were sort of backing into a, you know, fractional reserve model and upping the reserve factor over over time. Um you know, sort of as you know, you know, Frax exists right now, which is you 80% backed by by USDC and is working okay. And so it's like you know, you can imagine a world they do back into a, you know, 80% stablecoin backed version of of Luna or or of UST with you know, some some remaining float backed by by their own

shares and then it functions okay. And then you look like, you know, an idiot even though maybe at the time, you know, what you said was actually correct. Well, I mean, there's a world of difference between backing something that's correlated with your own death spiral and backing with something that's uncorrelated with it, right? I mean, that's the that's why a death spiral is scary is cuz the feedback loop. Right. And that's why I'm saying, hey, you know, things can change over time, right? Like you can imagine, you know, they could also put them some stablecoins in the LFG. And so it's sort of like your criticisms could be correct at the time, but market conditions and and product can change. That is also true. And it's something that we reflect on often as entrepreneurs is that or sorry, as investors into entrepreneurs is that you know, oftentimes the first pitch

that you get for something and the original, you know, the V1 is a a flaming pile of dog [ __ ] that isn't going to work. But they they realize that. They put something out in the market and it fails. It fails almost immediately. And they're like, huh, okay, well, that didn't work. Let's iterate. Let's like learn from that. And you end up iteratively backing into a better and better model and learning in real time. And that's one of the advantages of crypto is that you can learn in public and sometimes unfortunately you learn with other people's money, but you know, as long as there's a mutual understanding of, okay, hey, this thing is you know, it might not succeed. It's fine. I think the part of it that gives me the most pause is the degree to which we had very prominent members of the

community basically pushing the stuff onto retail and advocating to retail like, hey, this thing is safe. It's super robust. Like, you know, to ignore all the naysayers. Even though we were investors in Anchor, we were way too mortified to ever tell anybody put money in Anchor. I mean, for for us, we didn't I mean, we didn't put our own money in Anchor. And I think it it you know, it is true and Tom, it's a good counterpoint that like, look, sometimes things start off not working and it's okay to give people room to figure things out. But it there there was something about the the energy and the I don't know I don't know what the word is. I guess the the disdain that the Luna community showed for the people who were ultimately trying to critique it that showed bad faith that resulted in making things

worse for themselves. And and you know, to your point, Kevin, short selling is really important. You cannot have price discovery without short sellers. And so short sellers, although it's much harder to make money short selling than it is to going long because things in crypto obviously, as Luna did on the way up and down, they can they can go up a lot easier than, you know, you can only make 2x if you short something to zero. But if you assuming you're not using leverage, but if you go long, you can make 100x your money. And that's why as VCs, in many ways, our job is much easier than somebody who's engaged in short selling, especially in a market like crypto. Yeah, you know, I would say that at least diplomatically, it's very hard to be a short seller. You know, I actually you know, some of the investors on on

their cap table good friends of mine, you know, and and I've known them for many years. And I remember sometime in December and January literally hitting them up and saying, oh, by the way, at some point I'm going to short this thing. So I just want to say sorry ahead of time. You know, and that's kind of like, you know, how things are in the space, you know, it's just like you have when you're long, you're long together. When you're short, you're alone, you know? And it's just a it's a bit of a tough it's a it's a tough lift, I would say, just on the social side. Like how many parties did I not get invited to because I was on the short side, right?

Like at least one or two, right? Like cuz I don't know I don't know what the counterfactual is, but I imagine just by by the sense of things, right? Just by intuition, probably at least one or two, right? Well, I I I suspect you're going to be invited to a lot more parties now. And we will we will make sure that you get invited to all our parties. I appreciate that. I appreciate that. But yeah, no, I agree. I think there's there's a lot of this kind of like echo chamber effect. And I think on top of that, there is this sense of some of the investors. I don't want to say all cuz I think a lot of them are well-intentioned, but some of them are in it only for a quick flip. So whether they just burn retail and rug them, it doesn't really matter to them, right?

And this is something that's a little bit different than in some ways a step back from Web 2 VCs, where even if they were grifting with like WeWork, they at least had to go through many many years through Series D through Series E through the SoftBank round and then through into the public markets, right? Like even if they were doing it grift, they couldn't they couldn't just do a quick flip. They had to really dedicate themselves to it. But I think in crypto, because time to liquidity is so quick, now the incentives there for the founders and for the VCs are really shifting. And I think it really comes down to the personality of the of the people running it to not go the easy route. And really And I think in the long run, it benefits them even better to actually, you know, fund

something that works. Like for example, like FTX for example, right? Something that's not a quick grift, that's an actual business that one day generates great revenues. Deserves to be you know, valued very highly rather than just, you know, recycle the money, flip it over and over again on on these shitcoins. But it just it really comes down to then further up the waterfall to what the LPs want, right? So like if you were ever to try and build a VC firm where, you know, you're only going to invest into things that have long-term that you think has long-term value and not purely optimize for financial gain, then the LPs have to be on the same page. That they have to understand that they could do better with their capital elsewhere, but almost in a slightly altruistic way. I mean, I think they'll still make money, but in a

slightly altruistic way, not pure profit maximizing and willing to, you know, fund a VC like that. So it all it all falls it all you know, it all rolls downhill, right? It all starts from the very top where the capital allocators sit. And then all of that kind of culture starts to then you know, every layer down the way starts to seep in, right? So that's kind of what my thought is. So So I think actually you're you're getting to this point that's actually like cultural point about VC versus trading firms and and you know, one of the reasons I think a lot of actually pretty smart people I knew both from tech and from quant trading were like, "Oh, we're going to build on Luna."

was effectively because of Jump and Jump sort of pulled this slide of hand of of being trying to be both a VC and a trading firm at the same time. Uh and effectively that's what led them also to have to try to save uh things at the end. But of course the I I would say like you know, there was kind of this dupl- duplicity of of you know, effectively a lot of really smart people were like Jump is a place that there are a lot of smart people at. They usually do well in normal markets. This crypto thing seems like a scam but Jump's doing it so like I'll go do something. What does Jump What What Where is Jump saying is a good ecosystem? Oh, Terra and maybe Solana.

And okay, cool. Yeah, I'll just go make a uh uh a DeFi protocol on on their I'll quit Citadel or I'll quit Millennium and like there's a lot of people like this, right? Who like fell for this trap. And at the same time Jump basically at the had to effectively maintain the peg for everyone else. If If If we're If we're being honest just from from a couple of facts. One is they had to run a ton of Luna validators because Wormhole they had to actually be staked in Luna and basically be able to stake in both Solana and Luna to to run the Wormhole validators. So you know, we can see their public addresses from that pretty clearly cuz there's not that many Wormhole validators, maybe like 15. And

then I think the other thing that's interesting is like trading firm tries to rebrand as a VC because the market structure changed. And then sort of ensnared a lot of people who then sort of now are probably out of luck. You know, how do you feel about that from this perspective of like that's almost even like you know, you know, you were talking about LPs having to be altruistic. Here you have actually the opposite. You have like the LPs which is the trading firm themselves is actually quite maybe anti- antithetical to almost everything not just in the things they're investing in but the things building on top of the thing they're investing in, right? Which is actually you know, I think in Web 2 land you never see that, right? There's a reason so when I worked at DE Shaw they like they had this VC firm that was horrible

and failed. Two Sigma not a very good VC firm, you can go see. And one of the one of the reasons they're not very good is like no one trusts them because they'll kind of rug you. And somehow somehow there's a slight of hand in the Solana of X 2021 where everyone just kind of like was like, "Oh yeah, all the trading firms are great VC investors in our project." Mhm. So how do you feel, you know, being on the trading side watching that evolution? Uh and do you think like what do you think the like regression to the mean will be? What does it mean that like the trading firms exit doing long-term longer-term things? You think it you know, between Alameda and Jump I feel like it it does they they sort of have both had this kind of impact on the

market. I think I'll I'm going to hear Kevin Rose say that I think there's a similar dynamic with FTX and Alameda where you know, Sam is on Twitter talking about, "Oh yeah, we knew Luna was bad. We knew it was going to blow up." like you know, this thing was never going to work. And it's like and yet you know, you you listed it um and and UST. And so it's like you know, is there some moral hazard with like you know, running an exchange uh having having some um you know, say over what you actually want to list on the platform. Mhm. Yeah, you know, I I definitely agree with both of your guys's points. Um maybe just to start I want to say that you know, I think the reason that uh there was this slide of hand with Jump uh because I completely agree with

you. I think trading firms, what's there to be said about them? Uh their entire job is to make money and they're literally not in the business of losing money or you know, being altruistic. I mean even if you look at Sam who's very altruistic person, um he's really separated that out into effective altruism and then right now just earn as much as he can, right? Like you don't ever want to in many ways in the market handicap yourself while you know, you're doing you know, both things badly. Rather do one thing well and then just funnel all of that into the other thing and do that well, too. Um I think there was a slide of hand. I think it was good uh it was smart of them uh to have Kanav uh you know, just lead the effort. They realized they needed more presence

online and they needed to do um some branding and PR. And for the most part that was very successful. But I think it's all you know, everything is just it's a butterfly effect from uh from the prior cycle. You know, you had 2017 where you had all these quote unquote crypto VCs that basically rugged retail. And then uh around that time it was when the trading firms were a lot more neutral about things and had not started their VC arms, right? So you had folks like you know, CMS, you had like Three Arrows, you had all these guys uh who were on the trading side and they were actually being pretty honest about stuff and they were like calling stuff out.

They were not super long biased. And then finally when it came to this cycle, you know, the VCs the crypto VCs had a bit of reputational damage. The trading firms didn't. They had now had enough money through that cycle to become VCs or they were managing too much money that they couldn't keep things market neutral anymore. So they had to go long. And then on top of that all of the um all of the newer projects were a lot more centered around DeFi and financial concepts and they could benefit from both the market making from these trading firms as well as the expertise that these guys had that the VCs did not, right? So all of a sudden the power and the influence shifted over to these trading firms. And then you know, through that well then they learned the exact same lessons that the VCs learned

which is that it is way better to be on the long side and be together on the long side and do a quick flip. And you know, you live long enough to see yourself become the villain and I think that's literally what happened with all the trading firms. And I think you know, it's it's no it's no surprise to me that for every successful trading firm they eventually get to a size where they're managing so much capital they are no longer able to deploy market neutral and they always eventually set up VC and go long. And then you can see the tone at which they talk about things shift, too. And I think that's just a natural consequence of managing too much capital. So I think maybe the only way to avoid that is to you know, just stick to one particular thing, do it super

well and not scale up. Or you know, you scale up and you just try and um you know, get you know, the the the investors uh on the same page that look, we're actually not going to try and maximize. I mean crazy even think because these guys it's in their DNA to maximize profit. But you know, to create crazy to even say but you know, to get them to agree that that would be the case. Um but I don't really I think it's a lot of human nature. I don't even think there's anybody who's particularly at fault. I don't want to really point the finger at you know, Jump or Three Arrows or anything like that. I mean it's a natural course of being very good at what you do that you end up having too much capital that you're forced to go long into beta, right? I I And one

thing I will say is like I I I'm not necessarily refer- didn't want to like single out Jump necessarily as a bad actor themselves, right? Like if you look at the code bases they've contributed a lot. Though in fact probably more in the last year than the TFL associated entities. And I think if you look through the the Luna code base you'll be surprised at how few contributors there are uh in the last year. Um but but I I I think like they have by and large been pretty active on the development side in a way that I think trading firms usually aren't. I think the problem is the slide of hand came in that in that they like that was used to to sell a lot of very smart people who were maybe just young and not didn't know the history of this type of

stuff into thinking that like, "Oh Oh, we should go raise money from YC and put half of our fundraise into Anchor." There are so many stories like that. And YC themselves was encouraging people. I mean if you go look at the YC uh crypto list, 90% of the YC crypto companies are just front ends for Anchor. And if you just take a little more time and dig into like what they're doing where their yield is coming from. They're not just putting into Compound or Aave. They're they're they're 100% were just putting into Anchor. And so I think there was kind of this extra duplicity where like Jump's brand was then used to like create this whole narrative of like the smart guys think UST is the best. And it that thing kind of really spiraled out of control in

like a a way that I think we've never seen in either finance or tech. Yeah, and I think really it's just that there should be a slight change in um the message there. It's not that oh, you know, these smart people think that it's going to work. It's that these smart people think that they'll be able to make money by backing this thing. And I think that's very different. Because they are very smart. They are very smart. I I want to actually touch on on you know, Tarun's point around um you know, these teams that have raised money to build on on Terra and maybe sort of just like the sort of next step or or you know, fallout from this. There's obviously the Terra 2 proposal and there's teams that still have a lot of money that you

know, are were building products to work on top of Terra, not the Anchor front ends but you know, they're DeFi applications and stuff like that. I'm curious what you guys think about the Terra 2 proposal and then maybe in tandem what these you know, teams that are in the you know, Terra ecosystem are going to do next. Honestly, um you know, I was sitting down today with an entrepreneur uh who basically they they they were building on Terra and they are like, "Okay, we're obviously leaving. Like we're not sticking around for Terra 2. Like what the hell is the point of Terra without UST?"

Um there's going I mean Terra 2 is going to be a hollowed-out shell of what Terra was. And so you know, to the extent that they can salvage what they do have left and use it to try to make uh UST users whole and Luna holders whole um for the losses they've incurred, I'm I'm supportive of that. Um I haven't spent a whole lot of brain cells trying to figure out what is the best way to do that exactly but I I I think it's it's it's on them to do their best to try to salvage what they can. But the reality is that the vast majority of high quality entrepreneurs are not going to stick around. Because why would they? There are such better options. And Terra dream is over, right? Like it's it's sort of like you know, after the collapse of the Soviet Union if you

could leave you're going to leave. You know, and now you still do have to have the question of like, okay, how do you rebuild Russia? How do you rebuild some of the post-Soviet states? These are hard questions and there's no good answers to them. And you have to do it. You can't run away from it. Or I should say, not everyone can run away from it. But the most, you know, the the smartest, the most capable, the most well-known people, 90% of them are going to leave. And so I think that's going to result in Terra being a shell of what it was. So I I feel like I've talked to maybe like 10 to 15 Terra projects and people I knew at Terra projects over the last few days and just on on the sample size of say 15, I would say there's like an exodus to

probably Solana and Avax seem to be the top two contenders for most people and then third is sort of like Polygon. I feel like those three seem to be like the the most likely places where they'll go. There are people who are staying, although I think there's a lot of problems people are realizing from a technical implementation standpoint. Right? So the Terra 2 proposal has this May 27th deadline. But let's you know, for instance Mars protocol which was sort of built by Delphi and people from TF formerly from TFL.

Mars basically today was like we can't guarantee anything will work in Terra 2. Withdraw right now because without UST literally none of the margin and code is correct because it like assumes it makes a lot of assumptions about like the relative value of like a LP pool share as a function of the UST price the UST doesn't exist. That doesn't make sense. So there's going to actually there's a huge amount of technical debt to remove UST that I think at least I mean obviously it's like a very chaotic situation so it's like I totally understand you don't have time to like figure out the precise technical specs but for instance you need to have some way of redeeming all of these on-chain assets like an Astroport LP share for a UST and and another token

such that people can redeem that without relying on the UST token which is going to not exist in Terra 2. from a just like strict programming standpoint I think there's it actually even if you really really are diehard there's a huge amount of basically tech debt you're going to have to have because we just turned this thing that was sort of a unreliable invariant of the virtual machine into a null pointer. And like that is like a very weird that that means you have to go change all your code, right? Like it basically means everything's wrong. Like half of your audits are wrong now, right? So I think from a very practical standpoint I actually think it's a really hard thing if you use UST anywhere in your code and that's literally every

application. Yeah, I know I definitely agree. I think there's a lot of like secondary and tertiary effects there that haven't fully been thought through. I'm very curious as to why they didn't just have a UST but instead of mint and redeem mechanism just have it be like a maker die system where you know you just have some external collateral at least then a lot of that code can be transported over. But then that begs the question where is that collateral going to come from because who in the right mind would have the confidence to actually create and mint this stuff by putting up good collateral on this new chain where we don't even know if it's going to be a complete dumpfest or there's some residual recovery value.

You know, I would say that you know in their in their favor at least there probably is some value residual value to the block space to this L1 chain even without UST. But how much is it and whether or not there could be enough confidence restored that it can survive without being completely dumped again to zero as people's final exit liquidity you know as a way for people to recover some amount of value because they're already scared shitless that this even happened. So really hard to say. What my proposal to them was which also Do refused to take the call is that I think that they should try and favor one what's fair two the smaller holders and three the folks that are least likely to dump. So whether it be by ignorance or whether it

be by true belief there were some people that just never moved their Luna or never moved their UST throughout this entire thing and just held it from the point at which it depegged till now and the address has never moved the coins. I would say that that's pretty strong hands. Whether it's stupidity or whether it's just actual belief either way indistinguishable from each other you maybe want to favor them too, right? And then on top of that you probably want to favor people even who are buying during the hyper inflating period but where they didn't realize there was recovery value, right? So even if they're buying lottery tickets maybe it's still fine but like once you announce that there's going to be a new chain or a new proposal to airdrop people. Well then there's a lot more speculative demand, right? So like what about doing some

kind of timestamping on the announcement of that that there could be this new proposal and then just anybody who was buying it before that maybe gets something a little bit more than everybody who was buying it afterwards, right? And then there's also political questions on how to deal with the exchanges, right? Because if they're not favoring the people who bought it during the hyper inflating period then the exchanges aren't happy because their customers are unhappy with them, right? So it's just like if you if you piss off the exchanges too much then they might not list your new coin anyway. So you got to throw them a bone too. So I think that there's a lot of political considerations now and that you know all these different factions all holding all of these different you know classic coins you know they all want more of the

pie from this new coin and I think figuring out how to divide it is a very tricky situation. But I think at least they should hear me out, you know? I mean I mean after all this, you know? But Yeah, well all all of that complexity is why bankruptcy law was invented. And so I guess this going back to like speed running finance. Yes. Where we're discovering why some of these things are so complex. Yes, definitely. We're definitely speed running finance where we're discovering things. Which layer one's going to have bankruptcy law as part of consensus rule?

Or for a failure. No, which just like let's just let's just let's just take Yeah, well EOS did it by forking out Block.one first which in in theory TFL is doing to themselves here, right? But I'm curious like if if you were to guess of the existing chains that live and have you know, greater than a certain greater than like a billion dollars of TVL. Who do you think who do you think will be the first to be like our differentiator our differentiator is going to be we have bankruptcy law built in for for like settlement of these things. I I've been looking for UST as a protocol, right? Like yeah, I I don't think I don't think that's I don't think there will be a protocol that does that.

It's too narrative breaking though. It's just too narrative breaking, yeah. I don't I don't agree. I think there is a way to do M&A protocols and equally so I think there's a way to do a bankruptcy. Not for the layer one themselves but for like For underlying applications. applications. I I think it'd be too hard to understand the app semantics. No way. No way. It's too hard to understand the semantics of an app. I'll put I'll make my prediction in this bear market someone will basically build that. Even though it won't be called that it will be like you know, it's kind of the way Uniswap was not called a automated market maker when it started, right? It was just called the swap thing and like people didn't understand it and it's like still it's exposure is kind of complicated to most people who who

haven't thought about it, right? So I think there's going to be someone who figures out some protocol that like recycles dead DeFi TVL and is able to kind of like rehypothecate it and then redistribute it to to more live protocols. Do you do you think it would be too narrative breaking to even have that as part of the white paper because people are going to read it and think what wait a second so this thing can fail? Really? I I said this is why it needs branding. This is why you need this is why you need a unicorn. No, no, no. But this is just something where like if there's a protocol that's dead and the token holder is like we want to get rid of it instead of the TVL just sitting but then but then what you create now is you create lobbying, right? Like now

suddenly there interest groups of like oh we deserve the TVL. Like this is this is I I the protocol the protocol could literally just burn it. The the L1 can just take it and burn it into the L1. Well, but how is it if the if the thing is dead then it's already effectively burned, isn't it? Not but it doesn't it doesn't reward the L1 token holders. It doesn't reward the validators for for keeping that state secure, right? In spite of the fact that it's not generating any income. So like there what I'm saying is this will happen. There will be some smart kid who does this but like it does it for a totally different reason like oh I made a memory allocator that's very not fee agnostic and it knows how to it knows how to do like malloc coalescence really well. Oh actually oh lo and

behold that actually does this TVL refresh thing. from this are going to reverberate and hopefully we get stuff like that which would be cool. All right. Well, speaking of reverberations last thing that I want to I want to end on is you know, many people have said that this is the end of the cycle. That the collapse of Terra will be remembered as the kind of the the the last gasp of the uh 2020 to 2022 bull cycle and that we're now going into a bear market. And obviously you know, lots of assets are down from their peaks. Bitcoin is down peak trough over 50%. A lot of DeFi tokens are down 70 80%. L1s are down about 70%. Alt ones I should say. It's been a pretty brutal

market and obviously a lot of it this year what who's that? You know, it's comfy, Tom and I Milady holders. Okay, that's true. Actually I heard this I heard this The the Milady Milady Miladys are going close to all-time high in ETH terms. NFT floor prices have been doing pretty well. They've been doing pretty well. I actually heard that during the during the Terra downfall that actually there was an enormous amount of trading volume in NFTs on Terra. Because of course like people couldn't get through wormhole while Terra was falling apart. And so you saw tons of as Luna was hyper inflating people just started buying up NFTs whose prices were going up like crazy which is exactly what you see in a bank run as people start dumping currency to buy commodities. And so

the effective store of values were Terra NFTs which I I've also heard are looking for a new home. So um you know, we'll see we'll see where that ends up. But, but anyway, so to to finish the point, um you know, obviously a lot of the downturn this year has been driven by macro, but it seems like Terra kind of gave an extra nudge to the bearishness around crypto. Um so, how are you guys um and Kevin, I I you know, given that you're a trader, I'm sure that this is you know, the the the the water you swim in. Um how are you thinking about where we are in terms of the cycle?

Yeah, you know, I think um overall, at least historically from what I've seen, uh the more severe the drop, the shorter the bear market uh uh you know, uh um lasts. And I think a lot of it is because, you know, when everybody's kind of on the same page that this is the bear market, that this is it, right? Then it's just like there are no new pessimists to sell the price further down, right? As opposed to you look at very like um really long bear markets, right? Like for example, after the 2017 one or after 2013 one, that was even brutal. And it's because a lot of that was just the digestion of hope. As long as there is hope, as long as there are some bulls, then, you know, there are still some uh some people to be convinced that it is uh that is a bear

market and they will then sell at some point. So, I think the bear market bottom is only reached when basically there's no marginal seller left. Everybody is already um you know, feeling like completely bleak um and there's no hope left. And for the people who still holding onto the coins, um they're so die hard believers that they will never sell at any price. So, basically during every cycle, you you you know, all these coins move from weak hands to strong hands and there are some that are so strong that they will just never sell, which forms the bottom. And then there's the rampant pessimism that it eventually dissipates into optimism. So, I think, you know, for this, I think it's actually good that it happened now, that it happened so severely, because, you know, I was thinking that if it happened later, it'd be another 9

months, it'd be another 18 months and it could it could even take like multiple years. But now after this thing, I'm thinking, well, maybe not not as long, you know, maybe like 6 to 9 months is enough. Um but that being said, uh we're not actually in control of the markets anymore, um you know, in crypto ourselves, because the the Fed itself, it you know, it could do whatever it wants. And everything so correlated to equities, um hopefully this decoupling, you know, we thought there was going to be decoupling with the crypto was going to decouple up. It decoupled down, right? But at least there was some kind of decoupling. Blew out all the um correlation algos. So, now all those guys have to rejigger their algos. They're not going to hold things as tight in a band uh to equities. So, hopefully the decoupling's already

happened. We do decouple from equities even further and maybe another 6 months. Now, if that's not the case and we're still trading basically Fed with whatever the Fed wants to do, um then, you know, it's just like we're just going to follow the rest of equities and and uh you know, that'll be un- until they capitulate and then it's more about macro, about when, you know, they're going to they think uh either inflation has subsided enough or the market has dropped enough because of like the, you know, the the Greenspan-Bernanke put, if it drops a certain amount, um then at some point they just capitulate and maybe we all die by inflation. So, you know, all those are possible. So, you know, either the Fed or hopefully very soon, because I'm I'm actually a bit more on the optimistic side, but I would say at least in the near term, a lot of

funds blew up, so their uh LPs are going to be redeeming out of them. Uh so, that's going to cause a lot of force selling. Um you know, initially there was a lot of force selling because of people defending their toxic margin positions uh by selling good assets. Then there was a relief rally because anytime there's a lot of force selling, you know, there's a bounce back. And then after that, uh now there's once again force selling on the longer cycle, on the monthly, maybe one or two month cycle, uh where funds basically unwind and close shop and have to sell assets to redeem out investors. And then after that, we'll probably another relief rally. And then hopefully, you know, hopefully then, you know, it'll be good by then.

So, it sounds like what you're saying is that the pessimism is cause for optimism. Uh yes, exactly. Yeah, I mean, when everybody's uh riding the high of mania, there are no new pessimists at all, right? Uh there are no new optimists at all. Everybody's just max long and then like then just the tiny little prick of the bubble can just completely crash everything. So, same thing for uh the bottom of the bear market. When there's no new marginal sellers uh and all the people who hold it will never sell, then, you know, price can only go up. I mean, one thing that struck me about this whole uh this whole Terra collapse is that, you know, obviously everybody kind of knows who was exposed, who was talking about it, who, you know, owned Terra on the books.

Um everyone I have talked to says that they're okay. And I'm like, okay, somebody must be lying to me. It's like, I don't know who it was. I don't know where this $14 billion of USD and 30 billion went. the same thing to Robert yesterday. I was like, every single person I asked if like they had any Luna or USD exposure, like, no, no, no, no, I sold Luna for like 40X, Exactly. Everybody tells me that they are totally fine. I don't believe this. I just don't believe it. that's true. No [ __ ] way that's true. Like Yeah, I think there's no way that's true. There's this collective delusion amongst a bunch of people. Uh and like the it's a game of chicken until until we read the news story in Bloomberg.

Yeah, I would say that there's no way that's true, but what would be even more harrowing is that if it was true, because then it really means that the insiders just dumped on retail, but they got out unscathed, right? That would be even worse of an outcome. That would be absolutely devastating for the space. Retail's not coming back for like 3 years after that, if that's the case, you know. Yeah, I mean, I I think that there's definitely an element of that, right? Like who was holding Luna? Like who was watching curve pools? Probably the sophisticated investors, right? Who really understood the death spiral? It was sophisticated investors. Who were the first people coming out of Anchor when the when the rush started for people to leave Anchor, who were selling out at, you know, 95, 90 cents?

Uh it was sophisticated investors. It was not retail. Retail were almost certainly the most likely to have held to the bottom. Um so, I think I think that's true, although we I I did hear of one fund that did admit that they never sold USD. But only one, only a single fund that I heard of that that didn't that admitted to holding onto USD. Everybody else, um it was it was it was an Asian fund. Uh everybody else I've spoken to claims that they're totally fine. It's like, oh no, no, no, we're totally okay. It wasn't a big deal. We're all good. CZ said that Binance never sold. They held their entire stake up and down to zero, basically. I mean, I can believe that. I mean, for Binance, it probably wasn't material to them.

forgot they probably forgot that they even had it. It was part of a fire team that is somewhere in cold storage. They don't even know how to get it out. couple days ago, CZ sits down and he's like, wait, so we actually own this stuff? Like what happened? Like how do we get this? Well, he did he did write that tweet that was just like, I I I never even heard of this thing. It wasn't even on my radar. That's great. He's like, oh, this thing is giving me so much stress now and like I never even heard of it. Like who cares about USD? Wrote something like that that was like amazing.

Yeah, CZ, he just lost from the peak, you know, like a a yard, you know, and he's like, nah, not a big deal, you know. There's plenty where that came from. Well, amazing. Um well, it's been a harrowing week and um I think we have uh in in in in part, we have you to thank for the sanity that has finally come over crypto. It seems like it's going to be a bear market for a while, uh which means things are going to be a little quieter, thankfully. Um and uh but we'll have a lot more chopping up to do as uh as we as we get into this next cycle. So, One thing I really miss, uh I wish we had talked about uh a little bit was the staked ETH peg, cuz like actually on

this show, like about 2 months ago, I was like, one of the big risks that we have to think about is the staked ETH thing. I think uh the Luna cascade the into that was a very amazing thing to watch on chain. Yeah, there's there's so much to untangle about this story and obviously an hour is not enough for us to really get to the bottom of it, but there yeah, there were so many things and then of course there was the Tether scare and there's there's there's a lot more that uh so, maybe we'll do um You know, what what was that what was that protocol that hard coded USD as equal to a dollar? They just hard coded it. There was some protocol that did that.

Oh uh Kava USD. Oh, that's right. That's right. Yeah, and USDX. face palm on that one. That's a big face palm. Yeah. Yeah. They were so confident. They they you should give all of Luna V2 to those guys, cuz they're really confident that the peg would have held. I mean, those guys uh you know, those guys will believe anything. So, give them all the Luna V2, you know. Those are strong hands somewhere there. I mean, and they're a Maker system. So, they they they they could accept it as collateral, you know. Oh, okay, there you go. But I mean, look, to be to be fair, like how many on-chain protocols are prepared for global settlement for Maker?

You know? Probably none. Like if Maker triggered global settlement, probably half the things in DeFi would break. So, That's fair. That's fair. I I think like it's it's greater percentage than you think though. I I I do think like the Yearn ecosystem has a bunch of things built around it. And but I but I agree. It it it in the sense that like non-ETH based CDP systems, no one no one even cares, I think. Mhm. Yeah. So, anyway, um so, we do we do have to wrap. Uh but uh Kevin, thank you so much for coming on and sharing with us your your wisdom and insights and I hope you're invited to a lot more parties going forward. Uh I appreciate that. Yeah, send me the invites and uh Hey, Kevin, remember, I invited you to a party before uh you did That's true. Tarun

did. Tarun did. You know, when everybody still hating on me, Tarun invited me to a party. So, there you have it, you know. So, I appreciate that. Appreciate that invite and uh send me all the invites and uh really appreciate you guys having me on the on the podcast. It was a pleasure. All right. That's everybody. All right. Peace out.