WEBVTT - This Is How the Terra Stablecoin Actually Imploded 0:00:10.160 --> 0:00:14.360 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.400 --> 0:00:19.759 I'm Joe Wasn't and I'm Tracy Allaway, Tracy Luna, Tera 0:00:20.000 --> 0:00:24.520 stable coins, crypto crashing stuff. I'm gonna throw something else 0:00:24.560 --> 0:00:28.840 out there, Roman history. Let's talk about classic history. What's 0:00:28.880 --> 0:00:32.239 the Roman history part? It's Rome sacking Carthage. Have you 0:00:32.240 --> 0:00:35.760 not heard about that? Yeah? Is that what's going on? 0:00:36.040 --> 0:00:38.880 Is a Carthage big sacked right now? Well, that's actually yeah, 0:00:38.960 --> 0:00:40.800 I mean that's kind of what we're going to talk about. 0:00:40.920 --> 0:00:43.200 So we're going to be speaking with someone who has 0:00:43.200 --> 0:00:48.120 framed himself as Rome in the historic parallel going after Carthage, 0:00:48.280 --> 0:00:52.000 which would be Tara and Luna. The algorithmic stable coin, 0:00:52.080 --> 0:00:55.120 slash cryptos This is such a wild story. I mean, 0:00:55.240 --> 0:01:01.960 like I think you know, look, crashes, hacks, pond zis, 0:01:02.520 --> 0:01:06.160 rug polls, they happened all the time in crypto, right 0:01:06.200 --> 0:01:08.320 like it's almost it almost just like boring, And most 0:01:08.319 --> 0:01:10.080 of the time they're not even worth reporting on or 0:01:10.120 --> 0:01:12.720 talking about because they're like a daily occurrent. But the 0:01:12.920 --> 0:01:17.840 Terra ecosystem, the us T stable coin, the Luna token 0:01:18.200 --> 0:01:22.959 had gotten so big, so valuable, and so many major 0:01:23.040 --> 0:01:26.640 backers of crypto um were invested in it or had 0:01:26.720 --> 0:01:29.319 invested in it in some way that this is not 0:01:29.480 --> 0:01:33.000 just like another coin to crash. I think that's absolutely right. 0:01:33.040 --> 0:01:36.720 So two things here. One top ten coin, right, like, 0:01:36.760 --> 0:01:39.600 it's not it's not every day that you see something 0:01:39.640 --> 0:01:43.000 like this happened to a top ten coin. Secondly, the marketing, 0:01:43.520 --> 0:01:48.920 so everyone knew it was an unusual experiment, an algorithmic 0:01:49.000 --> 0:01:51.720 stable coin, and we'll get into exactly how it's supposed 0:01:51.720 --> 0:01:56.120 to work. But even with that said, it was pitched 0:01:56.560 --> 0:01:58.920 as a stable coin, as something that is supposed to 0:01:58.920 --> 0:02:01.880 maintain a peg one to one with the dollar, and 0:02:01.920 --> 0:02:03.720 people are supposed to be able to use it to 0:02:03.800 --> 0:02:08.200 get in and out of more volatile cryptocurrencies. And clearly 0:02:08.880 --> 0:02:12.080 that's not what's been happening because we've seen the peg 0:02:12.160 --> 0:02:13.960 has crashed. I think it got too as low as 0:02:14.040 --> 0:02:18.960 like point three is right, No, I mean that's exactly right. 0:02:18.960 --> 0:02:20.680 So it's a stable coin. The interesting thing is, like 0:02:20.720 --> 0:02:24.120 stable coins, there are many different flavors of stable coins, 0:02:24.120 --> 0:02:26.400 and people have been skeptical about them for a while. 0:02:26.800 --> 0:02:30.440 Most of the discussion about vulnerable stable coins was focused 0:02:30.440 --> 0:02:34.200 on tether, which but this was a so called algorithmic 0:02:34.240 --> 0:02:37.600 stable coin. They had some collateral backing. It's sort of complicated, 0:02:37.600 --> 0:02:40.640 we're gonna get into it, but the point is that, yes, 0:02:40.840 --> 0:02:43.520 it is sort of this classic example of the thing 0:02:43.600 --> 0:02:45.680 that blows up is the thing that has to maintain 0:02:45.680 --> 0:02:48.360 a peg, which is a lesson that in the trad 0:02:48.440 --> 0:02:51.000 fi world is understood for a long time, which is 0:02:51.080 --> 0:02:53.960 often the sorts of big sources of big risk are 0:02:53.960 --> 0:02:56.519 the things that, on the surface appear to have the 0:02:56.600 --> 0:02:59.520 least volatility. Here's the other thing that makes the story 0:02:59.600 --> 0:03:02.520 so in staying it's the people involved. You know, you 0:03:02.560 --> 0:03:06.240 mentioned some of the big funds like Galaxy Slash Novograts 0:03:06.280 --> 0:03:11.600 who were invested in Tara slash Luna. Yeah, which I 0:03:11.639 --> 0:03:14.200 thought was fake when I first saw that photo, but 0:03:14.440 --> 0:03:16.359 it is in fact real. But the other thing is 0:03:16.400 --> 0:03:20.600 there are strong personalities attached on both the pro Luna 0:03:20.720 --> 0:03:25.600 Tara side and the sort of against or warning about 0:03:25.880 --> 0:03:29.079 Tara slash Luna side. And that's where that Rome versus 0:03:29.160 --> 0:03:32.919 Carthage analogy comes in. You had the founder Do Kuan, 0:03:33.400 --> 0:03:35.360 and I don't know if anyone follows him on Twitter, 0:03:35.760 --> 0:03:41.600 but he is incredibly I guess outspoken would be Yeah, 0:03:41.640 --> 0:03:44.640 this is putting it all very very politely. But people 0:03:44.720 --> 0:03:48.880 would come out with criticisms of the entire algorithmic stable 0:03:48.920 --> 0:03:53.600 coin idea, and people would highlight vulnerabilities in the system 0:03:53.640 --> 0:03:55.839 and he would just bat them away, or he would 0:03:55.880 --> 0:03:58.040 just say, you're poor. I don't Yeah, you're poor. I 0:03:58.040 --> 0:03:59.680 don't need to talk to you. So what is going on? 0:04:00.120 --> 0:04:02.240 We are going to be speaking with a perfect guest. 0:04:02.280 --> 0:04:04.600 When everyone was like odd Lots has to do an 0:04:04.600 --> 0:04:08.880 episode on Luna obviously, and everyone my d MS flooded 0:04:08.960 --> 0:04:11.040 with this is the guest you have to have on 0:04:11.120 --> 0:04:13.440 because he's been warning about it for a while. We're 0:04:13.440 --> 0:04:16.320 gonna be speaking with Kevin So. He's the co founder 0:04:16.400 --> 0:04:20.400 of Gail Walk Capital, which is a crypto hedge fund 0:04:20.560 --> 0:04:23.880 that was launched in so that's old by crypto hedge 0:04:23.920 --> 0:04:27.839 fund uh longevity. But actually he's been in the space 0:04:27.839 --> 0:04:30.840 for about a decade, which is truly extraordinary. He knows 0:04:30.839 --> 0:04:33.560 it well. He's been warning. He had been warning about 0:04:34.120 --> 0:04:36.560 Tara and Luna for a while. So, Kevin, thank you 0:04:36.640 --> 0:04:40.680 so much for coming on odd Lots. Yeah, absolutely, thanks 0:04:40.680 --> 0:04:43.800 for having me. Kevin, you started a crypto hedge fund, 0:04:45.520 --> 0:04:48.239 like you know, now everyone has a crypto hedge fund obviously, 0:04:48.279 --> 0:04:52.720 but you that's legit, legit, legit veteran in the space. 0:04:53.440 --> 0:04:55.880 What what's your background? Why did you how did you 0:04:55.920 --> 0:04:59.960 get into it so much earlier than most people? Um, yeah, 0:05:00.040 --> 0:05:02.400 so you know, I think my background, Um, you know, 0:05:02.400 --> 0:05:05.200 I've been in crypto for a while now, really got 0:05:05.240 --> 0:05:08.960 started in I hadn't joined industry at the time. I 0:05:09.000 --> 0:05:11.359 was just mostly trading my own p a uh. And 0:05:11.400 --> 0:05:16.160 then I joined the industry, joined a small um bitcoin startup. 0:05:16.360 --> 0:05:18.839 It was an exchange. It was called butter Coin. It 0:05:18.920 --> 0:05:22.640 was the second y C company that was dealing with crypto, 0:05:22.680 --> 0:05:25.360 the first being coin base. Um, things didn't go so 0:05:25.400 --> 0:05:27.359 well over there and in the in the winter of 0:05:27.360 --> 0:05:31.000 two thousand thirteen, we shut down. Afterwards, I joined Kraken, 0:05:31.440 --> 0:05:35.120 ran their trading desk for two years, and then afterwards 0:05:35.160 --> 0:05:39.839 in uh, you know, in I guess early seen, decided 0:05:39.880 --> 0:05:46.599 to leave and start Galwa Capital and we launched in January. So, 0:05:47.400 --> 0:05:49.760 as we mentioned in the intro, there's been a lot 0:05:49.800 --> 0:05:54.120 of criticism of Terra and Luna and you're I think 0:05:54.160 --> 0:05:57.680 probably the biggest voice in that space. What piqued your 0:05:57.800 --> 0:06:02.320 interest in this particular pin or you know, system, when 0:06:02.360 --> 0:06:05.800 did you first start getting interested and start looking into it? 0:06:05.800 --> 0:06:08.760 And why? You know, when I first started looking into it, 0:06:08.839 --> 0:06:13.080 I'd say it was around mid or late last year. 0:06:13.839 --> 0:06:15.920 And uh, you know, at the time, I didn't think 0:06:15.960 --> 0:06:17.800 too much of it. I thought, oh, you know, this 0:06:17.920 --> 0:06:20.120 is just one of those i'll go stable coins. It 0:06:20.160 --> 0:06:22.840 probably won't work out, you know, it'll just implode pretty soon. 0:06:22.960 --> 0:06:25.400 Turned out not to be the case. It just kept going, uh, 0:06:25.520 --> 0:06:28.799 you know, Luna kept going up, us T kept maintaining stability. 0:06:29.080 --> 0:06:32.320 It grew bigger and bigger. And then I revisited it 0:06:32.960 --> 0:06:35.800 in January of this year, and I at this point, 0:06:35.839 --> 0:06:37.440 you know, I was kind of surprised at just how 0:06:37.640 --> 0:06:39.920 big it got, you know, it all of a sudden, 0:06:39.920 --> 0:06:41.719 you know, it's now like a top ten coin or 0:06:41.760 --> 0:06:43.880 something like that. So now I was starting to get 0:06:43.880 --> 0:06:45.960 worried because I've never seen one of these, you know, 0:06:46.000 --> 0:06:48.120 i'll go stable coins get so big. Usually they just 0:06:48.160 --> 0:06:50.600 collapsed before that. So you know that I thought, well, 0:06:50.640 --> 0:06:53.159 you know, maybe this is first one, maybe a great 0:06:53.160 --> 0:06:57.520 shorting opportunity, and to maybe this poses some systemic risks 0:06:57.760 --> 0:07:00.360 to the entire space, and and maybe it's time intosan 0:07:00.480 --> 0:07:02.520 sound the alarm, you know not. I mean, obviously for 0:07:02.600 --> 0:07:04.640 my own benefit, I would definitely like to make money 0:07:04.680 --> 0:07:06.599 on the short but also I think just as a 0:07:06.600 --> 0:07:09.400 public service to also let everybody else know to So 0:07:09.800 --> 0:07:12.720 can you actually back up for listeners? And we hear 0:07:12.760 --> 0:07:15.400 stable coins and we sort of mentioned it in the intro, 0:07:15.480 --> 0:07:17.920 which is that there are various flavors of stable coins. 0:07:18.440 --> 0:07:22.080 Tethers one model, U S d C is a similar model. 0:07:22.160 --> 0:07:25.800 There's also um maker and die. But what is uh 0:07:25.960 --> 0:07:29.720 an Elgo stable coin, this project that keep trying and 0:07:29.760 --> 0:07:32.240 they do have a long history of continuing to blow up. 0:07:32.360 --> 0:07:36.960 How is an Elgo stable coin different than other stable coiners? Um? Yeah, 0:07:37.000 --> 0:07:39.600 So I think we should first separate out these so 0:07:39.680 --> 0:07:42.840 called um these centralized stable coins with the centralized ones. 0:07:43.240 --> 0:07:45.400 So you know, first on the centralized side, you have 0:07:45.440 --> 0:07:49.520 folks like UH USDT which is tether, and USDC which 0:07:49.560 --> 0:07:52.480 is uh you know, circles dollar and you know, basically 0:07:52.520 --> 0:07:54.560 what's happening here is that there's a dollar in some 0:07:54.600 --> 0:07:57.400 bank account and for every dollar there they issue out 0:07:57.400 --> 0:07:59.680 one coin. Anytime you return a coin to them, you 0:07:59.680 --> 0:08:02.560 can demount of physical dollar, you know, by wire transfer 0:08:02.640 --> 0:08:06.440 or whatnot. It's very much kind of tethered together between 0:08:06.440 --> 0:08:09.280 the real world and the virtual world. Um. You know, 0:08:09.440 --> 0:08:11.680 on the on the sort of decentralized side, you really 0:08:11.720 --> 0:08:15.160 have variations of two models, right, So you have sort 0:08:15.200 --> 0:08:18.120 of like the collateralized model, which is like make or 0:08:18.200 --> 0:08:21.520 die um. What that is is basically you can post 0:08:21.760 --> 0:08:25.760 uh some amount of um some other type of asset, 0:08:26.640 --> 0:08:29.000 and in return you're going to get some stable coin, 0:08:29.320 --> 0:08:31.720 which is maybe you know, like if you if you 0:08:31.760 --> 0:08:35.600 over collateralize it by then you're gonna get a percent. 0:08:35.600 --> 0:08:37.760 So if you put in a dollar worth of value, 0:08:37.880 --> 0:08:40.000 you get back a dollar uh. And then at some 0:08:40.040 --> 0:08:43.880 point the price of the underlying collateral will fluctuate to 0:08:43.920 --> 0:08:46.120 the point at which you reach like a point where 0:08:46.120 --> 0:08:48.920 there's a margin call and then you know, either your 0:08:48.920 --> 0:08:51.520 collateral get seized or you top it up or you 0:08:51.600 --> 0:08:55.880 return the borrow. Right, So it's basically collateralized leading right. 0:08:55.960 --> 0:08:57.880 That's kind of you know, that that sort of model. 0:08:58.120 --> 0:09:00.520 And then finally, and this is where you know we 0:09:00.520 --> 0:09:03.560 we we start talking about Luna and Ust. You know, 0:09:03.600 --> 0:09:06.960 finally there is this pure class of algo stable coins 0:09:06.960 --> 0:09:11.520 which do not have collateral or or severely undercollateralized and 0:09:11.920 --> 0:09:16.199 they have some kind of stabilization mechanism. Long story short, 0:09:16.600 --> 0:09:20.720 it's basically like a perpetual motion machine. And it's not 0:09:20.840 --> 0:09:23.560 the first time that exact phrase has been used on 0:09:23.600 --> 0:09:28.119 this podcast in reference to a Tero slash Luna. Yeah, definitely, 0:09:28.360 --> 0:09:31.920 I would say either perpetual motion machine or giant Rue 0:09:31.920 --> 0:09:34.840 Goldberg machine. Right, So some of these are just really 0:09:34.840 --> 0:09:38.960 elaborate contraptions and you know, you don't know where the 0:09:39.000 --> 0:09:42.160 hand crank is, but someone's turning a hand crank to 0:09:42.280 --> 0:09:45.040 keep the system going. And it's not actually a perpetual 0:09:45.080 --> 0:09:47.800 motion machine, which we know is impossible, but um so, 0:09:47.800 --> 0:09:50.640 so that's the analogy. But basically the idea is that 0:09:50.679 --> 0:09:54.839 you have some kind of mechanism which in some way, 0:09:55.040 --> 0:09:59.440 you know, indirectly or directly expands the supply of that 0:09:59.520 --> 0:10:02.400 stable point when the price is too high in order 0:10:02.400 --> 0:10:05.000 to push it back down, and on the other side, 0:10:05.280 --> 0:10:08.559 contracts the supply of that stable point through some mechanism 0:10:08.760 --> 0:10:10.959 when the price is too low, hence pushing the price 0:10:11.000 --> 0:10:13.640 back up. Right. So these are kind of like these. 0:10:14.000 --> 0:10:17.080 You know, there are these feedback mechanisms regardless of how 0:10:17.080 --> 0:10:19.439 you design it. Within this class of stable coin. They're 0:10:19.480 --> 0:10:23.920 all these feedback mechanisms which eventually caused something like this 0:10:23.960 --> 0:10:26.240 to happen, which is why in the end, I think 0:10:26.240 --> 0:10:28.720 they're all pretty much the same, but you know, just 0:10:28.760 --> 0:10:30.960 through different methods. I mean, they all look different, but 0:10:31.000 --> 0:10:33.360 when you really, like when you start to really break 0:10:33.360 --> 0:10:37.719 it down, it's all just about supply contraction and expansion. 0:10:38.360 --> 0:10:41.880 So two things here. One, could you give us a 0:10:41.960 --> 0:10:46.280 little bit more detail on that arbitrage mechanism between Terra 0:10:46.480 --> 0:10:50.280 and Luna, like walk us through exactly how it works 0:10:50.320 --> 0:10:52.440 if the price of Luna goes up or the price 0:10:52.440 --> 0:10:55.240 of Luna goes down, and you know, vice versa with Tera. 0:10:55.440 --> 0:10:59.680 And then secondly, you mentioned a hand kind of turning 0:10:59.720 --> 0:11:03.880 the rank. And my understanding here is that yields on 0:11:04.040 --> 0:11:07.199 offer from Tera slash Luna were exceptionally high, I think 0:11:07.240 --> 0:11:11.440 something like nineteen or And this is another question that 0:11:11.480 --> 0:11:14.160 we ask a lot in the crypto or DeFi space 0:11:14.200 --> 0:11:17.400 more broadly, but where do those yields actually come from? 0:11:17.440 --> 0:11:23.160 Like how does this entire incentivization mechanism work? M Yeah, definitely, 0:11:23.240 --> 0:11:25.400 And and I completely agree with you that I think 0:11:25.480 --> 0:11:28.960 this component of it, which is the anchor yields on 0:11:29.120 --> 0:11:33.400 deposits for US T this nineteen and a half percent, 0:11:33.520 --> 0:11:36.840 which then eventually dropped down eight. That's exactly the hand 0:11:36.880 --> 0:11:39.840 crank in this perpetual motion machine that that makes it 0:11:39.920 --> 0:11:42.640 not perpetual. That's it's a great question always I think 0:11:42.679 --> 0:11:44.560 to ask where do the yields come from? I think 0:11:44.600 --> 0:11:46.920 a lot of times, you know, it just seems like 0:11:46.960 --> 0:11:49.560 there's free money, but it turns out you're you're just 0:11:49.679 --> 0:11:53.360 subsuming all of this kind of indirect or hidden risk 0:11:54.000 --> 0:11:55.640 that you're not aware of, right, A lot of this 0:11:55.720 --> 0:11:59.480 kind of like tail risk, which only manifests once in 0:11:59.480 --> 0:12:01.920 a blue moon, but when it does, it completely wipes 0:12:01.960 --> 0:12:04.040 you out, right. So it's just it's just really kind 0:12:04.080 --> 0:12:07.160 of like very dangerous kind of invisible risk. What I 0:12:07.240 --> 0:12:09.760 always like to say is that most of the time, 0:12:10.160 --> 0:12:12.200 you know, if you can't find where the yield is 0:12:12.200 --> 0:12:17.320 coming from, then effectively it's coming from future bag holders. Right. 0:12:17.800 --> 0:12:21.920 So it's like this idea that the sort of true 0:12:21.960 --> 0:12:25.400 belief and sort of the cultish behavior of true believers 0:12:25.760 --> 0:12:30.760 will eventually produce some value which gets extracted from them, 0:12:31.240 --> 0:12:33.200 and it is given to you now in the present. 0:12:33.280 --> 0:12:35.480 So it's extracted in the future and given to you 0:12:35.520 --> 0:12:37.800 in the present right now, right, And I think that's 0:12:37.840 --> 0:12:41.400 basically exactly what's going on with this with this lunar model. 0:12:41.440 --> 0:12:43.600 I know that's a little bit abstract, but um, you 0:12:43.640 --> 0:12:45.240 know that's kind of how I how I see it. 0:12:45.640 --> 0:12:49.640 And then maybe just returning to your first question, we 0:12:49.640 --> 0:12:52.080 could do remind me again with the first question, can 0:12:52.120 --> 0:12:55.880 you explain exactly how the arbitrage mechanism between Luna and 0:12:56.240 --> 0:13:00.240 Terra or Ust actually works, Like, walk us through what 0:13:00.440 --> 0:13:04.120 is happening as the prices of either of these things move, 0:13:04.679 --> 0:13:08.640 like how they balance out. Yeah, so, um, how they're 0:13:08.640 --> 0:13:13.079 supposed to balance out, I should say, yeah. So I'll first, um, 0:13:13.120 --> 0:13:15.960 sort of just describe the simple model and then I'll 0:13:15.960 --> 0:13:19.240 add some caveats on some of the intricacies there. So 0:13:19.280 --> 0:13:22.439 the simple model is that at any point you can 0:13:22.480 --> 0:13:28.280 always redeem one UST for one dollars worth of Luna, right, So, 0:13:28.360 --> 0:13:31.160 like if Luna was at a hundred dollars, then one 0:13:31.280 --> 0:13:34.800 us t would get you, uh, one luna penny right 0:13:35.000 --> 0:13:37.839 point zero one Luna, which is equivalent to one dollar. 0:13:38.280 --> 0:13:40.720 And if Luna is one dollar, then you know one 0:13:40.840 --> 0:13:42.720 UST is going to give you one Luna. Right. But 0:13:42.800 --> 0:13:46.599 in any case, you're always able to redeem us T 0:13:47.360 --> 0:13:51.920 UH for the equivalent amount of dollars worth of Luna. Uh. 0:13:51.920 --> 0:13:53.800 And the amount of Luna you get is based on 0:13:53.920 --> 0:13:57.000 where the current market value for Luna is and the 0:13:57.080 --> 0:13:59.440 vice and you know the opposite is true too. You 0:13:59.480 --> 0:14:03.880 can all is destroy or burn one dollar's worth of 0:14:03.960 --> 0:14:08.200 Luna to create one U s T. Right. So the 0:14:08.320 --> 0:14:12.040 idea behind this feedback mechanism is that if us T 0:14:12.600 --> 0:14:14.959 is trading below one dollar, what you can do is 0:14:15.000 --> 0:14:17.800 you can buy that on the open market, right, and 0:14:17.840 --> 0:14:20.920 then convert that to one dollar's worth of Luna and 0:14:20.960 --> 0:14:23.960 then sell that one dollar of luna. Right. So that's 0:14:24.000 --> 0:14:26.800 kind of how that arbitrage mechanism works in order to 0:14:26.920 --> 0:14:30.760 maintain this peck. So that's that's basically the simple model. 0:14:31.120 --> 0:14:33.880 Now it gets a little bit more complicated because there's 0:14:33.880 --> 0:14:37.600 a lot of dials um and and knobs that you 0:14:37.600 --> 0:14:40.600 can adjust uh and you know, bells and whistles around this. 0:14:40.920 --> 0:14:44.520 So the first thing is that it's not technically true 0:14:44.680 --> 0:14:47.200 that you get exactly one dollar's worth of Luna for 0:14:47.480 --> 0:14:51.400 burning one U s T. There is basically something called 0:14:51.480 --> 0:14:54.560 a automated market maker. This is something that has been 0:14:54.560 --> 0:14:58.480 popularized by you know, uh, you know, unit swap, sushi swap, 0:14:58.560 --> 0:15:02.120 curve balancer, a lot of these you know, m M protocols, 0:15:02.200 --> 0:15:06.440 these uh, these sort of decentralized liquidity pools, and it's 0:15:06.520 --> 0:15:11.800 really this automated market maker bonding curve which governs sort 0:15:11.800 --> 0:15:16.360 of the slippage or the costs of converting between Luna 0:15:16.720 --> 0:15:22.400 and UST. So the first component of this mechanism is 0:15:22.440 --> 0:15:25.400 that the greater the size that you do, the worse 0:15:25.520 --> 0:15:28.200 of a price you're going to get. Right, So this 0:15:28.280 --> 0:15:31.040 is like equivalent to like market slippage. You know, if 0:15:31.040 --> 0:15:34.080 you want to buy, you know, a million dollars worth 0:15:34.120 --> 0:15:36.720 of something, you know you're gonna pay a little above 0:15:36.960 --> 0:15:39.040 market price. If you want to buy a billion dollars 0:15:39.040 --> 0:15:42.400 worth worth of something, you're gonna pay well above market price. Right. 0:15:42.440 --> 0:15:43.760 So it's just you know, it kind of depends on 0:15:43.760 --> 0:15:46.400 liquid in the market, but really it's governed by this 0:15:46.800 --> 0:15:49.440 bonding curve, and you know, the greater the size that 0:15:49.480 --> 0:15:52.240 you do, the more slippage you in curve. The second 0:15:52.360 --> 0:15:54.440 part of it that's a little bit nuanced, is that 0:15:54.480 --> 0:15:56.400 there is some fee that's collected in the middle just 0:15:56.480 --> 0:15:58.720 like all these other bonding curves, all these other A 0:15:58.840 --> 0:16:02.240 M M s. There is a fee for converting. It's 0:16:02.240 --> 0:16:04.400 not very high, but you know, there is still some 0:16:04.480 --> 0:16:08.080 fee which adds on to basically the transactional costs, which 0:16:08.080 --> 0:16:10.400 are the slippage you know, plus the fee itself. And 0:16:10.440 --> 0:16:13.160 then the last part that's really interesting about this mechanism 0:16:13.600 --> 0:16:16.200 is that you know, before the full collapse, you know, 0:16:16.240 --> 0:16:18.920 in the past couple of days, there was basically a 0:16:18.960 --> 0:16:24.920 gating mechanism on which governed exactly how much ust could 0:16:24.960 --> 0:16:28.600 be created or destroyed per day, So being destroyed being 0:16:28.640 --> 0:16:30.800 you know, moving back into Luna, and I think that 0:16:30.800 --> 0:16:34.120 that number was around like two fifty mil uh dollars 0:16:34.160 --> 0:16:36.760 worth per day. Um, So anything beyond that you just 0:16:36.840 --> 0:16:38.960 you're just gonna have to wait until the next day. 0:16:39.040 --> 0:16:42.280 And then you know, there's also all sorts of like um, 0:16:42.320 --> 0:16:45.160 you know, much finer details like pool recovery periods and 0:16:45.160 --> 0:16:46.800 stuff like that, but you know, none of that is 0:16:46.800 --> 0:16:48.920 really that important, I think, to what we're gonna be 0:16:48.920 --> 0:16:52.240 talking about next. So I think just based on that explanation, 0:16:52.320 --> 0:16:55.080 I think we should be able to describe the phenomenon 0:16:55.160 --> 0:16:57.200 that we've we've seen in the past few days. So 0:16:57.240 --> 0:16:59.560 I want to get before we get into sort of 0:16:59.600 --> 0:17:02.560 like what happened over the last few days, because I 0:17:02.600 --> 0:17:04.800 think you've said some important things. The fact that there's 0:17:04.800 --> 0:17:07.080 a limit on how much can be converted in a 0:17:07.080 --> 0:17:10.040 given day is really important to understanding the action. The 0:17:10.080 --> 0:17:12.760 fact that there's a fee obviously for the more you trade, 0:17:12.800 --> 0:17:15.440 which if everyone's trading, fees go up. The one other 0:17:15.720 --> 0:17:20.680 UM element I'm curious about an understanding its role actually too. 0:17:21.119 --> 0:17:25.159 I want to understand a little bit further them. The 0:17:25.280 --> 0:17:29.640 Luna Foundation bought a ton of bitcoin I think earlier 0:17:29.680 --> 0:17:32.200 in the year, and their basic idea was like, Okay, 0:17:32.520 --> 0:17:35.400 you know, just in case I guess this the the 0:17:35.440 --> 0:17:38.600 perpetual motion machine starts to wobble a little bit, we 0:17:38.680 --> 0:17:41.560 can defend the PEG with this big bitcoin reserves, sort 0:17:41.600 --> 0:17:46.439 of like classic e M style. So I found this 0:17:46.480 --> 0:17:49.240 move really weird because either you're sort of a fully 0:17:49.280 --> 0:17:53.280 backed stable coin or its traditional reserves, or you're an 0:17:53.280 --> 0:17:56.080 algorithmic stable coin. Because the whole the whole problem they 0:17:56.080 --> 0:17:57.920 were trying to solve was that they wanted to get 0:17:57.960 --> 0:18:01.639 away from the traditional financial system UM without having to 0:18:01.680 --> 0:18:04.159 build the reserves. It's sort of like being like a 0:18:04.200 --> 0:18:07.480 little bit pregnant or something like we're sort of a 0:18:07.560 --> 0:18:11.440 little bit a little bit uh, a little bit unbacked. Yeah, 0:18:11.480 --> 0:18:13.760 like we're sort of reserved back but not so what 0:18:13.880 --> 0:18:16.639 is what was the role? Well, I I want to 0:18:16.680 --> 0:18:20.880 know what is the role of the Bitcoin Stabilization Fund? 0:18:21.200 --> 0:18:23.000 And then also I know you touched on it, but 0:18:23.040 --> 0:18:25.399 could you just explain a little bit and Tracy as 0:18:25.520 --> 0:18:29.600 but I think it's crucial that percent yield that was 0:18:30.080 --> 0:18:32.840 being given to induce people to hold us t this 0:18:32.960 --> 0:18:35.119 sort of big reason to hold a stable coin and 0:18:35.160 --> 0:18:38.520 actually make money holding a stable Like where was that 0:18:39.040 --> 0:18:41.960 coming from? Like what was the source of funds specifically 0:18:41.960 --> 0:18:45.000 other than just sort of theoretical future bag holders, Like 0:18:45.000 --> 0:18:48.600 how was that paid out? So basically, you know, when 0:18:48.880 --> 0:18:52.480 Luna or the terror Eco system first got started, Uh, 0:18:52.520 --> 0:18:54.399 there was some funds that were set aside for the 0:18:54.440 --> 0:18:58.240 company itself, right, And the main company is Terraform Labs TfL, 0:18:58.840 --> 0:19:01.800 and they have this huge stash of Luna which unlocks 0:19:01.800 --> 0:19:04.240 over a certain investing schedule. Right, so even for them, 0:19:04.320 --> 0:19:07.400 you know, slowly unlocks over time. So what they would 0:19:07.400 --> 0:19:09.760 do in order to finance their operations and to also 0:19:09.920 --> 0:19:13.280 finance the anchor yield reserve. Is they would sell large 0:19:13.280 --> 0:19:15.679 clips of this too, you know, willing investors at some 0:19:15.760 --> 0:19:18.080 kind of discount that also has a one year clip 0:19:18.160 --> 0:19:20.720 for some kind of vesting schedule, uh something like that, 0:19:21.200 --> 0:19:23.439 and then they would use that for operations, and they 0:19:23.440 --> 0:19:26.679 would also use that to keep basically topping up the 0:19:26.720 --> 0:19:31.439 anchor protocol on their year reserve because they were paying 0:19:31.480 --> 0:19:35.760 more interests to depositors than they were collecting from borrowers. 0:19:36.080 --> 0:19:38.719 And you know, I think in the end stages of Luna, 0:19:38.960 --> 0:19:42.280 in its final days, um, you could see that the 0:19:42.400 --> 0:19:46.000 uh you know, the the deposit amount was way way 0:19:46.119 --> 0:19:49.040 higher than the borrowed amount. So you know, they're they 0:19:49.080 --> 0:19:50.840 were bleeding. I mean, I think at some point so 0:19:51.080 --> 0:19:54.800 everyone so everyone buys UFT in order to collect that. 0:19:55.920 --> 0:19:58.720 But that basically has the effect, if you think it through, 0:19:58.840 --> 0:20:02.479 of sapping those reserves fund faster. They're sort of like 0:20:02.520 --> 0:20:05.160 set aside to sort of bootstrap the whole thing and 0:20:05.440 --> 0:20:09.240 incentivize the whole thing. But essentially, if everyone is chasing 0:20:09.280 --> 0:20:11.359 for it at once, that starts to get depleted or 0:20:11.359 --> 0:20:15.200 you start to like strain your ability to pay that up. Uh. Yeah, 0:20:15.200 --> 0:20:18.040 that's exactly right. I think at the at the peak, 0:20:18.119 --> 0:20:21.400 they were burning maybe about seven million a day, uh 0:20:21.440 --> 0:20:24.560 dollars worth a day of their their their yield reserve, 0:20:24.960 --> 0:20:27.399 and uh, you know, originally I think it was something 0:20:27.440 --> 0:20:29.680 like fifty mil or eighty mil or something like that. 0:20:30.160 --> 0:20:31.679 And then they had to do a top up of 0:20:31.880 --> 0:20:34.880 four fifty mill and then, you know, very quickly soon 0:20:34.960 --> 0:20:37.840 after that, soon was almost depleted, and they were thinking 0:20:37.840 --> 0:20:40.600 about how much to do another top above. Whether you know, 0:20:40.640 --> 0:20:42.159 they were thinking about whether to do it or not. 0:20:42.240 --> 0:20:46.399 Everybody was you know, you know, lobbying Dough Dough quant 0:20:46.440 --> 0:20:48.600 to to do it. You know, he was, you know, 0:20:48.680 --> 0:20:50.879 running some rumors that oh maybe it's going to be 0:20:50.920 --> 0:20:53.840 over a billion this time, this, this and that. So 0:20:54.040 --> 0:20:57.000 you know, the whole the whole thing was very expensive. Now, 0:20:57.080 --> 0:20:59.159 I think what they were thinking, because I don't want 0:20:59.160 --> 0:21:01.000 to strawman them, you or, I think what they were 0:21:01.040 --> 0:21:04.720 thinking is that, you know, they just want to uh 0:21:04.800 --> 0:21:07.280 you know, they think about this as a marketing expense, right, 0:21:07.320 --> 0:21:08.760 so they just want to get to get everybody talking 0:21:08.800 --> 0:21:12.160 about Luna, everybody using us t um. You know, they're 0:21:12.200 --> 0:21:14.200 just bleeding seven million in a day, but they're getting 0:21:14.200 --> 0:21:17.200 a lot of people you know, talking about anchor using anchor, 0:21:17.640 --> 0:21:21.200 you know, using their ecosystem, putting their money into it, uh, 0:21:21.240 --> 0:21:24.840 into this bar lending protocol. So you know, I personally 0:21:24.880 --> 0:21:26.600 don't think it was worth it. I think they you know, 0:21:26.680 --> 0:21:29.720 probably even even if they were right, which I don't think. 0:21:29.920 --> 0:21:32.400 I think they're absolutely wrong. But even if they were right, 0:21:32.440 --> 0:21:34.360 they probably could have gone away with a little bit 0:21:34.359 --> 0:21:38.560 lower than yields. I mean probably like even like eighteen 0:21:38.840 --> 0:21:40.879 seventeen probably would have been fine. Now, it's not going 0:21:40.960 --> 0:21:42.439