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"But they, our ancestors, became arrogant and stiff-necked, and they did not obey your commands. They refused to listen and failed to remember the miracles you performed among them. They became stiff-necked and in their rebellion appointed a leader in order to return to their slavery.” (Nehemiah 9:16-21)
Bitcoin’s genesis block is historic, not just because it contained the first 50 bitcoins, but because it had a message coded in the hash code: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks."
Nathan Thompson is the lead technical writer at Bybit.
This reference to the 2008 financial crisis from Bitcoin’s creator, the pseudonymous Satoshi Nakamoto, is often read as an indirect mission statement: The financial system could be redesigned, money could obey immutable laws written into code, and finance could flow unimpeded. Bitcoin would be decentralized, beyond reproach and beyond manipulation.
However, it seems that the crypto industry, rather than recreate a trustless and egalitarian digital economy, has been dogged by in-fighting. We have recreated a techno version of the Old System, where greed for yield led people into convoluted and dangerous profit-maximizing strategies.
That is, without the benefits of power.
The meltdown of TerraUSD (UST) – which was once the third-largest stablecoin by market capitalization, which was once famous for offering a 20% annual percentage yield on deposits in the Anchor protocol and which was once going to make a lot of people very rich – appears to be total. This time there are no taxpayer bailouts.
Terra’s collapse, coupled with a consumer price index of 8.3%, has led to selling across the crypto markets. Bitcoin buckled and is now below $30,000, with alternative coins faring no better as investors either sold into BTC or exited into cash.
Due to its algorithmic design, UST has a price that moves in sync with the price of Terra’s native cryptocurrency LUNA. The bank run that disentangled UST’s peg to the U.S. dollar also collapsed LUNA’s price, which crashed over 99% in two days to less than a cent. Earlier this year, UST and LUNA had a combined market cap of $60 billion, and now it’s under $7 billion.
The fallout has just started. There are yield aggregators that use UST as collateral and God knows what other complex financial strategies built on top of UST that are now at risk. People have lost their life savings; there are tears and depression.
Do Kwon, the braggadocious CEO of Terraform Labs, last year made CoinDesk’s Top 10 Most Influential list. Like other brilliant tech entrepreneurs, he had the status of a cult hero – people thought UST was one of the most brilliantly designed financial products, because it was successful.
It’s still unfolding how or why UST collapsed. But Kwon made powerful enemies with a plan, unveiled earlier this year, to make UST one of the premier stablecoins in the world by draining liquidity from rival projects on the decentralized finance tool Curve Finance. He exacerbated things by throwing his weight around on Twitter.
Indeed, Kwon took a multimillion-dollar bet on the price of LUNA, said rival stablecoin DAI would “die by my hand” and called a critic a slur for someone with diminished mental capabilities for pointing out vulnerabilities in UST’s design.
It's not surprising, then, that blockchain analysts are already finding evidence that UST’s meltdown was caused in some part by sabotage. It seems an unknown actor dumped $84 million of UST exactly one minute after Terraform Labs had withdrawn capital to fund its new “4pool” on Curve. That helped cause UST to deviate from its peg, which started the avalanche of panic selling and liquidations.
Today, Kwon and his team are scrambling to find a solution. Many believe it is beyond saving, especially as traders will long and short UST the whole way back to dollar parity – if it ever gets there.
Kwon reminds me of another crypto folk hero, Daniele Sestagalli, the founder of Wonderland Money and a celebrated crypto developer. A series of liquidations plus revelations that his business partner was a convicted criminal led to a complete loss of faith in his projects. Sestagalli has yet to make a comeback.
The industry would do well to remember Satoshi’s founding message: Crypto is supposed to make things better. It’s supposed to offer people a way to save and grow their capital without having to trust third-party actors who have failed time and time again – like Do Kwon.
I’m not naive enough to think that the lessons learned from today will lead to a kumbaya situation where the proverbial lions lie down with the lambs. However, we are seeing strength from bitcoin and the faith that it and other quality assets will withstand this pressure and that as long as they do, Satoshi’s dream will live on.