How Far We’ve Fallen: Lessons Learned from the Terra (LUNA) Ecosystem Crash


By Frank Corva

Much noise has been made about the collapse of the Terra (LUNA) ecosystem, and rightly so.

LUNA, TerraUSD (UST) and other tokens in the Terra ecosystem had a total market cap of over $60 billion, close to Enron’s market cap before its bankruptcy filing.

Inevitably, many were hurt as a result of the failure of the Terra Network. Some went all-in on LUNA and UST and thus lost most of their net worth. A handful of those people have posted online about their suicide attempts, divorces and other tragedies they experienced as a result of the crash.

It’s hard not to feel sympathy for these people, but it’s also hard to imagine why they would put their net worth in assets that are part of a relatively new and untested cryptocurrency network.

There are many lessons to be learned from reflecting on this crash, as it’s not just the prices of the older version of LUNA – now Terra Luna Classic (LUNC) – and UST that have plummeted, but also our ability to educate newcomers on the risks associated with investing in this asset class.

We continue to manipulate blockchain networks in ways that technology founder and inventor of Bitcoin, Satoshi Nakamoto, didn’t seem to want us to.

Before continuing, I would like to reveal that I owned LUNAs and USTs at the time of the crash. When I use words like wei’m not talking about the royal we, I refer instead to myself as the former owner of these assets. I also use we to describe myself as someone who has invested in the crypto space for years and helped educate others about it.

LUNA to the moon-a!

It’s no secret that people get caught up in the “get rich quick” hype that surrounds crypto. And when people see industry leaders like Mike Novogratz, CEO of crypto investment firm Galaxy Digital, going too far (see the tweet) with its love for LUNA, it’s no wonder most thought LUNA was heading “to the moon,” the crypto is talking about both exponential and rapid price increases.

Let me update you on the price action of former LUNA (now LUNC). It went from $0.65 in January 2021 to just over $119 at its peak in April 2022. And then, starting in March 2021, you could earn over 19% on your UST via Anchor Protocol, the “ gold standard for passive”. income on the blockchain,” according to the Anchor white paper.

What was wrong? You could get rich holding LUNA, but not too much gavona by storing your wealth in a “risk-free” asset like UST which seemingly magically offered a return of nearly 20%.

It sounded too good to be true.

And it was.

After the crash, LUNC is now trading at a fraction of a penny, while UST is trading at just over a penny.

MOON 2.0

On May 28, 2022, the old LUNA chain – again, now called Terra Luna Classic (LUNC) – forked hard, setting in motion a new Terra (LUNA) blockchain, “LUNA 2.0”.

The new LUNA was airdropped to former and current holders of the old LUNA (now LUNC) and UST when the new blockchain began.

Investors hesitate between buying or selling, as the price of LUNA has been volatile since its inception.

Part of the reason LUNA’s price has been so volatile is that investors don’t know what the asset’s underlying value is. Now that LUNA is no longer burned or permanently destroyed as a means of hitting UST, which is its original purpose, the new hard-forked Terra (LUNA) chain remains missionless.

The LUNA 2.0 hard fork is not the same as the Ethereum 2016 hard fork

Many newcomers to the crypto space do not know that in 2016 the Ethereum ecosystem experienced a major hard fork, similar to this LUNA hard fork.

After the Ethereum DAO hack, an event in which a hacker exploited a flaw in the code of a smart contract containing over $150 million in Ethereum, the Ethereum community chose to hard fork the chain as a way to recover Ether (ETH), the native asset of the Ethereum blockchain, which was stolen during the hack.

The new chain is the Ethereum (ETH) blockchain that most know and use today, while the old chain is the Ethereum Classic (ETC) blockchain.

Similarly, in May, the new LUNA channel retained the symbol “LUNA” while the old LUNA channel added “Classic” to its name.

It may seem that what happened to Ethereum is happening to LUNA, although that is not quite the case.

Ethereum remains a much more dynamic network than Terra (LUNA), which existed almost solely to support stablecoins like UST.

The Ethereum network billed itself as “the decentralized computer of the world” and was far more versatile in its abilities even in 2016 than the new LUNA chain is today.

Additionally, when the Ethereum community recovered the stolen ETH, they did not return it to its rightful owners with a two- to four-year vesting schedule, as the LUNA community did for 70% of the tokens. which he will return. to the victims of Terra’s collapse.

This again plays to the extent that we fell.

When Satoshi Nakamoto created Bitcoin, the first cryptocurrency, he envisioned a permissionless network where participants could freely transact with their tokens and code was law. Now, not only do we roll back blockchains if something goes wrong, but we also prevent network users from using or selling their tokens as they see fit.

Some argue that steps taken by the Terra community to return some value to customers are a way to prevent regulators from cracking down too hard on the industry. Others point to the need for self-policing within the industry as a way to keep regulators at bay.

Calls for self-monitoring

Crypto industry leader Ryan Selkis of Messari — a company that provides data, research and tools for crypto investors — called on the industry to step up its self-policing. Another industry leader, Nic Carter of venture capital firm Castle Island Ventures, warns the industry will attract unwanted attention and the anger of regulators because it did not control itself better.

Although self-policing sounds like a good idea, history shows that it often fails miserably.

In the 1980s, when mortgage-backed securities (MBS) were the new hot commodity on Wall Street, Lewis Ranieri, then an executive at Salomon Brothers and founder of mortgage-backed securities, assembled a team of Ph. of the Ivy League to control the quality of the loans packaged in these titles.

This policing went pretty well for years – until Ranieri and his team were fired from Salomon Brothers in the late 1980s. Then, as Michael Lewis points out in the classic Liar’s Pokerno one has sufficiently monitored and regulated the quality of the mortgages that have been invested in these MBS products.

Fast forward about 20 years, and the “unchecked” subprime loans built into many MBS products triggered the global financial meltdown of 2007-2008.

The lesson is that if Selkis’ calls for self-policing are to be taken seriously, then policing, like crypto assets themselves, will need to be sufficiently decentralized.

Prominent and knowledgeable members of the crypto industry who work for a variety of different institutions should have the power not only to sound the alarm when they see fit, but also to take action.

This is to say nothing that the members of such a police council could abuse their power in order to crush the products of their competitors.

In conclusion

If regulators aren’t already anticipating overly heavy regulation of the crypto space, then those of us more familiar with the space will need to step up our efforts to educate newbies, while those who are really in the know may have to play a “law enforcement” role, however futile such efforts might end up being.

Over the years, we have moved away from the philosophy of blockchain, an open-source, permissionless technology through which people can transact freely and between peers.

It’s time to revisit the basics of what Satoshi Nakamoto gave us and share with newcomers that it’s best to start with smaller, safer bets in this space, like allocating no more than 1% 2% of your wealth to a digital asset like Bitcoin.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.




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