How Did UST Collapse? | Jordi Alexander & Mika Honkasalo

Transcript

[Music] [Applause] all right everyone we have a really important episode of empire today today we are sitting down with jordy from salina capital and mika xperify one of the smartest people i've ever met in crypto um and also a writer of a very good blog out there that you guys should check out today we're talking about ust and luna and tara obviously probably the most important thing going on in crypto today this is not an episode to dance on anyone's grave this is not an episode of pointing blame at anyone i think we're really just here to revisit like how the hell did this happen what happened and really more importantly some lessons

learned and and really where do we go from here so just to kick it off maybe uh mika if i could pick on you for this really broad general question i'm what did happen here like this this week aside right not talking about this specific week but what happened here how did we get here how did this thing ust and luna get so big yeah i mean if we look at the sort of current problem um the stablecoins have been growing very a lot over the past like a couple of years it's the use case that tends to go only to the right and up and and there's a few different models of doing this and and the luna and terra model is perhaps like one that's the sketches or like the most complex in

terms of how you justify how it's able to maintain its peg particularly in adverse situations the market we've been in has been sort of very positive and very forgiving on sort of the downside risk before the last couple of months and i think the way we've got here is that now we're in a different type of market than we've been before uh and luna's in like a really different type of market than it's ever been before at scale and uh what we saw essentially was the first time that it's really being tested and sort of having to and failing that process a lot but it starts with very simple things i think where they're they're just more sellers than buyers right and that happens every now and then to stable coins and the stable

coin goes off its peg but really when when that happens the arbitrage mechanisms kick in and i think it's quite obvious that here the luna arbitrage that how it's supposed to maintain its peg it sort of didn't kick in and immediately we went into this process where we fall back on trying to find these big buyers we're able to keep the market price now uh good but uh not really like uh the algorithmic side of the luna system didn't really like ever really take over here and and i think that's sort of how we ended up where we are right now yeah definitely there is this um this concept of uh getting to getting too big to be able to manage and as this thing grew and grew and like a lot more money came in that was not

necessarily you know convinced about the ecosystem they were just maybe trying to get some anchor yield um the size of the door to to exit was not changing and um at some point what happened over the weekend is people were withdrawing causing other people to get scared wanting to withdraw and then the mechanism like mika said there's like a mechanism in place supposed to hold the peg there are some constraints around the mechanism we can get into the details later but you know there's like a daily cap on how much can be absorbed there's also just a cap on uh you know how much liquidity there is for luna which is the other side of the equation because the the arb to get out is through luna

and that kind of causes this cascade and of course the bitcoin reserves was supposed to be one of the defense mechanisms in place that takes time and i think uh we just didn't get to this like long-term state that could have possibly provided a bit more stability um so yeah i mean ultimately it grew at a pace that was very rapid and um you know we really really want we're not able to get to the long-term state i think so i want to ask both of you um there i mean how did it get this big there was a number of criticisms around

obviously this people use the word ponzi liberally in crypto sometimes it is unfounded because the word ponzi is very you know i think people use that liberally and i i want to ask you guys like juan do you believe it was a ponzi and two how did there's a lot of institutional capital behind this project um you know using ust and farming it on anchor and i understand the yield is pretty enticing and so you know we're all yield farmers in crypto but when you see a ponzi it's sort of like you don't want to be a talib turkey i've played algorithmic stable coins before esd dsd-based basis when you understand at some point these things can collapse pretty rapidly so i want to maybe start there hey do you think this is a ponzi if so why

and then what what did other people believe that wasn't a policy to put so much capital risk like i don't necessarily view it as a ponzi uh although there are like elements of that in it i would say that the biggest misconception is just like an optimism around the previous stable coins you always have someone sort of absorb the downside risk and here uh you have luna holders who do that but you have something a bit more than what esdn these other algorithmic stablecoins had which is you have this blockchain with like a lot of things apparently happening on it a lot of economic activity that you can extract rain from and that economic activity is the one that really like backs it and i think there was like too much positivity around

is that economics activity sort of real and and is that something that actually makes people really excited to hold luna when there is a situation like this where you're going to have to like mean more and you you're going to struggle with the peg i've been i've been accused of using the word ponzi very liberally i'm definitely one of those on that side um i did use the word ponzi to describe ust i don't mean it as a scam like someone is trying to rock pull you know there are actual scams out there um and i i talk about there being a spectrum and um you know you have big connect on one side and things like hex that are kind of close to that side and then on the other side you know you kind of have like more sustainable um ecosystems um

i i think it was it was a ponzi trying to not become a ponzi basically when you're in the game of creating money you want this like incredibly difficult end state to be reached where people view your coin or your token as money as like as the end state like ust i can get paid in ust and i can just spend ust and i don't need to think about converting it into something there's nothing to convert it into it's just ust and i think you know people also have the same view about bitcoin or ethereum and those are also on that path of trying to get into this you know and state where people just view it as base money and they both have like large communities

um viewing it that way so i think ust was trying to become another one of those and they were executing um well enough that they managed to really escape you know the usual constraints of like one two billion dollars and they got to like tens of billions of dollars because of just how well they were executing on that path but ultimately if you don't manage to convince people that they don't need to convert out of ust that ust is the money um then then things can collapse it's kind of what we saw yeah i think that's a really good observation my foregone conclusion after participating in a lot of these like esd dst and base base coin was

you know pure game theory kind of doesn't work uh you need to have like utility usability drive stability and i think that speaks to your point jordy which is um i think tara started as a project and said we're gonna have this wallet called chai to support ecom like support commerce and that felt to me like a different approach in a pretty healthy go to market which is if you can become a usable stable coin in korea and other markets then people want to have ust if you get discounts if you have a number of perks across like a merchant network and then i think that worked reasonably well uh up to a point and then it felt like

kind of like over the last 12 months it just went from being with anker in particular and mirror it just became way more speculative speculative than and a lot of large players like just using ust to farm and get that sweet 20 apy on on anchor which is it's not sustainable but i think it's not just about it being speculative because there's a lot encrypted that's speculative obviously so ust took the approach that a decent decentralized stable needed utility right and a lot of the other decentralized tables that you mentioned santi haven't taken that approach and the utility they thought was going to be chai but i don't think anyone's really spending that much ust so yeah it turned into so anchor was this like was the was the best app for that for that

and i turned santi's comment into a question of like did anchor cause this flood of capital into anchor did that cause ust supply to get too far over its skis and did that have any sort of impact on what we're seeing today absolutely i mean that was the the main i think look i don't think it was orchestrated i think it was by accident if you if you kind of look at the history of this thing what happened is they had this during the whole defy you know bull run and nobody cared because 20 yields were not attractive and so you know for a lot of last year anker was not necessarily some uh focus of the ecosystem at all and then has like d5 yields went down

and you have this stable yield that just stays put at some point i think unexpectedly the use case of hanker became so large and the senior age that they were making by you know being able to print ust for real money um became so sizable that they just let it keep going so in terms of the yield itself being unsustainable i'm not sure that that's what caused this current issue i think it might be more what you said um that basically it just got very large and uncontrollable and unable to take of supply i would say that utility is uh there's sort of a maybe a mix here which is that utility brings some sort of stability to the stablecoin but i think

what we've seen actually is sort of the opposite utility brings demand but when we're talking about a stablecoin it seems to be like the stablecoin is only as good as the thing that backs it and what is that like collateral and here where then it's the sort of economic activity on luna and the willingness of people to hold luna through it like these muting periods especially um and versus something like die where it's so straightforward where it's always backed by collateral so you never have the issue of really going off of the peg at least on the downside like there are nuances there that need to be thought of both ways actually but you don't see that problem on the upside at all because when you go up and the demand is too high for the one dollar price to be

one dollar you can just always mint more and put the price down so it's a very easy problem to have you can react to that uh volatility but you can't really react to the downside one in the same way so i would say that like utility is actually the wrong way to think about it in terms of stability utility is just something that creates demand but it doesn't guarantee anything about stability so let's talk about the collateral for a second here initially it was just luna backing this and and maybe just why would people believe that luna has any value in the first place it's question number one and then question number two is obviously most recently uh lfg uh decided to buy all this bitcoin um to as collateral of course the criticism there is well

you you're using even bitcoin is a very volatile asset that can swing 80 percent through cycles so it puts into question the actual um you know the actual like soundness of that collateral in terms of collateral i think when you have the chain backing it it's this nebulous concept because who knows how much a chain is worth um and it's fine when it's small i think at some point because of all the anchor money coming in they were able to raise a lot of money um through their reserves and through like open market operations and they were just deciding you know do we do we buy stable coin here which is kind of you know this concept that some people like some people don't like i mean die for example is obviously

backed by usdc and then what's the point of die like there was this kind of like question to be asked and um you know they took the approach that we can just use bitcoin as uh the most decentralized form of money to um to back things and in a way you can see it as like they started being long bitcoin um in a leveraged fashion that can get liquidated if um if bitcoin price drops for example that's not exactly the case because it's not like they're fully collateralized by bitcoin you know it's just a small portion of um of the ust but there is that element so you know the upside was there i think it was a bit of

a gamble i mentioned that word gamble and i got a lot of heat for it but when you're kind of looking at end states and you say well if it three x's then we're over collateralized and everything's fine no one's ever going to try to attack us because we're going to have this like war chest of you know tens of thousands of bitcoin and you know in the year 2023 2024 that bitcoin could be so valuable that like our our stable cone is is really backed um but yeah we never really got to see that long distance uh upside because the you know the macro environment is so tough right now that we just got the downside let's uh i mean this is kind of a reminder like everything's kind of a social construct so

you look at it us dollar and says it's backed by kind of the faith of the us government which has you know this this does remind you an awful lot of fiat right print and debase to remain solvent bring more people in until it breaks again and then continue to bring more people in and more capital that's my point like i think like theoretically these things are pretty fascinating experiments but time and time again we see that they haven't really kind of worked in crypto because we are still in a very early fragile state of this market which we can talk about like there are rumors of market manipulation there are rumors of folks seeing an attack vector and and exploiting that um d5 is very adversarial environment so

maybe if we can transition a little bit to that and and understand amika you mentioned earlier that kind of the mechanism didn't kind of work so let's dive deeper into that because there are kind of rumors out there circulating that there was uh someone out there came out pretty well and profited a ton from this from this fallout yeah having thought about this a little bit just uh who who the attacker was and and what they really did and and how horrible that was i sort of come to a conclusion that ultimately if you think about the big picture of luna and this system sort of going forward in the future this was ultimately like relatively a tame attack like you you're starting with this uh when you were looking at the unchained

data you start with this 85 million swap that starts to put the curve pool into imbalance and then slowly the curve pull starts to get more and more into imbalance and then you start seeing that okay there will be like a pretty big war here i think that's where people underestimated they thought that if we just went off a peg a little bit we've seen that before that's fine i don't think they really realized that the market started to be very very imbalanced there and that the amounts to protect this will have to be very large and that it would be like a real real issue so yeah i think it it was it ultimately the way i think about the attack is just that that it wasn't that serious you would expect something much worse to happen in the future at scale the market conditions could be much more

adversarial against you we could be in a much longer bear market with much longer draw or harder draw down so the fact that it couldn't sort of really survive this uh in its current state wasn't really to me like a vote of confidence on algorithmic stable coins because uh whether or not someone made a lot of money but it's still it's still a very small attack by someone compared to like the things you could imagine in the future these systems haven't been able to take so does this feel like i mean there's there are a lot of kind of conspiracies floating around so there's everything from like there's a good chance that some very large trad five fund put on a massive bt btc short used it to break the usd peg as a way to realize the gain and um there's there's uh i think charles

hoskinson just shared something uh on twitter this this morning about blackrock and citadel borrowing a hundred thousand dollar 100k bitcoin from gemini uh they swapped that and to be uh that into ust and this was like all a lead up to a big attack then there's something that's maybe a little more reasonable like um you know there's just some liquidity that was kind of pulled from four pool um and it wasn't a citadel but some maybe just a fun taking advantage of an inefficient market so what maybe jordy i'd ask you like what seems like the likely situation here um i think it's extremely unlikely that citadel and blackrock are getting it makes a good story jory it makes a really good reddit wall street bets citadel is kind of like the

darth vader of the ecosystem um but i am extremely confident that that's not what happened uh now whether there was some defy native whale that found an opportunity to start profiting and and saw a weakness kind of like a george soros style uh it's possible um it's kind of 50 50. i can also see the case where there's just this cascade of people being worried because other people are worried and and that just kind of builds on itself because when this whole thing started over the weekend i was watching extremely closely at the beginning we just had maybe like 100 million 200 million leaving um anchor and around 300 million uh people that i know started

buzzing and just saying okay i'm going to take the 30 40 bips hit at the time which was you know it was like 99.7 on ust and i can just imagine that cascading where it's like well okay now it's one percent like and it's two percent um i think at some point yeah just just the mechanism between like luna and ust and and what how that works um started to get poked out in ways that were only theoretical before and for the first time became practical like what happens if um and i was i guess a bit surprised that there were not contingency plans really in place and it all kind of felt very

haphazard in terms of how do we respond and like you know jump trying to possibly like um provide some liquidity into the different like curve pools or on finance um and then we just had so much fluctuation that i think once the trust got lost it it was hard to put it back in this is like a classic bank run which is it's sort of like there comes a point an inflection point that everything cascades dramatically um we saw the peg drop to like i think it was 75 or like kind of mid like 80 and then it went all the way back up to like close to 90.

and then obviously after that it just collapsed to where it is now which is what is it 30 40 cents now um but to your point jordy i want to like maybe dive deeper into maybe two questions if you're an investor like what did you have to believe because you always kind of stress test these things and like you do simulations hopefully like why do you think so much institutional capital was just kind of playing in this talib turkey musical chairs game uh did they just never believe that this type of bank run would have been possible um like how concentrated were these pools where if one large fund like yanked

it would have caused like this massive like in like degradation of trust that it spiraled out of control or was it like a very small kind of like was it i'm just kind of curious to understand if you're a fan like why would you place why would you play in this system in the first place i think you know there's two approaches that funds take and the the type of fund matters if you're very very safe or institutional you're not even going to touch it you're just going to say like this is not fully backed theoretically there's some way to get out but i don't want to touch it and then you have sort of like this gray area where you want to profit if there is like an edge

um and i would put a lot of funds in this category like all the alameda jumps you know different different funds where you basically look at it as an opportunity to get out before other people get out as long as you understand you know where where the exit is you can enter the building and know where the fire escape is and you know still get some guild um and and that's uh i guess to the point of it being an adversarial environment that's one of the things i like the least about d5 is it is this sort of you know some people have more information than others some people have more technical expertise than others and especially with an app that just lets you click a button and deposit your money as a savings account

you don't necessarily have the level of sophistication to understand where the exits are and i think what we saw was that most of the wallets did not exit and most of the really large institutions exited because they were the ones really kind of on top of it so just answer your question as a fund it makes sense to participate if if you understand how the structure is um but it is very adversarial and and of course like you know retail can often be the last to um to move i think as a fund if you really believe in this you sort of do have to believe in only really two steps here which is the first one is that there won't be any

short-term selling so large that you won't be able to stop it and stop the beginning of a bank run and the second is once you stop that that the luna token holders essentially you'll be able to sell your ust back to them and and create this arbitrage which uh now hasn't really existed people have used the words of incorrectly but you imagine that you're able to play this arbitrage like just over and over again and it's completely fine but the problem i think that really comes from just the fact that you can look at the numbers and say that okay the ust supply it's over ten billion fifteen eight fifteen to eighteen billion whatever and then you look at how much were these uh big players right now at the liquidity event able to absorb and it

wasn't a big it wasn't a large percentage of that so uh if you you didn't really have to imagine a lot of the supply really moving until you realized you would be in big trouble and once you were in big trouble then you get the cascading effects very quickly so i think it sort of is a weird underestimation of how much money can move and how much on your confidence just hold the peg and hold the line and make sure everything's okay and then being able to exit that position down the line again once you've taken that arb for yourself mika do you think um when you look back at something like bernie madoff and i really don't want to i actually i don't love using the word ponzi here because something like bernie madoff is a ponzi scheme like this feels uh different to

me um it's kind of maybe like intentions uh behind it good intentions versus bad intentions um but bernie madoff got on he was running that for like 17 years until it got and the reason it got uncovered is because the market absolutely shut the bed in 2008 right and so uh mika i'd i'd throw this back to you of how long could this have gone on and is there a way this could have been successful if the market wasn't in the condition that it's in right now where you know equities are down 60 the fed is yanking interest rates up the cpi print again today exceeded expectations like could this have gone on longer uh if all of this stuff wasn't in the condition that it's in the answer is yes and i think when you're thinking about the success of

luna you really have to separate it into short term midterm and long term or short term it's just are you able to find buyers to match the sellers at any given moment and that's the short term game you're playing you might actually like succeed at this right now get the peg back everything's sort of semi-okay even though the reputational hit is large but you might win that game then in the midterm the game becomes a lot more like okay if the crypto market and the market overall is very negative it's probably more likely that you would see this kind of bank run at some point down the line so uh yeah you may save it today but you're not able to save it for three months consecutively from this moment i i would imagine if the market is very poor even if you save it today

you're not going to be just able to save it down the line in the same way anymore so you need that positive market really over the midterm to make it successful then in the long term it really is this question of whether or not it's possible to build such a robust economy on a blockchain where that economic activity without significant collateral itself uh is so useful and sort of so uh highly valued that any stablecoin based on uh that activity as collateral really is able to succeed so i think in all these short term midterm long term you you have very very different scenarios that could play out and and i think they sort of would have played out in each variation uh like just depending on the global macro

environment basically so i'm curious like um what does this mean for the future of like decentralized stable coins i kind of stopped playing in these games after est and dsd for me that was just like the it just was clear that it was it was very difficult to pull off these these things and i think it's very adversarial um but mika you talk about like and jordan you also mentioned this like you were kind of surprised that there were no kind of contingency plans in place by the foundation or just a group of that um i mean i'm sure that if if you're part of the tara team like you would have thought through these simulations um what kind of contingency like if you were to build something like tara again and i'm sure

someone will try because this in crypto people control c control v all the time like what kind of contingency plans what kind of different architectural design kind of things would you do differently or would you just say this is not possible stop doing it um well first of all we've had the control c control v right we have tron tron dao you know this this stuff just came out um we even have something on near although it seems to be like not as aggressive so maybe uh they're not trying to um create you know this um exact flyable effect that the luna had but maybe let's take a step back

and just talk about what is the vision for decentralized stable coins and then we can think about like will people keep trying to do it so just probably speaking you have centralized stable coins usdc and you know usdt can even possibly be put in that category where you have like a real world bank that is physically keeping the money supposedly um to be able to exchange back and forth and uh of course like with the ethos of crypto and the cypherpunk ethos that we don't want to deal with bankers and and that kind of like institutional side we just want to have like a free transparent you know unchained world so um you know there's a lot of believers in that and that's why people

keep trying to create something that doesn't rely on an actual bank account to do a conversion and we can have a stable i don't know stable but like a fiat kind of pegged value system that we can interact with and use so the vision obviously is something that's appealing to many people in in terms of um the types of things that we've seen we have the fully collateralized and over collateralized which are the die maker type of model which are more secure but also like very inefficient capital wise it's very hard to create more dye you know it needs so much backing to be

able to do that and even that has a lot of issues with like you know the ways that things can get liquidated um and then we've had these um copycats now of luna that will probably take this as a warning and i imagine that they're not gonna you know play it as fast and loose given given what they've observed um although you know justin's son might might surprise us because he likes to um you know uh be creative but i think what the future holds is uh you know the next thing we'll we'll probably look at is something like frax which is a hybrid model that um

has more ways and a kind of more complicated design to keep its stability but we'll have to see if that has the right combination of you know decentralization stability and scalability that um the ecosystem looks for jordy what's the like if you're if you're a betting man which i know you are what is the like likelihood that something like another decentralized stable works in the near term like something like frax so now because to me if you santi mentioned a bunch of these decentralized tables it feels like we're just like okay didn't work on to the next didn't work onto the next but the scale of these things keeps getting bigger and bigger and bigger and i mean tara just brought this uh i'm looking at the market cap right now it's like two

or three billion it was 40 billion that's the size of lehman brothers when they went down was that was 60 billion uh bear stearns at their height was 25 billion right so this the scale of these things is absolutely massive now so do you worry at all that we're just kind of on to the next on to the next and they get bigger and bigger and at some point you know the scale of these things is like the ripple effects are going to be too strong so i'm very confident that that's not that's not the case i think this this was the sort of seminal moment that will go down in in like the you know the crypto history at the point at which we stopped really believing that something that's not collateralized can work um

we might so frax is semi-collateralized it's collateralized to a certain extent and then it allows itself to get less collateralized as its um as its value kind of grows let's say so uh it's a very well thought out model that might break but um is not as aggressive but also has not seen the kind of success that you mentioned like the you know the huge you know 20 to 40 billion dollars which ust has i will put that down to two things one is you know dokkan um might have you know possibly failed in this experiment now but he's clearly an extremely capable operator that has made many many friends in powerful places that were able to

kind of you know really support the ecosystem and and um you know spread it across different exchanges and you know create this like liquidity that was needed to even get it to this point um and then secondly you know this anchor idea sort of out of nowhere i think appeared that drew a lot of people in because what we don't realize as crypto natives is you know if you just walk outside the street like 99.9 of people don't even know what's happened you know unless like you're living in like a financial like uh a hub like in the city of london or something i don't think people out there even realize the kind of like huge ripple wave that is going through the crypto market and

a lot of those people um are the types that would use an app that says like you know you can get 20 this is like a stable coin and um they can buy in there's such a large gap between like the crypto native world and the kind of more retail world that was bridged by by like this this type of savings account um that you know it it did create this this huge flywheel i don't think we're gonna see like an 80 billion dollar one and like 160 video like i don't i think i think we're done uh because this this story will always get pointed to i don't know santiago what do you think about that there's a great quote by someone says look but esd and dsd it's like there's in-gang fighting

it was only degens so you know and this was different because you now there's civilian violence people got hurt a lot of people got hurt and i think um we'll see how regulators react to that i think there's going to be some regulatory action or or some type of regulator's going to come out and said hey we need to stop this because people get hurt and it's not just gangs against gangs and and i think you're right jordy like you know i don't think the space is kind of ready for for this stuff it sucks to see all these people not properly understand how risky these experiments are um and it does put in the question like we are

creating better on-ramps and wallets and experiences for people to play in this decentralized what is still a wild world like wild west and we need better guard rails and disclosures and disclaimers around the level of risk like if you got to ask yourself like you don't understand where the yield is coming from you are the yield like you're earning 20 on a stable coin is paired up like it's oxymoronic like it's just it's too good to be true in many ways yeah but so was getting a five dollar uber ride in in new york right today it's fifty dollars that's just just a market none of these businesses would have ever gone off the ground unless you're in this free kind of cheap money like over the last 20 like over

the last 10 years you've been in this qe environment like without vcs subsidizing that free uber ride none of this would have happened no i agree with you i'm i just push back i don't think the 20 on anchor was the problem 20 on anchor was was a marketing spend and it yeah basically that's a clickbait and that's what i'm pushing back on like like okay like i understand that you need to reward people but like people don't rationally think this way like they see 20 they're like oh it's a stable coin like you know it's what could go wrong right yeah here let me let me put myself in a dangerous seat here which is almost defending some of this what would what would you have done so if i'm putting myself in doe seat you got to bootstrap the hell out of this new stable coin

you're trying to do everything right you're you're putting a bunch of dollars into like the um the floating rate on anchor should have been like probably i don't know five or six percent or something like that maybe even lower they put it 20 in the same way that uber a ride cost 50 bucks a day but they're at five dollars to bootstrap demand and like obviously doe was completely crazy at some points on uh on twitter like coming at anyone who took him down but like he was trying to bootstrap money basically so the question for you guys is like i don't i don't know how do you approach it differently when you when this the vision and the scope of your project is like so grand here mika maybe throw it to you yeah in a bull market it's easy for us to and this is maybe something that

industry players big investors could do better is really be uh sophisticated about and rigorous about the mechanics and thinking about and communicating those and not packing things that they know they essentially know that may have holes in a way but it's just because you can get away with those halls during a good market and everyone's sort of having fun and and yeah it's a party so i think that that's one part that i think like just our industry could do a better job if i was in the ust position uh because and this is just a fundamental design thing like what how does how does the thing help maintain stability well it's that it has good collateral i think the what i would have done is every bit of growth and every bit of value i would

have extracted out of the system i would convert it into good collateral which is stable coins or if i don't like stable coins at least like more and more eath more aggressively you know just all the time get that thing up there's what i did it's like a frac situation where it covers 80 something percent of the thing and then we can then we can then we don't have any of these issues right then we can fight the battles on the liquidity front as much as we want we and and we'll be fine so i think it's a fundamental flaw with the system ultimately i think but that brings this down and would have done so later if not now so uh if you're going to go to this direction where you bootstrap it very aggressively you have to somehow be able to convert that into that sustainable growth and i

think the only really sustainable thing that you could have done here is is to have better and more collateral yeah i'm i'm only pushing back on this because you just can't have your cake and eat it too right everyone in crypto is like no accredited investor laws free markets free markets rule everything and then they're like something like this happens and it's like we needed more information i mean every time you know ever every time you bought ust you should have got a disclaimer or something and i don't know you just you can't have it both ways you can't have completely free markets and no no laws around these things but then also have disclaimers and information every time you buy an asset like i'm all pro innovation like i still think we need more diversity and diversified state like fully like decentralized stable coins

that is the achilles heel of d5 and and we need that and i totally agree with mika's point you needed to have more collateral like i we had dough on the episode uh a couple weeks ago and a lot of people criticized kind of saw his move of buying bitcoin as a reserve as like acknowledgement that a pure kind of like trust-based algorithmic stablecoin wouldn't have worked that you needed to have collateral and i agree with mika i think it's a little too little too late um now the question that you posed at the beginning of the episode is a really good one is how did we get to this point where it was so big and i think it's uh what mika said which is you were just kind of in a kind of

mostly like bull market environment where these things like in bull markets these like design flaws don't really show up it's really when you stress test the system where kind of hits the fan and and and things break um and when things break in this environment people get hurt and there's no bailouts there's no 1-800 number to call and i don't know what the answer to that is candidly i just think from a front-end user perspective i think more like like a questionnaire like even when you're going on ftx or like finance you need to take some sort of level of test to assess your understanding of using these products we can probably maybe beef that up a little bit

i don't have a perfect answer for that but um from a mechanism standpoint i think for me it's you know die continues to be the least sexy but i think the most resilient and proven stable coin out there and you it's not perfect because it is a lot of the collateral is uscc and it's centralized but still maybe for ax is a good one too and we should have sam on the episode talk about his kind of the mechanism that they use yeah i mean i want to say something about like these mechanisms because i talk to a lot of really really intelligent people who are crypto native you know running big funds and even for these guys like trying to really wrap your head around exactly what the mechanism is doing you know it's not enough to just like read a

explanation or white paper or watch a video like it's so complex and i study these things and i still like have like 99 understanding and then you know i i've had to recently over the last few days kind of try to think and understand where the flaws are and i found some of them and i haven't even heard anybody discuss them uh before obviously you have some some kind of complex mechanism where like luna is supposed to be a store of value for money that goes into ust because you're buying luna to convert it into ust but if somebody like buys luna like ten dollars and sells it a hundred dollars they are taking a lot of money out of the system and then if the liquidity is not there

when people want to sell and no one's like willing to buy everything at a hundred dollars and you know the price moves so like this kind of idea of like you can look at market cap and you can say well 40 billion backs 10 billion that's fine and then it all kind of hides in liquidity it's kind of what i like to say because you can't sell everything at 100 there's no buyer that's going to absorb that much and as this thing gets to like 10 20 billion dollars the amount that kind of get absorbed at a certain price point um is a smaller and smaller percentage of of the total market cap you know like market makers will only quote a certain number of uh coins at like each price level and pretty soon like that money's left the system

um you know you've had a lot of seed stage people that you know made a thousand x and exited into fiat and that money's not there then when people want to like leave um on exit themselves so these things are super complex um i do want to say you know we're still in the early innings of d5 this thing is going to go on for many years we're doing experiments it it it's very sad and like you said like we're not dancing on anyone's graves like i'm very sad like that this is happening for like everyone that's like losing a lot of money um i didn't want this to happen or like uh i i think it's it's in a way part of the natural evolution of the cycle where we're learning things okay

this didn't work let's let's not do that again i don't think we're going to keep trying to do this um we'll adapt and something new will come about and in the long run we'll find what the solutions are but we have to make those mistakes first jordy i think you hit on a really important point there and i did hear you talk about something with um jose from delphi and the bankless guys on the episode a couple weeks ago which is kind of related to what you're talking about of this multiplier effect when lunar luna goes down so just to make i want to make sure everyone kind of gets the full lay of the land in this episode can you just explain that that multiplier effect that you talked about on the on the bankless episode a few weeks ago yeah so basically like luna does not

have a fixed supply and that's the main difference compared to something like bitcoin for example like muluna can get minted um from this mechanism from ust exiting and the amount that gets minted is determined based on the price like there's kind of like an oracle price so um the unfortunate feedback loop is as the price of luna goes down people exiting ust can get even more coins of luna so as the price goes down by half then you can get twice as much luna so that dilutes it even more and then there's even more selling pressure because there's more coins and that's kind of what we've seen over the last few days where the price just goes literally

to a dollar or below dollar based on like all this new supply because people exiting ust at some point i don't think we've yet um as of airing of this episode have had a case where ust was above luna in price but it got very close so you can imagine exiting a million dollars of ust you you can get close to a million luna coins which yeah like i mean that's very hard to absorb is this a case of something getting so a lot of folks brought up george soros right breaking the bank of england is this a case of these markets don't really get tested until they're big enough because it's not worth testing them right when if the stable coin had

20 million market cap 50 million even 100 million dollar market cap it's not really worth it for a big fund to come in and try to break that market but when you get to a 40 billion dollar market cap there's a lot of incentive to try to break these markets and you're right it's you know a lot of these people who are creating these things there may be startup founders first time founder they've never created what you're doing is you're creating economies here and now when you get these systems that are so large you're creating an incentive for some of the largest funds in the world to come in and try to break these markets to profit off of them is there do you think that's happening here with luna did this thing get so big that now there was so much so many eyes on it that it was actually

incentivizing people to come break it um personally i think it's it's not so much that there were more eyes on it i think it's that it became harder to control like when it was 100 million it's not that somebody could have attacked it because you know jump and you know three arrows and whoever else was backing it can destroy somebody who's trying to short something it's 100 million like it's like peanuts but is jump willing to put billions and billions of dollars i mean people know jump and they know they're big they've done the 300 million wormhole that was their own project so if they value that internally at like two three billion dollars which is what they were trying to raise at of course they're going to bail it out but if it's someone else's project

will they like back it up with billions and billions of dollars um right we are talking about like a a trading firm that is market neutral you know for the most part when they're trading so it wasn't clear that they would be willing to take that much of hit so it might not be the case i know exactly what you're talking about definitely like with smart contracts you have that exact effect where like if there's only five million dollars you won't get like the best hackers in the world to try to like manipulate that smart contract but then you know at 500 million dollars you you'll get like an army of like north koreans to um to look into it as much as possible but i think in this case it's more of it's more of it got so big that the money is so substantial people could

not back it uh jody uh i think your point is a fantastic one which talks about the relationship between the market the value of the aggregate value of luna and and ust is is something that people watch we're watching closely i think what they didn't appreciate is like the order book kind of like you you can't sell everything at 100 mil 100 you're right uh luna these have cascading effects right um on that point so you know obviously tara is trading out right now like went all the way from 100 to 2.28 um cents so but it still has sort of an aggregate market cap of like 2.3 billion um ust 45 cents 48

yes 49 cents loon is at 423 yeah usc's at 52 cents i'm saying it has like a circulating supply of like seven billion where do we go from here um well if you look at just what does polls plus today essentially i i do think it was a a kind of in a small sense of giving up where now we're just gonna have to go through this process with the current mechanism that there is which means essentially that maybe to make a like a company analogy you're bailing out the sort of uh bad stuff on your balance sheet by minting new equity essentially and you do have like a very large hyper-inflationary problem um when you're doing that here and the precise mechanism and limits on it actually i

don't think matter really that much it's more just the idea that well you know that there's this bad debt coming in that you have to absorb well you know you're the value of your equity sort of gonna go down a lot uh because of that and and that shows up as hyperinflation in the token and a very low price and and the market kept collapsing so yeah i think now it looks like we just have to go through this process um this thing has been defended with like some billions already i i don't this is the very difficult question you never know when the seller is sort of exhausted really so if you start trying to prop this up a bit more uh with with like again trying to put in like 500 million into curve pull and do

that dance again you don't know how well that's going to go but you might want to try that again to get it to peg but even if you do like you still have the fundamental system problem and in those twitter messages he did say that oh yeah we want to collateralize this and then that's a process you basically have to start from zero with the fact that people already know that this mechanism doesn't really work and you've admitted that you need to collateralize it so that makes this i think a really really difficult challenge and and unless the market is like very forgiving i i do struggle to see how exactly this gets like fixed before we go to you jordy i want to ask you mika just a quick follow-up which is what is the

what is the collateral level that one should have and this goes to the frax model because frack sort of says we're going to build trust and then the it plays around on the curve around how much collateral there is underpinning um what is that level because in the case in this case i think the aggregate value of that bitcoin at that time was like no more than like 20 or so much less right it was like a fraction a very small fraction i think we know that well i would say that conceptually the more the better if you could have 10x collateral on the money supply yes do it but it's just that that becomes sort of untenable from a scaling perspective so uh the more security you have the more difficult it is to scale and then when you just put the collateral level down

the maker system i think is sort of inefficient and the margins you want to really work with are like 110 120 kind of thing on your collateral types going forward um i think frax is doing like okay it's shown that the 80 whatever percent type of system that's okay as well so uh it's it really is like sort of finger in the air at the moment but 20 didn't seem to be fine i think there were good reasons to be skeptical y20 wouldn't be fine um at the larger scale i think that it just needs to be like a relatively one-to-one match or like something close to it because you do always sort of run into this issue where well what if they're collateral of sort of

and if if you spend a collateral that's horrible right because if you just like spend it it's like a bullet and it's gone and you can never use that again so uh having the collateral in this case that didn't even actually help it arguably made the thing worse because after you sell that collateral well then you don't have it anymore so you start from zero so you cut you know the value of your ust has technically like gone to the floor is zero now it's not the btc price anymore so it sort of gets worse so yeah i think like a safe assumption right now is that project should like start with that sort of 83 area and then as we get to scale we can like think about whether or not that should be marginally pushed up or marginally down but uh otherwise it doesn't seem to work

jordy is this the end of the kind of terra luna ecosystem here yeah i'm sure a lot of the viewers are kind of watching just for that question um i think it's a transformation of it i don't think it's going to be the end there are certain assets that are both goodwill and tangible assets and also actual assets um so we are talking a little bit without full information we don't know exactly how much of the bitcoin if any is left out of the um initially three billion dollars of bitcoin that was bought that has been moved around to different counterparties like jump and other people and exchanges and we don't actually know how much is left there there could still be quite a lot left um

we know there's some avalanche tokens that they still own and we know that there is you know ultimately the the blockchain itself which has different apps and has intellectual property and let's not discount that although the community um of luna has suffered a i'm sure like huge losses there is some kind of like you know network value of of the those people and that attention value so i think what doe is basically saying at this point is we've tried to bridge this asset liability mismatch which was in the billions of dollars

they tried to raise around to start to bridge it it was my understanding that many people were skeptical to put in you know a lot of money into that round and ultimately that approach was expressly kind of um admitted to not be the case right now so they're not going to be getting a huge bailout i think this price barrel at some point reduces the mismatch because things just get so cheap like let's just take a thought experiment let's just say like ust went from a dollar peg to one cent well suddenly like you know somebody can

buy that debt and at one cent on the dollar and and like everything's liquid and you know they can the mechanism can start working um so it shouldn't be worth one cent um obviously the market is trying to figure out where it should be worth it was a bit surprising to me that luna was when i went to sleep yesterday was still you know worth 20 30 40 dollars um the mechanism for ust is that it can keep redeeming itself for luna so it can keep pressuring the lunar price down and ust has is like the senior debt let's say out of all this like they have the seniority luna cannot have any value while like ust is trying to get out so

um you know should ust even be depect it's quite an interesting question if there's any bid for luna in the future then ust should be pegged and we might see it re-peg once a lot of the usd gets sold at a low rate and at some point there's not much left to exit the system so um it is possible we see a re-pegging if there is some bid for luna at some very low price in the future where um you know somebody says well this is worth something and i will put in some amount of money into it and maybe there is still some collateral in bitcoin or other coins and um you know the chain survives now

of course you know trust is lost and you're not going to see all these institutions getting back into anchor right they're not going to go back in like it's kind of like a traumatic event that you can't return from so what what's probably going to happen is you know doe will completely change the model he'll go to some fully collateralized model they will try to keep the chain and all the apps and all the define and all the gaming and all the projects that are building on the chain going but without this like senior ust debt to dump on them constantly so i think it won't die that doesn't mean you should like long luna i don't recommend that it's like a junior debt in like a very precarious

situation so you have to be very careful um and yeah it'll just transform into into something else is there an arb here is there a way to play this are you playing it and looking at the relation between ust and and luna i mean the issue though is liquidity in my you know you could theoretically like think about doing this right but when exchanges are halting withdrawals and the current pool seems to be there's a lot of congestion and there's a time delay and so you're taking a lot of risk so for anyone listening like conceptually yeah you can set parameters and think about oh yeah like i'm just gonna like scalp and like profit and of the relationship of ust and luna but market participants and the way these

things actually execute in practice one you probably can't do it at scale until there's some time element and components that make this difficult at least for now where things are a lot in you know in flux um but but i'm curious jordi or or mika like are you guys thinking about playing this at some point like there is a time where these assets trade at such a distress level that can make for a great investment um there's a lot of trades going on right now i can tell you um just from experience kind of um there's gonna be some huge huge p l days that you'll hear about from the trading firms because when you have such an unwind of billions of dollars of an asset it happens in such a messy way no one's

prepared for it and you can see like across exchanges you have like you know crypto.com has six dollars and ftx it's like one dollar so you can't move coins around everything's broken but there are arbs out there there's a lot of things to be done um and i hope that you know the the tower research and and the the jumps and all these companies who make all this money today will kind of put it back into the ecosystem in some some way or another to support the ecosystem um but for individuals for like retail there's no clear way to play this you can think about long ust short luna and think that well i can buy it at 40 cents and if luna goes to zero then

um i'll be fine because i'll make it on kind of like the short the problem with that is you have to be very careful with short squeezes you can kind of get like you know if luna suddenly spikes to 10 20 you can just get liquidated and it's very dangerous game to play so it's a game for professionals those games are being played but i wouldn't recommend um there's no simple way to do it so i wouldn't suggest it to anybody yeah i would say the my good time in this place is sort of vulgar in a way where uh i think you could see it from the on-chain data that the situation would be serious um and that you would have to have this sort of fight for the pay again and that there was a strong likelihood that it

would break and that fundamental analysis is sort of done i think another one right now to look at is just uh sort of still like what's coming out of anchor luna minting and what that means for um just the sort of cell pressure on luna so i think like those fundamental things still exist a little bit but but the most interesting one uh sort of went i want to transition a little bit that's what i'm saying i've been talking a lot of market participants um i i tweeted earlier i was just i woke up and i was like okay well some firms may blow up it has felt like a crazy last 72 hours and i was thinking what are the systemic effects of this and i can think of a few um but i want to first ask both of you how are you

seeing this impact and reverb rate across the industry and the appetite for risk in crypto putting aside macro for a second because we always talk about like cpi came in at like eight handle which was high and but those are things that like i want to talk about like idiosyncratic needs to crypto like specific things macro is always macro i think i'm on the pleasantly surprised side because given what's happened you could have seen you know obliteration uh the majors are holding up quite well altcoins is a different story i mean everything outside of maybe bitcoin eath has fallen a lot and so it goes to show that there is

this flight to quality aspect even within kind of crypto natives where they'll say well i'm just going to go into the majors right now and i'm happy to hold that for 10 years and not even think about like these short-term fluctuations and i was pleasantly surprised that there is a bid even even during this potentially like three billion dollar sale of bitcoin uh we don't know exactly how much was sold but it got absorbed um it wasn't the end of the world i was kind of saying this from from before that this too big to fail narrative i i wasn't really believing it i think people still believe in um in bitcoin and ethereum and some of the other um well-designed assets and yeah we might not see like a blow up top anytime soon

but i think given what we've seen it's one of those situations where confidence can start to build that even in cataclysmic scenarios this is not going to zero like we are there like there is a future um so it makes me quite optimistic in the long run mikko what about you when you look back at march 2020 i felt like defy was at risk right now it doesn't really feel like that it feels like the terra ecosystem is at risk so what are the ripple effects of this it felt very much at the time that we also took very clear lessons from why exactly like what was the problem with maker dial precisely and we sort of precisely addressed it and there were these very like engineering you know very exact things that we could do to

make these systems better whereas uh the luna one it's still like a question of what will the system look like going forward and will there be collateral and what's the sort of relationship between luna and ust so there's a lot more in the air that will sort of be left hanging on maybe the interesting dynamic to follow that i would i would like to at least see this play out is that usdt usc gets it it's pegback and then people are sort of confident about luna and do we see this sort of thing where people forget about this quickly uh surprisingly quickly even though now it feels like the end of the world and there uh whether or not we actually address those risks or do we just like go forward and have another party you know um

i think that that's a dynamic that hasn't played out in the market yet but that's the one that i would be most interested to follow it would be sort of the most interesting outcome and a very very negative outcome i think could be that that we just don't really react to it and just continue on the same path and someone saved us and they'll save us again in the future you know and and that sort of bad bad logic around this so yeah i think it's very different where and defy really i think took very specific lessons and implemented those at the protocol level and made these systems better and here i i don't know yet i i don't know yet what the like what the precise thing is how how will the next system be designed and and yeah so i'm looking just looking at that

oh that's a great point mika and just to add on top of that i think nothing is wrong with d5 i think it would be a miss if we extrapolate here and say one protocol going down on a very risky type of experiment on the risk curve doesn't mean that d5 has failed us in fact i think d5 is really resilient um and you know has survived many shocks and liquidations i think what i want to look at is the level of exposure of some of these lending protocols that had ust as collateral um it'll be interesting to see which projects in the terra ecosystem including like avalanche also that had like ust exposure like how they absorb those losses or that shock

and you know i think there are nascent defy ecosystems outside of ethereum that are perhaps a little bit more fragile might not have kind of like a keeper like liquidator or system as robust as in ethereum and so those are the things that i'm looking at but i think it would be a miss if we look at this in episode and say d5 can't work because i think time and time again there is more lindy to d5 and it has operated in a very adversarial environment the thing that i do worry is um yeah i think luna is a very retail ecosystem and my my kind of my conversations with otc desk is that a lot of funds had exposure to this a lot of them are kind of feeling the

pain and chopping alts relentlessly at a loss to make up for some of the losses and i think they're going back initially to btc and eth that's why that's why i think you're seeing some relative strength uh in btc and ease um although i would that might be phase one phase two might be then they chop btc unit because they get redemptions and you know you layer on top of that macro risk you're on top of that the risk of famine down the road uh if things continue and the situation in ukraine doesn't get resolved like i think it's just very different environment like it's this is 2018 was was felt just like a crypto kind of bubble popping now you have rising rates many of which crypto investors haven't

kind of witnessed um you also have geopolitical risks and so all of that candidate does make me nervous i don't think you want to be a hero in this market i think the name of the game is kind of surviving and you know just waiting how all these things play out and and you know i think maybe the the dejan spirits calm down a little bit uh for better force santa i have a question for you actually which is i mean when you look at the markets they're absolutely puking right bitcoin down 18 on the week salon and some others are down like 30 35 on the week and you know down like 80 off the highs when are you buying what is your moment that you look at this market and say now is the time i'm jumping in i haven't seen pain

this is not pain to you no it's not definitely definitely not man if anyone that's been in crypto for the last two three years is way up still way up you want to feel pain like i remember pain i was thinking about the story when i was met kane and at the finance conference in 2019 that was literally that week was the bottom of synthetics that was trading at 8 million fully diluted market cap he said every time we post something the token tanks because it reminds people that they have this bag and they sell it no one's showing up these conferences and i think that's pain right now you know people might some funds may blow up for sure that we're way over exposed to terra and luna

but i don't think we've seen pain overwhelming part of the market yeah mika what do you think have we uh agree or disagree with santo um maybe to give a slightly different answer just the way i think about it is the the the market cycles and what really drives them is having this baseline of really great innovation and then these moments where we come we have this like trigger and we really take off and um yeah i think it's going to be a while to maybe find that really next trigger so whether or not we go like a lot down from here i don't know but i feel like we're at least from the time component to a ways away from really like the next wave of really

bringing on user because it really the thing that makes any of this sustainable is like building great stuff that people want to use and hopefully actually getting to like mass user adoption one day so that's that's the really the north star on horizon and i think to accomplish that there's still a lot of work and it will take a while i'm a bit more optimistic i think um there's two narratives one is the bitcoin hard money narrative the other one is the eth merge narrative they're both going to be a huge deal i think the youth merge narrative will allow big fans that are you know environmentally conscious to be able to buy a layer one asset being proof of stake um there's going to be just a huge buzz when this actually happens

on the bitcoin side i think there is a need for hard money more than ever that will continue to increase as the year goes on and i think that narrative picks up so i'm very bullish for those two assets i'm i'm still long i'm not selling anything i'm not worried about it at all in terms of everything else i agree mika said i think there's a need for more innovation it's time to build um we've had such crazy primary valuations we've had just absurd numbers of you know meme coin billion dollars uh you know things going on so it's it's a good opportunity for those things to kind of get washed out

and um you know for the new builders the new generation of builders you know we had 1.0 uh d5 good stuff you know you create all these primitives all these ideas ave all these types of things i wasn't a big fan of the 2.0 the olympus dows and like some of these experiments i was not a fan and i think now is the time to kind of have all this smart people that have entered the crypto space from all different you know engineering and development and all these different places um just go through the rubble and see like what have you learned and what can you actually build that is going to be very sustainable going forward so i'm probably i'm quite excited and i don't mind that we're going to go through this kind of

building cycle now and i want to just those are both great observation guys i mean i want to preface like i'm still like net long like i'm a perma bull i think the fact that this industry is 1 trillion now is laughable but you need to take the long view the problem is i'm just sort of couching this because i don't play much in liquid markets i don't try to tie markets my pace of deployment in privates you know my average deployment across like 100 deals has been 30 35 fully diluted market cap and so i look at that and i say that's to me that feels really comfortable because we are entering in a not like we are entering in a kind of utility phase of this evolut of this you know asset class you know it was all

speculative for a long time and i agree with you jordy like the merge bitcoin ossifying as kind of a non-sovereign store value nfts like you know all of that is really powerful it's not going away it's just gonna take time and i think that that's that was my point which is i think time and time again these narrative there's always a mismatch between narratives and fundamentals i think we were in a period over the last six to 12 months of just over extended uh narratives and the fundamentals not catching up as much and and definitely agree with you we need more innovation and episodes like these are never fun but they do serve as as moments to look back upon reflect and then kind of improve upon

was a space which which is we tend to do really well especially because it's open source that's a great point satya uh mika jordy this has been great any last parting thoughts here yeah just that i'm also always a permabull and always long this stuff uh irrationally so but and i would just love to have a market wire uh in the d5 2019-ish maybe early 2020 i can't remember like whenever 2020 summer it really started the price appreciation it felt like oh well we have all this great stuff why isn't anyone like reacting why does the price react like we should be so much higher no one's getting this and i would love to be in that point again where oh we have all this cool cool stuff and why isn't this taking off they'll realize it at any

moment and then they do and then we sort of get to get to the next place i'd love to have that experience again yeah so my final thoughts i guess um i'm mainly focused on the people that lost a lot of money the the lunatics and other people that tangentially maybe lost money without even you know really understanding the risks that they were taking i think it's important to not like uh pile on on like the sadness that's out there i see like a lot of um dancing on graves and that kind of thing i really hope that people kind of get their mental health stable and start building optimistically

towards the future instead of you know view this as a catastrophic thing that can be recovered i think everybody can recover and um we saw a lot of those stories from like the last cycle where people got wiped out and then have done extremely well in like this uh latest cycle so um yeah i think let's let's try to just kind of get through and um above above all just remember the lessons more than anything like don't don't take risks that you don't understand and you know it is a bit of a casino out there that is one of the use cases of crypto but when you're in a casino you need to kind of know what your limits

are and and be quite careful i think that's very well said i think that's a good place to end on uh mika jordy thanks for coming on santi as always thanks for uh being my great co-host on this one and yeah if you're listening be well and things will get better [Music] you