I Hate You and Your Blockchain Sucks!
Inside the dysfunctional world of protocol communities.
6:30 A.M. Friday. Reality sets in. Replacing disbelief. Which replaced panic before it.
The sun rises on a post-LUNA world.
For the uninitiated, LUNA was the third-largest stablecoin and one of the biggest blockchains.
I use the past tense because for practical purposes it no longer exists, having plummeted from a high of $120 to its current price as I write this of $0.00002.
Yes, that’s four zeros before the two.
I’d show you a chart of the carnage except there are none, as LUNA has been de-listed from any legitimate crypto exchange – an oxymoron if there ever was one.
What makes the collapse in LUNA even more impressive is the speed in which it occurred, falling from around $90 to negligible in less than a week, wiping out $50B in the process.
I don’t know much about cryptocurrency but I know price action, and this is bad.
For context, at its height, Lehman had a $60B market cap before taking a dirt nap.
The angst among crypto bros the past few days was palpable as the streams of denial across Twitter turned into raging torrents of despair.
Now, against a background of the still-smoldering wreckage, a post-mortem on LUNA has begun.
If you have the time and are so inclined, you can find plenty of deep dives on what caused this crash. One of the best is this epic 3000-word post by Packy McCormick over at Not Boring.
For those who have a life, I can boil it down to two words: Financial engineering.
The quick, dirty, and highly oversimplified cliff notes are that LUNA had a semi-pegged relationship to UST, another algorithmic stablecoin, which could be loaned out or “staked,” paying the staker 19.5% APR.
As you can imagine, the lure of earning 20% for free was very enticing, made particularly so by the fact that you could leverage your UST by 5x, effectively earning you 100% on your money.
This is where two other important words come into play: Free lunch.
As in, there is no such thing.
Eventually, excess leverage met inadequate liquidity - and the rest was academic.
The fallout in the crypto community has been very informative.
Pop into any thread or meetup on the topic and you will find yourself in a very strange world populated by warring camps, each with their own take on what happened and what the future holds for cryptocurrency and the blockchain.
It’s like watching a cyber version of “The Warriors” in which the Van Cortlandt Rangers, Turnbull ACs, and Baseball Furies are replaced by crypto gangs: The Solanas, Cardanos, and the LUNAtics.
The rhetoric in these exchanges is as passionate as it is bipolar, with tribal zealots - conflicted between a lust to force their digital rivals to eat crow and the unsettling realization that “there but for the grace of the blockchain goes my protocol” – calling for Kumbaya-like unity one moment, then the next, hurling invectives at each other like the one I overheard during a Twitter Spaces with over 5000 participants.
“I hate you and your blockchain sucks!”
You’ll find this same lack of cohesion and clarity emanating from the overlords of this epoch, for example, the Christ-like creator of LUNA, Do Kwon, or the Terra project, the official mouthpiece for LUNA.
Their ramblings sound like the improvisations of an amateur Dungeon Master attempting to conduct his first D&D tournament - and I’m not completely convinced that a 12-sided die isn’t partially responsible for explanations like this.
The prevailing peg pressure on UST from its current supply overhang is rendering severe dilution of LUNA.
The primary obstacle is expelling the bad debt from UST circulation at a clip fast enough for the system to restore the health of on-chain spreads.
To expedite this goal, several measures are being taken. First, the current Prop 1164 will expand the base pool size and accelerate the burn rate of UST – helping deflate on-chain spreads.
You can find the full Agora proposal for burning the remainder of the community pool UST in the link below, including the proposal to burn the cross-chain UST. The vote will go live shortly.
TFL will port the remainder of the UST deployed as liquidity incentives on Ethereum (371 million UST) over the past few months back to Terra and burn it all using the burn module pending the result of the governance proposal.
In order to get your LUNA back you must find the magic paladin who lives in the emerald forest and have him forge The Sword of Icarus, which you will then use to slay the Gorgon of Chrysaor.
Okay, I added that last line, but you have to admit, this stuff all sounds like it’s being made intentionally opaque.
There are, however, some common themes among these groups.
You’ll hear them talk about how imperative it is to “rebuild” LUNA.
You’ll hear them prophesize its Phoenix-like rebirth.
And you’ll hear quite a few conspiracy theories about the “whales” who attacked LUNA and brought it down – the two most likely suspects being Blackrock and Citadel.
What you won’t hear is any talk about personal responsibility.
That’s because much of the crypto community is playing a different game from you and me, though it looks the same.
They’re in this as a social experiment and as a way to change society – though the specifics of those changes are a little murky.
They truly believe that they are building a better financial ecosystem. One without risks or losses.
The problem is, once their tokens for change became tokens for trade, they stepped into a different world, one they are ill-prepared for.
Listing cryptocurrencies on public exchanges has exposed their well-meaning advocates to agents of speculation, turning them into lambs among wolves – and the wolves are packing Uzis.
Every religion starts out as a fad, and crypto is now a religion, but one that operates in a world of non-believers.