Speaker 1: Welcome to tech Stuff, a production from iHeartRadio. Hey there,
Speaker 1: and welcome to tech Stuff. I'm your host, Jovin Strickland.
Speaker 1: I'm an executive producer with iHeartRadio and how the tech
Speaker 1: are you? So? Back on January twenty fifth, twenty twenty one,
Speaker 1: I published an episode titled It's a open Bracket Crypto,
Speaker 1: closed bracket Ponzi Scheme. So it's a crypto Ponzi scheme.
Speaker 1: That's where I was paying homage to stuff you should
Speaker 1: know as Chuck Bryant, who I have heard say it's
Speaker 1: a Ponzi scheme way back in the house stuff works days.
Speaker 1: And in that episode, I talked about numerous issues within
Speaker 1: the crypto community that relate to Ponzi schemes, and today
Speaker 1: I thought we would do an update to talk about
Speaker 1: one specific one that really had an enormous impact last year,
Speaker 1: and then a little additional details because even since twenty
Speaker 1: twenty one, there's been more examples of either outright Ponzi
Speaker 1: schemes in the crypto space or closely related issues that
Speaker 1: had enormous impact. So I'm not talking about every single one,
Speaker 1: but I'm talking about the really big ones. Now, first,
Speaker 1: we need to remind ourselves about what a Ponzi scheme
Speaker 1: actually is. Now. It takes its name from a guy
Speaker 1: named Charles Ponzi, who in the nineteen twenties used a
Speaker 1: method to steal a whole lot of money, reportedly around
Speaker 1: fifteen million dollars in less than a year. Now that's
Speaker 1: a lot of money right now, fifteen million. I would
Speaker 1: not sneeze at fifteen million. I would be shuffed to
Speaker 1: receive that. But holy cats, think about that in nineteen
Speaker 1: twenties money a ridiculous amount of cash. Well, what was
Speaker 1: he doing? Well? Schtick was centered around International Reply coupons,
Speaker 1: or IRCs, and essentially an IRC is a voucher for
Speaker 1: postage stamps in another country. So you would go to
Speaker 1: the post office and you would buy IRCs if you
Speaker 1: wanted to write back to your family in the old
Speaker 1: country and then have them be able to respond without
Speaker 1: them having to buy stamps themselves. So instead they would
Speaker 1: go to their post office, they would use the IRC coupon,
Speaker 1: and the coupon would cover the cost of stamps to
Speaker 1: send international mail back to you. You don't have to
Speaker 1: do this within the same country, because then you could
Speaker 1: just use a self addressed stamped envelope, but obviously a
Speaker 1: US stamp doesn't mean anything in a different country. Well,
Speaker 1: Ponzi's idea was to use IRCs and leverage the differences
Speaker 1: in postage costs in different countries. See, when you bought
Speaker 1: an IRC, you did so at whatever the local postage
Speaker 1: rate for a stamp was in your area, and even
Speaker 1: if the postage rate was higher in another country, the
Speaker 1: IRC would still cover the stamp. So this example doesn't
Speaker 1: really hold because the rates would be flip flocked. But
Speaker 1: here we go. If a stamp at the US cost
Speaker 1: a nickel at the time, so five cents, but a
Speaker 1: stamp in Germany cost a dime or ten cents in
Speaker 1: equivalent US cash, what you could do is you could
Speaker 1: go to the US post office. You would use a
Speaker 1: five cent nickel to buy an IRC. You'd send that
Speaker 1: over to your papaw in Germany, and your papa could
Speaker 1: use that same IRC to get a ten cent stamp
Speaker 1: at the post office, even though you only had to
Speaker 1: pay five cents back in the United States. So Ponzi's
Speaker 1: idea was to try and leverage this. He wanted to
Speaker 1: buy IRCs in cheap countries and then redeem them and
Speaker 1: innsive ones and then sell the stamps out a profit.
Speaker 1: So it was like creating money out of nothing. He
Speaker 1: tried to convince a bank to back this idea, of
Speaker 1: the banks weren't convinced that the strategy would work, or
Speaker 1: if it did work, it wouldn't really be scalable. You
Speaker 1: wouldn't be able to do this in a volume that
Speaker 1: would actually make you any significant amount of money. It
Speaker 1: turns out those banks were right. So instead Ponzi goes
Speaker 1: and starts talking to friends and acquaintances, and he starts
Speaker 1: making promises that within three months he could double an
Speaker 1: initial investment, and he secures a round of investment cash,
Speaker 1: and sure enough, some of these investors see impressive payouts
Speaker 1: from Ponzi later down the road. Except it turned out
Speaker 1: those payouts were not the result of this IRC scam
Speaker 1: he had in mind, or not even scam his scheme.
Speaker 1: This IRC scheme wasn't the reason why Ponzi was paying
Speaker 1: out the dividends on those investments. Instead, Ponzi actually found
Speaker 1: the logistics of getting this scheme to work were way
Speaker 1: more complex than he anticipated it. Like I said, the
Speaker 1: banks were right, So I think, at least in the beginning,
Speaker 1: he probably was determined to try and make it work.
Speaker 1: But in the meantime, what he did was he needed
Speaker 1: to find a way to give a return on investment
Speaker 1: to these initial investors. So he took out a second
Speaker 1: round of investing, and with some of the money that
Speaker 1: folks were pouring into the scheme at this round of investment,
Speaker 1: he took that money and paid out some of his
Speaker 1: earlier investors. Well, the earlier investors are incredibly excited to
Speaker 1: see that they got such a rapid and considerable return,
Speaker 1: so a lot of them reinvested back into Ponzi's scheme,
Speaker 1: and before long Ponzi shifts away from trying to make
Speaker 1: the IRC thing work. He just gives up on that
Speaker 1: and he steady just runs a scam where he takes
Speaker 1: the most recent round of investments to pay out returns
Speaker 1: to earlier investors and himself. Now, to be clear, Ponzi
Speaker 1: did not invent this idea. This was not a brand
Speaker 1: new concept. He was not the first to come up
Speaker 1: with a Ponzi scheme, but we call them Ponzi schemes
Speaker 1: because he went big time with this, mostly out of Boston, Massachusetts.
Speaker 1: While previous examples of these schemes followed essentially the same
Speaker 1: thing that what Ponzi was doing. Ponzi's version propelled him
Speaker 1: to such wealth that before the whole thing came crashing down,
Speaker 1: he was pretty famous in the New England area. Newspapers
Speaker 1: would cover his business favorably, and that of course led
Speaker 1: to even more investments. So when a newspaper would say, hey,
Speaker 1: these investors are super happy because they got so much
Speaker 1: money back on their investment, more people were begging to
Speaker 1: give Ponzi their money. Was able to perpetuate the scheme
Speaker 1: and make him even richer. But here's the thing. Even
Speaker 1: the best run Ponzi scheme will not last forever. Eventually,
Speaker 1: the incoming investments are not enough to cover all the
Speaker 1: previous investors, and you either have to pay out smaller
Speaker 1: and smaller dividends, which is going to upset your investors,
Speaker 1: or you got to take the money and run while
Speaker 1: you can. But while the scheme is booming, you can
Speaker 1: have yourself a swell time. Just you know, you've got
Speaker 1: to remember that at some point the piper will demand
Speaker 1: to be paid, and you'll likely also have some government
Speaker 1: agencies with some scary initials, and they'll be really, really
Speaker 1: interested in talking to you. Another way to describe the
Speaker 1: Ponzi scheme is the old saying robbing Peter to pay Paul,
Speaker 1: or sometimes it's borrowing from Peter to pay Paul. But
Speaker 1: you get the idea. You're not creating wealth, you're really
Speaker 1: just redistributing it. And it only works as long as
Speaker 1: you can keep finding more Peters so that you can
Speaker 1: keep paying all those Palls and keep them at bay.
Speaker 1: As for Ponzi himself, well, several months after he rocketed
Speaker 1: to wealth, the investigators began to close in on him.
Speaker 1: The US Postal Office denounced the underlying principle of his
Speaker 1: supposed business, which, remember, was not actually what he was doing.
Speaker 1: It was just what he said he was doing. But
Speaker 1: the US post Office said, there's just no way he
Speaker 1: could be making that much money through IRCs because the
Speaker 1: volume he would have to trade in was greater than
Speaker 1: what the supply was, so literally, there was no possible
Speaker 1: way for him to make his money through the way
Speaker 1: he was claiming, because there weren't enough IRCs out there
Speaker 1: to make it happen. And local newspapers began to suspect
Speaker 1: that perhaps they had been hoodwinked, and so chagrined, they
Speaker 1: began to launch their own investigative efforts and a way
Speaker 1: to try and save face, because if you talk someone
Speaker 1: up and then it turns out that they're a flim
Speaker 1: flam artist, that does not go well for your reputation. Right,
Speaker 1: So these newspapers are like, we need to if something
Speaker 1: is hinky here, we need to really look into it.
Speaker 1: There were a couple of points where it seemed like
Speaker 1: the mob was about to turn on Ponzi, that everyone
Speaker 1: was gonna pull their money out, which would have sent
Speaker 1: the whole thing into a collapse. But a couple of
Speaker 1: times he was actually able to dissuade them, and some
Speaker 1: folks who were determined to withdraw their money once the
Speaker 1: investigations began would later reconsider because Ponzi seemed to be
Speaker 1: on the up and up, like he was returning money
Speaker 1: to investors who were requesting it, like millions of dollars
Speaker 1: early on, and so folks began to say, well, if
Speaker 1: he was actually a crook, he wouldn't be returning money,
Speaker 1: so he must be honest. That means I might actually
Speaker 1: stand to make a whole bunch of money from this guy.
Speaker 1: And so people who had initially thought I'm out, ended
Speaker 1: up not just staying in, but some of them put
Speaker 1: even more money into the scheme. Now, ultimately, an audit
Speaker 1: by the US government found that Ponzi's business was thoroughly
Speaker 1: corrupt and totally baseless. The investigation ultimately found there was
Speaker 1: around sixty one dollars worth of IRC's in the whole
Speaker 1: dang business. You are not going to be making millions
Speaker 1: of dollars in profit off of sixty one dollars of
Speaker 1: these coupons, And it proved that what Ponzi really was
Speaker 1: doing was just convincing more and more people to hand
Speaker 1: him money to pay off the earlier investors and to
Speaker 1: make himself rich. Ponzi ultimately would go to jail, though
Speaker 1: not before having a few more adventures through skipping bond
Speaker 1: and running off to different states before he was ultimately
Speaker 1: apprehended and sentenced, and after serving his sentence, he was
Speaker 1: deported to Italy. He was an immigrant from Italy to
Speaker 1: the United States. He did not return to the US,
Speaker 1: but he did immigrate to Brazil and set up a
Speaker 1: business there until in nineteen forty nine he passed away. Now,
Speaker 1: there are a couple of scams that closely relate to
Speaker 1: a Ponzi scheme, but are slightly different. For example, a
Speaker 1: pyramid scheme. This is where you've got one person or
Speaker 1: a group of people at the very tip top of
Speaker 1: the pyramid, and then they recruit a layer of investors
Speaker 1: who pay money into the scheme. In return, these initial
Speaker 1: investors have to go out and recruit another layer of investors,
Speaker 1: and they keep a little bit of the money that
Speaker 1: those folks are contributing to the organization, and they pass
Speaker 1: the rest of the money up the pyramid and then
Speaker 1: this new layer, so now we're two layers down from
Speaker 1: the top. They have to go on and recruit yet
Speaker 1: another layer of investors, and so on. So each group
Speaker 1: of investors needs to get more investors. And if you
Speaker 1: want to think of a simple one, let's say that
Speaker 1: each investor needs to get two other investors to pay
Speaker 1: into the system. And it expands rapidly as you would imagine.
Speaker 1: And that's just if you only had to get two.
Speaker 1: And so meanwhile, the people at the top, they're getting
Speaker 1: payouts with every successive layer that's added to this pyramid.
Speaker 1: Each person along the top is getting a small amount
Speaker 1: per investment till you get to the tippy top where
Speaker 1: they're really making bank. But the people at the bottom
Speaker 1: are not making anything at all unless they are recruiting
Speaker 1: new people into the organization, so they're feeding into the pyramid.
Speaker 1: And like a Ponzi scheme, a pyramid scheme will ultimately
Speaker 1: fall apart because at some level the base of the
Speaker 1: pyramid is so large that there's no way to recruit
Speaker 1: more people to pay into the system, and the whole
Speaker 1: thing starts to fall apart. And really the only people
Speaker 1: who make any serious money are the ones near the
Speaker 1: top layers, like maybe the first couple of layers, and
Speaker 1: the tippy top being the ones who make the most
Speaker 1: money out of the whole thing. Now relate into that
Speaker 1: are multi level marketing schemes. These aren't necessarily outright scams,
Speaker 1: they are not necessarily illegal, but they also rely heavily
Speaker 1: on recruiting new members, and sometimes they rely more on
Speaker 1: the recruitment side than they do with whatever they're actually
Speaker 1: supposedly selling or marketing. And there are tons of these,
Speaker 1: and they're known for selling all sorts of stuff. The
Speaker 1: classic example is cosmetics, where you have people who get
Speaker 1: pay into the system in order to get access to
Speaker 1: cosmetics supplies to sell to people, but very quickly they
Speaker 1: see that the real money isn't in selling the cosmetics,
Speaker 1: but recruiting other people to join in to sell these cosmetics.
Speaker 1: And once you really start stripping things away, it starts
Speaker 1: to look like the cosmetics are just an excuse for
Speaker 1: the organization to exist. The real money comes in looping
Speaker 1: in more and more people into the scheme until you've saturation,
Speaker 1: and then if the cosmetics can support that, if selling
Speaker 1: the cosmetics can keep the organization going, it's technically a
Speaker 1: legitimate organization. It's just that it's probably not making the
Speaker 1: same amount of money it was when it was in
Speaker 1: the recruitment phase, and it's still kind of questionable. And
Speaker 1: then we've got the crypto version, and these can take
Speaker 1: a lot of forms, but the basic sequence tends to
Speaker 1: be someone creates a new cryptocurrency, either on an existing
Speaker 1: blockchain or possibly through a new one, and they hold
Speaker 1: an initial offering of coins ioc Man. There's a lot
Speaker 1: of initialisms in this episode, and sometimes I stands for initial,
Speaker 1: and sometimes it stands for international. It's initial in this case,
Speaker 1: so in return for an investment, the investor gets an
Speaker 1: initial offering of coins or digital tokens that are awarded
Speaker 1: to them, and they are newly minted, fresh, crispy crypto coins.
Speaker 1: We'll talk about where this can go wrong after we
Speaker 1: take this quick break. Okay, an initial offering of coins
Speaker 1: where you jump in on a brand new blockchain offering,
Speaker 1: whether it's on a brand new blockchain itself or on
Speaker 1: an existing one. You want to be an initial investor,
Speaker 1: so you put some of your real money into the system,
Speaker 1: and you are awarded some digital tokens, some crypto coins
Speaker 1: that have been mented specifically for this purpose to attract investors,
Speaker 1: and so your investment now is represented by these digital tokens.
Speaker 1: There's nothing inherently wrong with that, right. There are legit cryptocurrencies,
Speaker 1: or as legit as you believe cryptocurrencies to be. That's
Speaker 1: kind of a sliding scale in public perception. But there
Speaker 1: are also schemers who would follow this exact same chain
Speaker 1: of events in order to rake in that investor money.
Speaker 1: They'd meant out cryptocurrencies that ultimately would end up being worthless.
Speaker 1: Once the whole scheme comes down and the ringleader runs
Speaker 1: off with the investment cash, and everyone else's left with
Speaker 1: digital tokens that don't hold any value, and due to
Speaker 1: the fact that crypto allows for a certain amount of anonymity,
Speaker 1: it can be possible for the same scam artist to
Speaker 1: pull the scheme again at a later date with a new,
Speaker 1: equally worthless crypto coin. It's also possible for a well
Speaker 1: intentioned person or group to fall into this trap of
Speaker 1: a Ponzi scheme because they found themselves in a tough
Speaker 1: spot that they hoped was just a temporary situation, and
Speaker 1: they start practicing the whole Rob Peter to pay Paul
Speaker 1: approach just as a way to stay afloat while still
Speaker 1: hoping to make a legitimate recovery and not have to
Speaker 1: continue that practice. And maybe sometimes that works. Some folks
Speaker 1: might be able to use creative accounting to stay above
Speaker 1: water long enough to regain stability, But it definitely doesn't
Speaker 1: always work right, because there are lots of examples where
Speaker 1: this kind of thing will ultimately lead to a total collapse.
Speaker 1: And I want to add that one of the factors
Speaker 1: that I believe really helps fuel this is the combination
Speaker 1: of high enthusiasm and low knowledge or experience that the
Speaker 1: promise of a huge return, which is a typical red
Speaker 1: flag of any Ponzi scheme can really excite someone who
Speaker 1: has some money that they would like to invest and
Speaker 1: see that money increase. And the fact that cryptocurrency itself
Speaker 1: is a difficult thing to describe and explain. It's hard
Speaker 1: to teach someone how it works in a way that
Speaker 1: doesn't make them go cross eyed because it is very complicated. Ultimately, well,
Speaker 1: lack of information can end up helping if you're pulling
Speaker 1: a scam because people just know, oh, cryptocurrency, that's something
Speaker 1: that can in some cases at least lead to massive
Speaker 1: increase in value. So I could get rich overnight by
Speaker 1: investing in this, And because they don't have a full
Speaker 1: understanding of it, they aren't aware of the potential risks,
Speaker 1: and that's what creates this perfect environment for running scams.
Speaker 1: I frequently say, if there's a lack of information and
Speaker 1: an overabundance of enthusiasm, that is an enormous warning sign
Speaker 1: and you should take a moment to really think things
Speaker 1: through before you jump in and participate. Doesn't mean that
Speaker 1: it's necessarily going to go bad, but it's just that
Speaker 1: conditions are perfect for that thing to kind of happen,
Speaker 1: So you need to take that step back and start
Speaker 1: asking questions and make sure that you understand can you
Speaker 1: evaluate the answers before you start making decisions? All right?
Speaker 1: This finally brings us to talk about Terraform and UST
Speaker 1: and Luna. So Terraform Labs would be the company we'll
Speaker 1: be talking about. And the co founders were Quan Do Jung,
Speaker 1: although in the crypto community he's known as Do Quan
Speaker 1: and his business partner Daniel Shin. Quan had previously worked
Speaker 1: for some big tech companies in the US before he
Speaker 1: moved from the United States back to his home country
Speaker 1: of South Korea. He went into business for himself, and
Speaker 1: then in twenty eighteen, he moved to Singapore and co
Speaker 1: founded Terraform Labs in January of that year. So he
Speaker 1: located in Singapore, and you might wonder why, and a
Speaker 1: lot of these crypto companies they will locate in places
Speaker 1: that have lax regulatory bodies in an effort to be
Speaker 1: able to do business without having two much interference from
Speaker 1: government agencies. So Terraform Labs then introduces the terra blockchain
Speaker 1: and ultimately would begin to mint two different cryptocurrencies, although
Speaker 1: not right out of the gate. These were actually unveiled
Speaker 1: in different times. But one I want to talk about
Speaker 1: is terra USD, which we usually just refer to as UST.
Speaker 1: That does get confusing because UST stands for terra us D,
Speaker 1: and then the other cryptocurrency is Luna. All right, even
Speaker 1: though it came out second, we're going to take Ust
Speaker 1: first to explain what it is. Terraform introduced Ust as
Speaker 1: an algorithmic stable coin. Now we need to break that down.
Speaker 1: A stable coin is a type of cryptocurrency that has
Speaker 1: its value connected or pegged, as they say, in crypto,
Speaker 1: to some other asset. This is why ideally would keep
Speaker 1: this particular type of cryptocurrency stable. The value of the
Speaker 1: stable coin, at least theoretically, would only change if the
Speaker 1: value of the pegged asset also changed. So if you
Speaker 1: were to peg your cryptocurrency stable coin to the US dollar,
Speaker 1: which is a pretty common thing, then in theory, as
Speaker 1: the US dollars value rises, so would your stable coin
Speaker 1: that's pegged to it. Or if the US dollar value decreased,
Speaker 1: then the value of your stable coin would decrease in kind.
Speaker 1: Typically we're looking at a one to one relationship when
Speaker 1: we're talking about fiat currency, So one US dollar and
Speaker 1: one Ust would be equivalent in value, assuming that everything
Speaker 1: is going correctly. Stable coins try to address an issue
Speaker 1: that non backed cryptocurrencies often encounter, which is volatility. Now
Speaker 1: you've probably heard me say way too many times that
Speaker 1: one of my big problems with cryptocurrencies like bitcoin is
Speaker 1: that their value can fluctuate so much that you are
Speaker 1: discouraged from using it as actual currency unless you're willing
Speaker 1: to encounter some potentially significant problems. For example, the value
Speaker 1: of some cryptocurrencies like bitcoin can change by significant amounts
Speaker 1: so quickly that when you start a transaction, you're exchanging
Speaker 1: a certain amount of value or purchasing power, but by
Speaker 1: the time the transaction is complete, that amount could have
Speaker 1: changed dramatically. So let me give you a very oversimplified example.
Speaker 1: This is one I've used before. So let's say you
Speaker 1: walk into a convenience store and you want to buy
Speaker 1: a candy bar, and the candy bar is priced at
Speaker 1: one US dollar. So you pick up the candy bar,
Speaker 1: you go to the cash register, you hand over your
Speaker 1: hard earned US dollar, and in return, you get to
Speaker 1: take the candy bar and leave the store. But right
Speaker 1: at the moment that you're doing this exchange, let's say
Speaker 1: that the value of the dollar changes wildly, and now
Speaker 1: that one dollar bill has five dollars worth of purchasing power,
Speaker 1: because now the value of the dollar has changed, So
Speaker 1: what you could have bought with one dollar before has
Speaker 1: increased by five times. Now like technically that one dollar
Speaker 1: is equivalent to the value of five candy bars, not
Speaker 1: just one. But now that means the candy bar you
Speaker 1: bought is way overpriced, right, because it should now cost
Speaker 1: twenty cents, because the presumably the candy bar's value is
Speaker 1: independent of how much a dollar is worth. It's not
Speaker 1: like a candy bar is magically one dollar. No matter
Speaker 1: how much a dollar is valued, a candy bar has
Speaker 1: its own intrinsic value, and that value the price should,
Speaker 1: in theory, fluctuate with the value of the dollar, at
Speaker 1: least at some point. It's probably gonna trail because these
Speaker 1: things are not instantaneous, but it will change. So it
Speaker 1: would mean that perhaps in the future you would come
Speaker 1: to that same store and now you'd see all the
Speaker 1: candy bars are valued at twenty cents, not a dollar,
Speaker 1: because the value of the dollar itself has changed. On
Speaker 1: the flip side, let's say that at the moment of
Speaker 1: purchase the value of the dollar decreases by half, which
Speaker 1: means you've got yourself a one dollar candy bar, but
Speaker 1: at the purchasing equivalent of fifty cents before this change.
Speaker 1: Now the candy bar company or the convenience store is
Speaker 1: hurting because the dollar they collected isn't worth as much
Speaker 1: as it would have been pre purchase. Now that's a
Speaker 1: very silly example, right, But that sort of stuff actually
Speaker 1: happens with cryptocurrencies because the transaction times can be long.
Speaker 1: With bitcoin, you're talking about potentially ten minutes, and the
Speaker 1: fees that you pay with transactions are fairly high, and
Speaker 1: then you pair that with the currency's volatility. People end
Speaker 1: up being discouraged from actually using cryptocurrencies as currency because
Speaker 1: you could end up losing a huge amount of money
Speaker 1: just in the process as you're completing a transaction. However,
Speaker 1: stable coins, because theoretically they lack volatility, they can be
Speaker 1: more useful as digital currency. You could actually buy into
Speaker 1: a stable coin and be relatively sure that your money
Speaker 1: will be good wherever you spend it, and you don't
Speaker 1: have to worry about massive fluctuations and value. You can
Speaker 1: use it as a currency. Now, a lot of people
Speaker 1: use stable coins to move money into and out of
Speaker 1: non backed cryptocurrencies. Right, so instead of just immediately withdrawing
Speaker 1: bitcoin into US dollars, you might convert bitcoin into a
Speaker 1: stable coin first, then go through the conversion of the
Speaker 1: stable coin into US dollars. If you want to liquefy
Speaker 1: or liquid date, I should say your assets. Liquidity is
Speaker 1: very important for there to be confidence in the crypto market.
Speaker 1: But Ust is not a backed stable coin. It's an
Speaker 1: algorithmic stable coin. That means UST relies on a set
Speaker 1: of rules that's one algorithm is Ultimately, it's just a
Speaker 1: set of rules in order to keep the coins value stable.
Speaker 1: And this involves stuff like keeping very careful control of
Speaker 1: the supply of stable coins and by extension, the supply
Speaker 1: of the related but non stable cryptocurrencies. And that brings
Speaker 1: us to Luna. So unlike Ust, which is on the
Speaker 1: again the Terra blockchain and also traded on other blockchains,
Speaker 1: Luna was not a stable coin, and Ust, rather than
Speaker 1: being backed by a fiat currency or other commodity, was
Speaker 1: instead backed by Luna. And you might say, huh, so
Speaker 1: you've got one digital token and it's being used to
Speaker 1: help stabilize a different digital token, neither of which are
Speaker 1: connected to any real world commodity, and we could get
Speaker 1: into a discussion about how money in general is also
Speaker 1: a step away from real world, but then I'm just
Speaker 1: going to descend into madness, so we'll leave that for now.
Speaker 1: So terraform Labs, the company was using Luna to not
Speaker 1: just peg ust to another currency, but also to act
Speaker 1: as a proof of steak for the Terra blockchain. Proof
Speaker 1: of steak is how blockchains like Terra and now Ethereum
Speaker 1: allow for transaction verification. Members who want to participate put
Speaker 1: up a portion of their crypto holdings their steak in
Speaker 1: an effort to win the right to validate a block
Speaker 1: of transactions, and if they win that, they get a
Speaker 1: reward then the form of more digital tokens. So really
Speaker 1: the more you have, the more you can earn on
Speaker 1: these proof of steak models. Luna was also used to
Speaker 1: pay transaction fees on the Tara blockchain, because while proof
Speaker 1: of state doesn't require the massive compute power of the
Speaker 1: proof of work cryptocurrencies like Bitcoin, there's still are bills
Speaker 1: that have to be paid and also holding onto Luna
Speaker 1: gave Tara blockchain members the right to vote on proposals
Speaker 1: that would shape the network. So let's say you held
Speaker 1: some Luna and you wanted to trade that Luna out
Speaker 1: and withdraw your money from the Tara blockchain. First, you
Speaker 1: would trade the Luna for UST, and this would burn
Speaker 1: the Luna tokens, essentially destroying the specific tokens you held,
Speaker 1: and you would be paid an equivalent value in UST,
Speaker 1: with one UST being equated to one dollars worth of Luna.
Speaker 1: That's important, we'll come back to that. And since Ust
Speaker 1: was meant to be more or less the same value
Speaker 1: as a US dollar, this was like being paid out
Speaker 1: in US dollars, but it required another step, so it
Speaker 1: wasn't exactly the same because you would still have to
Speaker 1: convert your UST to US dollars at a crypto exchange
Speaker 1: and also pay some transaction fees along the way. This
Speaker 1: would set up the scenario that would allow for absolute
Speaker 1: disaster once things began to unravel. I'll explain more when
Speaker 1: we come back after this quick break. Okay, let's say
Speaker 1: that you had Luna. You had let's say eighty five
Speaker 1: dollars worth of Luna. Well, because the UST was supposed
Speaker 1: to be equivalent to a US dollar, even though it
Speaker 1: wasn't pegged to the US dollar. You do this transaction
Speaker 1: and Luna ends up converting over into eighty five US
Speaker 1: t right, and then they would burn Luna. That Luna
Speaker 1: token would get burned, and then you would liquefy your
Speaker 1: UST holdings. Let's say you want to pull that out,
Speaker 1: you want to make them into dollars. Well, in order
Speaker 1: to preserve the value of stable coins and keep them stable,
Speaker 1: the Tarra blockchain would then meant more Luna, and this
Speaker 1: was meant to keep the UST stable. Right, So even
Speaker 1: though we're talking about two different digital tokens that are
Speaker 1: not backed by anything other than each other, and as
Speaker 1: you are pulling out one, you have to ment more
Speaker 1: of the other to keep things stable. And then as
Speaker 1: you end up purchasing more Ust, you might end up
Speaker 1: having some different issues with the Luna supply as well.
Speaker 1: We'll get to that. So you could use your Ust
Speaker 1: to buy Luma. And you know, as I said, one,
Speaker 1: Ust was established as being worth one dollar of Luna. However,
Speaker 1: because Ust was not actually pegged to the US dollar,
Speaker 1: that meant that if UST was to slip and value
Speaker 1: and dip below a dollar, well, it gave you an opportunity.
Speaker 1: You could purchase UST with US dollars and remember, at
Speaker 1: this point the UST is worth less. Let's say it's
Speaker 1: worth ninety cents instead of a dollar. You could use
Speaker 1: US dollars to buy more Ust, because the US dollars
Speaker 1: worth more than the UST is at this point. Then
Speaker 1: you could exchange the ust each UST for one dollar
Speaker 1: worth of Luna. So if UST dropped to ninety cents,
Speaker 1: but you could still buy a whole bunch of UST
Speaker 1: and then use that to secure Luna, you could buy
Speaker 1: Luna at a ten percent discount because that one Ust
Speaker 1: equals one dollar of Luna. That wouldn't change. So UST's
Speaker 1: drop in value would give you the chance to buy
Speaker 1: Luna at a discount and potentially make a whole lot
Speaker 1: of money. Now let's get to the Ponzi scheme side
Speaker 1: of this. The Tara blockchain launched in twenty eighteen, and
Speaker 1: for the first three years things were pretty quiet, but
Speaker 1: in twenty twenty one things would change. So one of
Speaker 1: the things that helped this was an initiative that do
Speaker 1: Quan had previously introduced as an incentive to attract new
Speaker 1: investors to the Tara network, and that was promising a
Speaker 1: twenty percent annual return on investment if you posted your
Speaker 1: ust holdings the stable coin holdings against a lending platform
Speaker 1: called Anchor, which Doquan had also established Anchor. This lending
Speaker 1: platform was built also on top of the Tara blockchain,
Speaker 1: So you've got your stake right however much you decide
Speaker 1: to put on Anchor, and then on top of that,
Speaker 1: you make twenty percent every year, and you still have
Speaker 1: the original steak, So if you decide that you're done,
Speaker 1: you could just withdraw your steak, plus you have all
Speaker 1: those returns you've made over the years. Side note, in
Speaker 1: my experience, people never get tired of making money. So
Speaker 1: the thought was people will put up their steak and
Speaker 1: they'll just leave it there because it'll just continue to
Speaker 1: generate a twenty percent return year over year. So in
Speaker 1: five years, you've doubled your investment, right, because you could
Speaker 1: always pull your steak and then you'd have twice as
Speaker 1: much money as when you put it in. But these
Speaker 1: kind of promises are exactly the red flags for stuff
Speaker 1: like Ponzi schemes, and typically those promise an incredible return
Speaker 1: on a relatively short time frame, and the Anchor platform
Speaker 1: itself was a decentralized money market that again was built
Speaker 1: on top of the Tara blockchain, and its purpose was
Speaker 1: to loan out money to investors so that they could
Speaker 1: pour that money into, you know, another investment, perhaps right
Speaker 1: back into the system. So, in other words, they were
Speaker 1: encouraging UST holders to post money to Anchor. Doquon would
Speaker 1: then apparently take that steak and loan it out to
Speaker 1: investors who would then pour the money into investments, potentially
Speaker 1: right back into the tarra form blockchain. And meanwhile Doquan
Speaker 1: was promising the initial Anchor backers a twenty percent return
Speaker 1: on their investment. And people said, you know, this is
Speaker 1: sounding more and more like a Ponzi scheme. You're taking
Speaker 1: investor money to pay out other people. Things started to
Speaker 1: go south in the spring of twenty twenty two. On
Speaker 1: May seventh, twenty twenty two, some investors who had staked
Speaker 1: Ust on the Anchor platform began pulling their stakes to
Speaker 1: the tune of about two billion dollars worth of UST,
Speaker 1: and a lot of folks began to liquidate their assets entirely,
Speaker 1: meaning they were pulling it off the Tara blockchain. They
Speaker 1: weren't just converting to Ust, they were converting it to
Speaker 1: something else, whether it was another stable coin or a
Speaker 1: fiat currency. And there were questions initially about whether this
Speaker 1: started as a purposeful attack on the Tarra blockchain, that
Speaker 1: someone was specifically doing this to orchestrate the events that followed,
Speaker 1: because these were things that people had been warning about
Speaker 1: ever since the launch of UST, and it's pegging to
Speaker 1: the Luna cryptocurrency. People were saying, this sets things up
Speaker 1: for disaster, and that's exactly what was happening. So it
Speaker 1: led people to say, oh, did someone look at the
Speaker 1: warnings and take that as an instruction booklet on how
Speaker 1: to do an attack? But further investigations suggested that perhaps
Speaker 1: this wasn't so much an attack. It may have just
Speaker 1: been that investors were getting concerned because interest rates were
Speaker 1: on the rise around the globe and they wanted to
Speaker 1: start pulling their money. But whatever the cause, it all
Speaker 1: started a massive domino effect. So people started to cash
Speaker 1: out and the value of UST began to slip. And again,
Speaker 1: like when the value of UST goes down, it means
Speaker 1: technically you have the opportunity to purchase more Luna at
Speaker 1: a lower price. You're getting it for a discount, so
Speaker 1: the ust slipped to almost ninety cents, and cryptotraders pounced
Speaker 1: on it. They started to buy up Ust in order
Speaker 1: to convert it into Luna, and Luna was trading at
Speaker 1: a very high value up to that point, like in
Speaker 1: April of twenty twenty two, it was almost one hundred
Speaker 1: twenty dollars per Luna token. So if you could suddenly
Speaker 1: buy a ten thousand dollars stake of Luna for nine
Speaker 1: thousand dollars, and then because Luna's value had exploded since
Speaker 1: early twenty twenty one, like in early twenty twenty one,
Speaker 1: it was trading at around a dollar, well now is
Speaker 1: at one hundred twenty dollars or close to it. So
Speaker 1: you started to think, Wow, if it continues on that
Speaker 1: trajectory and I'm able to essentially buy a thousand dollars
Speaker 1: of it for free, I'm if I'm already sinking ten
Speaker 1: grand into it, man, I'm going to get stinking rich
Speaker 1: and it's just going to take a year, right if
Speaker 1: we're on the same trajectory. So you had all these
Speaker 1: these crypto traders jumping on that opportunity. Well, it turns
Speaker 1: out the assumption that the value of the lunatoken would
Speaker 1: hold was a really bad one because UST continued to
Speaker 1: slip and it became completely unpegged to the US dollar,
Speaker 1: and that led to a panic. Folks began to liquidate
Speaker 1: their UST holdings in an effort to save as much
Speaker 1: of their investment as they could. They were pulling out,
Speaker 1: you know, maybe they had made some money in the
Speaker 1: past and they're hoping like, all right, let's cut and run.
Speaker 1: This is about to go south. I want to get
Speaker 1: my money out before I take a bath on this.
Speaker 1: And some people got out with a considerable amount of money,
Speaker 1: but they were acting super early. And in the process,
Speaker 1: as people were liquidating their UST, it meant, because of
Speaker 1: the nature of this UST to Luna relationship, that the
Speaker 1: Terra blockchain had to mint more Luna to cover UST
Speaker 1: and stabilize it. Well. By minting more Luna, it meant
Speaker 1: that you were increasing the supply of the Luna cryptocurrency token,
Speaker 1: and opportunists meanwhile had been grabbing up more and more
Speaker 1: Luna due to UST's value taking a hit. But now
Speaker 1: all the Luna they had scooped up was worth less
Speaker 1: than it had been because you had this new rush
Speaker 1: of supply right, Supply and demand are the two things
Speaker 1: that determine stuff like value, and when the supply dramatically increases,
Speaker 1: the demand decreases and then you start to see the
Speaker 1: value drop. So at this point, crypto exchanges began to
Speaker 1: jump in because the value of Ust was plummeting and
Speaker 1: Luna was following suit, and so the crypto exchang just
Speaker 1: in order to reduce their liability, began to delist Ust
Speaker 1: and Luna because both currencies were seen as being extremely unstable.
Speaker 1: But obviously by delisting the cryptocurrency, that added to that instability.
Speaker 1: And you know, it's really hard to keep value with
Speaker 1: a cryptocurrency if it turns out there's nowhere you can
Speaker 1: go to exchange it for something else, because then it
Speaker 1: just exists on its own, isolated little blockchain. It's trapped
Speaker 1: there and its utility is greatly reduced, and that again
Speaker 1: impacts value. So perfect storm situation. The crash of Luna's
Speaker 1: value sent a massive shockwave through the entire cryptocurrency community.
Speaker 1: So it's one of those big events that precipitated the
Speaker 1: collapse of several companies that were connected to the crypto world.
Speaker 1: Like there were crypto exchanges there were crypto loaners. All
Speaker 1: sorts of companies that were related to the cryptospace began
Speaker 1: to take a massive hit due to this collapse. Some
Speaker 1: estimates put the amount of wealth lost in the wake
Speaker 1: of the crash at hundreds of billions of dollars. Now
Speaker 1: this has prompted several massive government agencies in countries like
Speaker 1: South Korea and the United States to look into what happened.
Speaker 1: They are very very interested in speaking with Doquan. Quan
Speaker 1: so far has evaded them. But the SEC, for example,
Speaker 1: believes that Doquan failed to inform investors of risks, that
Speaker 1: he made promises on returns that were unrealistic and unsustainable,
Speaker 1: and that he had outright lied about how Terraform worked.
Speaker 1: In fact, the SEC alleges the Doquan was engaged in
Speaker 1: securities fraud and that quote the Terraform ecosystem was neither
Speaker 1: decentralized nor finance. That's a sick burn, the quote continues.
Speaker 1: It was simply a fraud propped up by a so
Speaker 1: called algorithmic stable coin, the price of which was controlled
Speaker 1: by the defendants, not any code. Quote. The SEC is
Speaker 1: saying there wasn't any algorithmic nature to the stable coin
Speaker 1: at all, it was maintaining its value based upon just
Speaker 1: Terraform Labs saying it dead. Now do Quan's last known
Speaker 1: location with Serbia. He apparently fled there after he left
Speaker 1: Singapore because Singapore police are now investigating Terraform Labs as well,
Speaker 1: and do Quan had already picked up stakes and left.
Speaker 1: He fled to Dubai first and now is in Serbia,
Speaker 1: or at least his last known location with Serbia. My
Speaker 1: guess is he'll continue to try and keep a low
Speaker 1: profile and move around because he is a very much
Speaker 1: wanted man at this point in several countries. Now, before
Speaker 1: I wrap up, I should also mention the FTX debacle.
Speaker 1: I did an entire episode on FTX and Sam Bankman freed,
Speaker 1: the co founder, and arguably FTX isn't quite the same
Speaker 1: thing as a Ponzi scheme, but it does come down
Speaker 1: to a robbing Peter to pay Paul situation all the same.
Speaker 1: So the cliffs Notes version of the FTX debacle goes
Speaker 1: something like this. Sam Bankman Freed, or SBF as the
Speaker 1: folks who used to be his friends and believers called him,
Speaker 1: co founded a crypto investment company called Alimator, Research. So
Speaker 1: this company essentially what it did was it would take
Speaker 1: investor money and it would put it into different crypto
Speaker 1: investments in an attempt to create a profit. So far,
Speaker 1: so good. It's not a guaranteed moneymaker, right because the
Speaker 1: crypto markets can be pretty fickle, but it's fairly straightforward.
Speaker 1: And he located the business off shore because that helps
Speaker 1: and avoid those imperial entanglements. As obi Wan would say,
Speaker 1: that's important to remember. One of the big anchor points
Speaker 1: for the crypto philosophy tends to be that crypto could
Speaker 1: be free from regulations as opposed to the big established
Speaker 1: financial systems in various countries. However, this is something that's
Speaker 1: rapidly changing because governments around the world find themselves saying, wait,
Speaker 1: you lost how much investor money? So the regulatory agencies
Speaker 1: around the world have definitely been closing in on crypto anyway.
Speaker 1: A little later after founding Alimator Research, spf CO founds
Speaker 1: another company called FTX, and this is a crypto exchange.
Speaker 1: So this is a business that exchanges currencies for other
Speaker 1: currencies and it takes a little bit off the top
Speaker 1: to pay for its own operations. So an exchange is
Speaker 1: somewhere where you might swap your UST for Luna, for example,
Speaker 1: or vice versa, or UST for US dollars. You get
Speaker 1: the idea. These are the entities that make it possible
Speaker 1: to jump into different cryptocurrencies and participate in the crypto world. Now,
Speaker 1: FTX would actually grow to become the second largest crypto
Speaker 1: exchange in the world, and folks could keep their money
Speaker 1: in the exchange itself. They could treat it kind of
Speaker 1: like a bank, and when the dust would settle a
Speaker 1: FDx collapsed, it would appear as though SPF and his
Speaker 1: crew were a bit lucy goosey with the money stored
Speaker 1: in customer FTX accounts. So, just ahead of the collapse
Speaker 1: came this expose that included screenshots of spreadsheets that appeared
Speaker 1: to show that the FTX folks had been funneling money
Speaker 1: from customer accounts to Alimta Research to help cover investor
Speaker 1: returns there so again it looked like they were robbing
Speaker 1: Peter in the form of FTX customers to pay Paul
Speaker 1: the Alimator Research investors. This expose set off a chain
Speaker 1: of events that would lead to the collapse of FTX,
Speaker 1: and FTX had its own native token the FTT, and
Speaker 1: folks started to cash out their FTT investments because that
Speaker 1: expose showed that FTX probably didn't have enough FTT to
Speaker 1: cover all the money that customers had actually put into
Speaker 1: the exchange. So you're thinking, ha, they don't have as
Speaker 1: much money as people had invested into it, so I
Speaker 1: should pull my money out because I don't want to
Speaker 1: be left holding the bag. So people started to cash out,
Speaker 1: and not included Binance, the largest cryptocurrency exchange in the world,
Speaker 1: which coincidentally had also at one point offered to bail
Speaker 1: out FTX, and then TOTS changed their mind. They ended
Speaker 1: up cashing out their considerable amount of FTT tokens in FTX,
Speaker 1: and this accelerated the collapse, so FTX didn't have all
Speaker 1: the money they needed to pay this out. The reveal
Speaker 1: about the elimated research problem got published and everything came
Speaker 1: crashing down. So it wasn't exactly a Ponzi scheme, but
Speaker 1: there's a lot of overlap in the Venn diagram here,
Speaker 1: and it's stuff like Ponzi schemes that have really hurt
Speaker 1: the cryptocurrency industry in general. Like not every cryptocurrency is
Speaker 1: an outright scam or at least it wasn't initially created
Speaker 1: to be a scam, but there are enough examples that
Speaker 1: have really damaged the whole industry, including banks that didn't
Speaker 1: start in the crypto world but ended up getting tangled
Speaker 1: up in it. If you are interested in learning more
Speaker 1: about that, you should look up the bank silver Gate.
Speaker 1: This was a real estate bank or is a real
Speaker 1: estate bank in southern California that about a decade ago,
Speaker 1: a little less than a decade ago, got involved into
Speaker 1: the cryptocurrency world and now is in real crisis mode
Speaker 1: because of things like the FTX collapse and the collapse
Speaker 1: of several other cryptocurrency companies that had been customers. It
Speaker 1: has even gotten the attention of the US government to
Speaker 1: look into silver Gate, which may or may not have
Speaker 1: done anything wrong. Silver Gate might not have done a
Speaker 1: single thing wrong, but once you start getting the attention
Speaker 1: of the authorities, then customers start to get really nervous,
Speaker 1: and a lot of cryptocurrency companies have pulled their accounts
Speaker 1: with silver Gate. So this kind of activity, these ponzi
Speaker 1: schemes and stuff, can end up having a very large
Speaker 1: ripple effect beyond just the initial investors who lose their money.
Speaker 1: It could end up poisoning the well for everyone. There's
Speaker 1: the saying one bad apple can spoil the bunch. In
Speaker 1: this case those Ponzi schemes and related scams. That's the
Speaker 1: bad apple, and it could poison the entire blockchain community.
Speaker 1: Even though blockchain on its own is not necessarily a
Speaker 1: bad thing, it's just that it's prone to this, largely
Speaker 1: due to the lack of regulation, which again means that
Speaker 1: potentially to solve this, the crypto world needs to change
Speaker 1: its stance and its thoughts about regulation and its role
Speaker 1: in finance. It goes flies in the face of the original,
Speaker 1: like crypto anarchists who thought that deregulation was the way
Speaker 1: of the future. As it turns out, it does create
Speaker 1: the perfect opportunity for scam artists to steal lots of money,
Speaker 1: which hurts everyone. Okay, that's the update on It's a
Speaker 1: crypto Ponzi scheme. Hope you enjoyed this. If you have
Speaker 1: questions or maybe you've got an idea for a show
Speaker 1: I should do in the future, a couple of different
Speaker 1: ways you can reach out to me. One is you
Speaker 1: can send me a message on Twitter. The handle for
Speaker 1: the show is tech Stuff HSW or you can download
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Speaker 1: can navigate over to tech stuff a little search bar.
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Speaker 1: click on that, you can leave me a voice message
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