Some Thoughts On LUNA / UST
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I’ve been traveling today so my apologies on sending this letter later than usual.
The entire crypto market has been glued to their computers and phones as they watch the volatility and drama unfold related to Terra, LUNA, and the UST stablecoin. As many of you are already aware, the UST stablecoin lost the $1 peg earlier this week and the LUNA token has fallen more than 99% in value.
I figured it would be helpful to share a few thoughts about these events.
First, there is a large number of people kicking the team behind this technology while they are down. No true builder is going to do that, because they understand how hard it is to create anything of value from scratch. Punching down when a team is struggling isn’t how I roll, it isn’t how I expect any founders that I invest in to act, and that isn’t how any well-respected entrepreneur or investor who has a long career in this game will act either.
Second, the idea of “never invest more than you are willing to lose” gets shared around the bitcoin and crypto industry often, but many people assume it is just a meme. There is real money at stake in these nascent technologies and there is real risk. Amazon once drew down 95%, Bitcoin has drawn down ~ 85% multiple times, and there is a laundry list of shitcoins that have lost 99.9% of their value. Just because something goes down in value a substantial amount during bear markets or liquidity crisis doesn’t mean they have no future value. With that said, it’s likely that 99% of non-bitcoin projects will go to zero for various reasons. Understanding the risks that you take in allocating capital to an industry that is brand new must be part of your diligence process.
Third, most of the people screaming “I was right!” on the internet weren’t actually right. The majority of these people were yelling about how LUNA/UST was a scam or future rug pull. Rather than having the intellectual rigor to identify structural challenges around the peg and articulate those risks (like @FreddieRaynolds did so well here), these individuals resorted to the same trite attacks (Scam!) that bitcoin critics have used for years. It doesn’t appear that UST was some sophisticated scam or rug pull. Rather, it was a badly designed technology product that was exposed by intelligent market participants who had a lot of capital at their disposal.
Needless to say, this doesn’t excuse the carnage that LUNA / UST caused.
Fourth, the UST peg was broken, which to the average person sounds ridiculously scary. This isn’t the first time that the industry has seen this occur though. USDT (Tether), which is the largest stablecoin by market cap, has had the $1 peg break multiple times before. Just a few recent ones include a drop to $0.85 in 2018 and a drop to $0.90 last year. Even though the USDT stablecoin asset has been depegged numerous times before, it still boasts a market cap of $82 billion currently. I’m not making an argument that Terra’s UST stablecoin will survive or comeback, but rather a mention of historical facts that most of the current crypto users were not around for in past market cycles.
Fifth, there are a lot of people who are inaccurately claiming that I was “promoting” LUNA or UST. I spend hours a day writing, interviewing, and recording content to better understand what is happening in the bitcoin ecosystem. If there is someone buying up $3-10 billion of bitcoin, I am going to talk about it. In the letter that I wrote, the podcast that I did with Do Kwon, and other conversations that I had with folks like Peter McCormack, there were always conversations around risks. As I stated over and over again, this was an experiment that was worth paying attention to.
For example, in the piece that I wrote about the LUNA / UST experiment in March 2022, I started it off with acknowledgement that no one has been able to figure out the algorithmic stablecoin problem, included a link to an entire 15-page white paper about why algorithmic stablecoins fail, presented the naysayers argument, and explicitly called out that this was an experiment.
Here is a screenshot:
As if this wasn’t enough, I then went on to mention that there were lots of risks in one of the closing paragraphs:
“Regardless of how this situation unfolds, Terra’s move to back UST with bitcoin is worth paying attention to. There are lots of risk, but if they successfully pull this off then they will be creating a playbook for other stablecoins and/or central banks to follow. Bitcoin is a decentralized, digital currency that has successfully achieved the properties necessary to serve as superior collateral.”
Which brings me to my sixth point — experimentation is imperative when you are trying to build new, innovative technology. It doesn’t matter if past experiments have failed or not, you can’t innovate without trying new things. The same intellectual curiosity and fascination with innovation that brought me to bitcoin will continue to drive me forward as I seek to understand what various technologists and entrepreneurs are working on.
Seventh, it takes a special skill to be optimistic about technological experiments, but simultaneously a rational skeptic that can publicly present every risk. The more technical the nature of the experiment, the less qualified majority of market participants are to underwrite complex risk. One of my personal takeaways from this situation is that although I spend a considerable amount of time highlighting risks and trying to present both sides of an argument (as outlined in the example of the letter above), I am going to work on more effective ways to highlight the voice of skeptics on a variety of topics in the future.
Lastly, point number eight, can be summarized with the following idea: Bitcoin has survived Silk Road, Mt Goxx, nation state attacks, and much more. The decentralized, digital currency isn’t going anywhere. Bitcoin is the most resilient technology in the world and it is backed by the strongest computer network that has ever been created. There is fear and chaos everywhere, but don’t lose sight of the fact that bitcoin continues to produce block after block after block of transactions without caring about any of it.
Hope each of you has a great day. I’ll talk to everyone tomorrow.
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