WEBVTT - Revisiting Crypto Ponzi Schemes 0:00:04.360 --> 0:00:12.319 Welcome to tech Stuff, a production from iHeartRadio. Hey there, 0:00:12.320 --> 0:00:15.840 and welcome to tech Stuff. I'm your host, Jovin Strickland. 0:00:15.920 --> 0:00:19.800 I'm an executive producer with iHeartRadio and how the tech 0:00:19.880 --> 0:00:24.000 are you? So? Back on January twenty fifth, twenty twenty one, 0:00:24.079 --> 0:00:28.480 I published an episode titled It's a open Bracket Crypto, 0:00:29.160 --> 0:00:34.240 closed bracket Ponzi Scheme. So it's a crypto Ponzi scheme. 0:00:34.560 --> 0:00:37.280 That's where I was paying homage to stuff you should 0:00:37.280 --> 0:00:41.080 know as Chuck Bryant, who I have heard say it's 0:00:41.120 --> 0:00:44.200 a Ponzi scheme way back in the house stuff works days. 0:00:44.640 --> 0:00:48.600 And in that episode, I talked about numerous issues within 0:00:48.640 --> 0:00:53.200 the crypto community that relate to Ponzi schemes, and today 0:00:53.240 --> 0:00:55.640 I thought we would do an update to talk about 0:00:55.720 --> 0:01:01.120 one specific one that really had an enormous impact last year, 0:01:01.480 --> 0:01:06.119 and then a little additional details because even since twenty 0:01:06.160 --> 0:01:11.280 twenty one, there's been more examples of either outright Ponzi 0:01:11.360 --> 0:01:15.200 schemes in the crypto space or closely related issues that 0:01:15.280 --> 0:01:18.840 had enormous impact. So I'm not talking about every single one, 0:01:19.319 --> 0:01:22.480 but I'm talking about the really big ones. Now, first, 0:01:23.360 --> 0:01:26.560 we need to remind ourselves about what a Ponzi scheme 0:01:26.680 --> 0:01:30.600 actually is. Now. It takes its name from a guy 0:01:30.680 --> 0:01:34.840 named Charles Ponzi, who in the nineteen twenties used a 0:01:34.959 --> 0:01:38.600 method to steal a whole lot of money, reportedly around 0:01:38.680 --> 0:01:42.560 fifteen million dollars in less than a year. Now that's 0:01:42.600 --> 0:01:44.839 a lot of money right now, fifteen million. I would 0:01:44.880 --> 0:01:49.200 not sneeze at fifteen million. I would be shuffed to 0:01:49.320 --> 0:01:53.080 receive that. But holy cats, think about that in nineteen 0:01:53.280 --> 0:01:59.320 twenties money a ridiculous amount of cash. Well, what was 0:01:59.360 --> 0:02:04.920 he doing? Well? Schtick was centered around International Reply coupons, 0:02:05.040 --> 0:02:09.640 or IRCs, and essentially an IRC is a voucher for 0:02:09.840 --> 0:02:13.960 postage stamps in another country. So you would go to 0:02:14.080 --> 0:02:17.440 the post office and you would buy IRCs if you 0:02:17.520 --> 0:02:20.320 wanted to write back to your family in the old 0:02:20.320 --> 0:02:23.680 country and then have them be able to respond without 0:02:23.840 --> 0:02:29.399 them having to buy stamps themselves. So instead they would 0:02:29.440 --> 0:02:32.359 go to their post office, they would use the IRC coupon, 0:02:32.520 --> 0:02:35.080 and the coupon would cover the cost of stamps to 0:02:35.200 --> 0:02:38.720 send international mail back to you. You don't have to 0:02:38.760 --> 0:02:40.639 do this within the same country, because then you could 0:02:40.680 --> 0:02:44.000 just use a self addressed stamped envelope, but obviously a 0:02:44.200 --> 0:02:48.959 US stamp doesn't mean anything in a different country. Well, 0:02:49.000 --> 0:02:54.639 Ponzi's idea was to use IRCs and leverage the differences 0:02:54.720 --> 0:02:58.760 in postage costs in different countries. See, when you bought 0:02:58.800 --> 0:03:02.440 an IRC, you did so at whatever the local postage 0:03:02.520 --> 0:03:05.919 rate for a stamp was in your area, and even 0:03:05.960 --> 0:03:09.800 if the postage rate was higher in another country, the 0:03:09.919 --> 0:03:14.440 IRC would still cover the stamp. So this example doesn't 0:03:14.480 --> 0:03:17.160 really hold because the rates would be flip flocked. But 0:03:17.480 --> 0:03:20.799 here we go. If a stamp at the US cost 0:03:20.880 --> 0:03:24.480 a nickel at the time, so five cents, but a 0:03:24.560 --> 0:03:28.200 stamp in Germany cost a dime or ten cents in 0:03:28.280 --> 0:03:31.119 equivalent US cash, what you could do is you could 0:03:31.160 --> 0:03:34.440 go to the US post office. You would use a 0:03:34.600 --> 0:03:38.520 five cent nickel to buy an IRC. You'd send that 0:03:38.560 --> 0:03:42.000 over to your papaw in Germany, and your papa could 0:03:42.120 --> 0:03:45.280 use that same IRC to get a ten cent stamp 0:03:45.600 --> 0:03:47.880 at the post office, even though you only had to 0:03:47.880 --> 0:03:51.600 pay five cents back in the United States. So Ponzi's 0:03:51.640 --> 0:03:54.920 idea was to try and leverage this. He wanted to 0:03:54.920 --> 0:03:59.520 buy IRCs in cheap countries and then redeem them and 0:04:00.040 --> 0:04:02.840 innsive ones and then sell the stamps out a profit. 0:04:03.200 --> 0:04:06.000 So it was like creating money out of nothing. He 0:04:06.120 --> 0:04:08.240 tried to convince a bank to back this idea, of 0:04:08.320 --> 0:04:11.280 the banks weren't convinced that the strategy would work, or 0:04:11.400 --> 0:04:14.120 if it did work, it wouldn't really be scalable. You 0:04:14.120 --> 0:04:17.040 wouldn't be able to do this in a volume that 0:04:17.080 --> 0:04:20.560 would actually make you any significant amount of money. It 0:04:20.600 --> 0:04:25.720 turns out those banks were right. So instead Ponzi goes 0:04:25.720 --> 0:04:29.400 and starts talking to friends and acquaintances, and he starts 0:04:29.440 --> 0:04:33.240 making promises that within three months he could double an 0:04:33.240 --> 0:04:38.480 initial investment, and he secures a round of investment cash, 0:04:38.560 --> 0:04:42.680 and sure enough, some of these investors see impressive payouts 0:04:42.720 --> 0:04:45.839 from Ponzi later down the road. Except it turned out 0:04:45.839 --> 0:04:50.800 those payouts were not the result of this IRC scam 0:04:50.880 --> 0:04:53.640 he had in mind, or not even scam his scheme. 0:04:54.720 --> 0:04:59.600 This IRC scheme wasn't the reason why Ponzi was paying 0:04:59.640 --> 0:05:05.320 out the dividends on those investments. Instead, Ponzi actually found 0:05:05.960 --> 0:05:09.200 the logistics of getting this scheme to work were way 0:05:09.240 --> 0:05:11.719 more complex than he anticipated it. Like I said, the 0:05:11.760 --> 0:05:16.880 banks were right, So I think, at least in the beginning, 0:05:16.880 --> 0:05:19.560 he probably was determined to try and make it work. 0:05:19.600 --> 0:05:24.080 But in the meantime, what he did was he needed 0:05:24.120 --> 0:05:26.760 to find a way to give a return on investment 0:05:26.760 --> 0:05:29.560 to these initial investors. So he took out a second 0:05:29.680 --> 0:05:32.599 round of investing, and with some of the money that 0:05:32.640 --> 0:05:36.520 folks were pouring into the scheme at this round of investment, 0:05:36.960 --> 0:05:39.359 he took that money and paid out some of his 0:05:39.480 --> 0:05:45.360 earlier investors. Well, the earlier investors are incredibly excited to 0:05:45.360 --> 0:05:48.320 see that they got such a rapid and considerable return, 0:05:49.240 --> 0:05:53.760 so a lot of them reinvested back into Ponzi's scheme, 0:05:53.839 --> 0:05:57.960 and before long Ponzi shifts away from trying to make 0:05:57.960 --> 0:06:00.760 the IRC thing work. He just gives up on that 0:06:01.080 --> 0:06:04.159 and he steady just runs a scam where he takes 0:06:04.240 --> 0:06:07.960 the most recent round of investments to pay out returns 0:06:08.000 --> 0:06:13.240 to earlier investors and himself. Now, to be clear, Ponzi 0:06:13.360 --> 0:06:16.080 did not invent this idea. This was not a brand 0:06:16.120 --> 0:06:19.200 new concept. He was not the first to come up 0:06:19.240 --> 0:06:22.080 with a Ponzi scheme, but we call them Ponzi schemes 0:06:22.600 --> 0:06:27.360 because he went big time with this, mostly out of Boston, Massachusetts. 0:06:27.920 --> 0:06:31.760 While previous examples of these schemes followed essentially the same 0:06:31.800 --> 0:06:35.320 thing that what Ponzi was doing. Ponzi's version propelled him 0:06:35.560 --> 0:06:38.920 to such wealth that before the whole thing came crashing down, 0:06:39.800 --> 0:06:44.200 he was pretty famous in the New England area. Newspapers 0:06:44.200 --> 0:06:47.479 would cover his business favorably, and that of course led 0:06:47.520 --> 0:06:51.360 to even more investments. So when a newspaper would say, hey, 0:06:51.480 --> 0:06:54.440 these investors are super happy because they got so much 0:06:54.520 --> 0:06:58.360 money back on their investment, more people were begging to 0:06:58.400 --> 0:07:01.760 give Ponzi their money. Was able to perpetuate the scheme 0:07:01.800 --> 0:07:05.119 and make him even richer. But here's the thing. Even 0:07:05.160 --> 0:07:10.280 the best run Ponzi scheme will not last forever. Eventually, 0:07:10.320 --> 0:07:13.320 the incoming investments are not enough to cover all the 0:07:13.360 --> 0:07:16.760 previous investors, and you either have to pay out smaller 0:07:16.800 --> 0:07:20.120 and smaller dividends, which is going to upset your investors, 0:07:20.600 --> 0:07:22.840 or you got to take the money and run while 0:07:22.880 --> 0:07:25.760 you can. But while the scheme is booming, you can 0:07:25.800 --> 0:07:28.760 have yourself a swell time. Just you know, you've got 0:07:28.760 --> 0:07:31.920 to remember that at some point the piper will demand 0:07:31.960 --> 0:07:35.280 to be paid, and you'll likely also have some government 0:07:35.320 --> 0:07:39.239 agencies with some scary initials, and they'll be really, really 0:07:39.280 --> 0:07:42.920 interested in talking to you. Another way to describe the 0:07:42.960 --> 0:07:47.360 Ponzi scheme is the old saying robbing Peter to pay Paul, 0:07:47.720 --> 0:07:51.400 or sometimes it's borrowing from Peter to pay Paul. But 0:07:51.480 --> 0:07:54.760 you get the idea. You're not creating wealth, you're really 0:07:54.840 --> 0:07:58.160 just redistributing it. And it only works as long as 0:07:58.200 --> 0:08:00.880 you can keep finding more Peters so that you can 0:08:00.960 --> 0:08:04.400 keep paying all those Palls and keep them at bay. 0:08:05.280 --> 0:08:08.760 As for Ponzi himself, well, several months after he rocketed 0:08:08.800 --> 0:08:12.280 to wealth, the investigators began to close in on him. 0:08:12.440 --> 0:08:17.080 The US Postal Office denounced the underlying principle of his 0:08:17.160 --> 0:08:21.200 supposed business, which, remember, was not actually what he was doing. 0:08:21.280 --> 0:08:24.120 It was just what he said he was doing. But 0:08:24.200 --> 0:08:27.320 the US post Office said, there's just no way he 0:08:27.360 --> 0:08:30.440 could be making that much money through IRCs because the 0:08:30.560 --> 0:08:33.960 volume he would have to trade in was greater than 0:08:34.040 --> 0:08:37.960 what the supply was, so literally, there was no possible 0:08:38.000 --> 0:08:39.720 way for him to make his money through the way 0:08:39.720 --> 0:08:43.760 he was claiming, because there weren't enough IRCs out there 0:08:43.800 --> 0:08:47.040 to make it happen. And local newspapers began to suspect 0:08:47.040 --> 0:08:52.120 that perhaps they had been hoodwinked, and so chagrined, they 0:08:52.160 --> 0:08:56.960 began to launch their own investigative efforts and a way 0:08:57.000 --> 0:09:00.320 to try and save face, because if you talk someone 0:09:00.480 --> 0:09:03.520 up and then it turns out that they're a flim 0:09:03.520 --> 0:09:07.240 flam artist, that does not go well for your reputation. Right, 0:09:07.400 --> 0:09:10.839 So these newspapers are like, we need to if something 0:09:10.920 --> 0:09:12.920 is hinky here, we need to really look into it. 0:09:13.800 --> 0:09:15.600 There were a couple of points where it seemed like 0:09:15.600 --> 0:09:18.080 the mob was about to turn on Ponzi, that everyone 0:09:18.160 --> 0:09:20.520 was gonna pull their money out, which would have sent 0:09:20.600 --> 0:09:23.720 the whole thing into a collapse. But a couple of 0:09:23.720 --> 0:09:26.880 times he was actually able to dissuade them, and some 0:09:26.920 --> 0:09:29.360 folks who were determined to withdraw their money once the 0:09:29.440 --> 0:09:33.960 investigations began would later reconsider because Ponzi seemed to be 0:09:33.960 --> 0:09:36.959 on the up and up, like he was returning money 0:09:37.040 --> 0:09:40.319 to investors who were requesting it, like millions of dollars 0:09:40.320 --> 0:09:43.920 early on, and so folks began to say, well, if 0:09:43.920 --> 0:09:48.200 he was actually a crook, he wouldn't be returning money, 0:09:48.240 --> 0:09:51.720 so he must be honest. That means I might actually 0:09:51.760 --> 0:09:54.000 stand to make a whole bunch of money from this guy. 0:09:54.320 --> 0:09:57.680 And so people who had initially thought I'm out, ended 0:09:57.760 --> 0:09:59.920 up not just staying in, but some of them put 0:10:00.040 --> 0:10:05.120 even more money into the scheme. Now, ultimately, an audit 0:10:05.160 --> 0:10:08.240 by the US government found that Ponzi's business was thoroughly 0:10:08.280 --> 0:10:13.080 corrupt and totally baseless. The investigation ultimately found there was 0:10:13.200 --> 0:10:16.880 around sixty one dollars worth of IRC's in the whole 0:10:16.960 --> 0:10:20.400 dang business. You are not going to be making millions 0:10:20.440 --> 0:10:23.679 of dollars in profit off of sixty one dollars of 0:10:24.520 --> 0:10:28.320 these coupons, And it proved that what Ponzi really was 0:10:28.360 --> 0:10:30.920 doing was just convincing more and more people to hand 0:10:30.960 --> 0:10:34.120 him money to pay off the earlier investors and to 0:10:34.120 --> 0:10:38.160 make himself rich. Ponzi ultimately would go to jail, though 0:10:38.280 --> 0:10:41.520 not before having a few more adventures through skipping bond 0:10:41.600 --> 0:10:44.240 and running off to different states before he was ultimately 0:10:44.720 --> 0:10:49.400 apprehended and sentenced, and after serving his sentence, he was 0:10:49.440 --> 0:10:53.320 deported to Italy. He was an immigrant from Italy to 0:10:53.360 --> 0:10:56.160 the United States. He did not return to the US, 0:10:56.240 --> 0:10:59.319 but he did immigrate to Brazil and set up a 0:10:59.360 --> 0:11:03.440 business there until in nineteen forty nine he passed away. Now, 0:11:03.440 --> 0:11:07.120 there are a couple of scams that closely relate to 0:11:07.160 --> 0:11:10.920 a Ponzi scheme, but are slightly different. For example, a 0:11:10.960 --> 0:11:15.080 pyramid scheme. This is where you've got one person or 0:11:15.080 --> 0:11:17.240 a group of people at the very tip top of 0:11:17.280 --> 0:11:21.640 the pyramid, and then they recruit a layer of investors 0:11:21.679 --> 0:11:26.880 who pay money into the scheme. In return, these initial 0:11:26.920 --> 0:11:30.719 investors have to go out and recruit another layer of investors, 0:11:30.720 --> 0:11:33.080 and they keep a little bit of the money that 0:11:33.280 --> 0:11:36.920 those folks are contributing to the organization, and they pass 0:11:37.000 --> 0:11:39.680 the rest of the money up the pyramid and then 0:11:40.040 --> 0:11:44.240 this new layer, so now we're two layers down from 0:11:44.280 --> 0:11:47.480 the top. They have to go on and recruit yet 0:11:47.520 --> 0:11:50.760 another layer of investors, and so on. So each group 0:11:50.760 --> 0:11:53.720 of investors needs to get more investors. And if you 0:11:53.720 --> 0:11:55.680 want to think of a simple one, let's say that 0:11:55.679 --> 0:11:58.520 each investor needs to get two other investors to pay 0:11:58.559 --> 0:12:05.120 into the system. And it expands rapidly as you would imagine. 0:12:05.559 --> 0:12:07.520 And that's just if you only had to get two. 0:12:08.440 --> 0:12:11.400 And so meanwhile, the people at the top, they're getting 0:12:11.440 --> 0:12:15.600 payouts with every successive layer that's added to this pyramid. 0:12:16.000 --> 0:12:19.720 Each person along the top is getting a small amount 0:12:19.840 --> 0:12:22.439 per investment till you get to the tippy top where 0:12:22.480 --> 0:12:25.040 they're really making bank. But the people at the bottom 0:12:25.080 --> 0:12:28.319 are not making anything at all unless they are recruiting 0:12:28.480 --> 0:12:33.080 new people into the organization, so they're feeding into the pyramid. 0:12:33.640 --> 0:12:37.320 And like a Ponzi scheme, a pyramid scheme will ultimately 0:12:37.320 --> 0:12:40.000 fall apart because at some level the base of the 0:12:40.000 --> 0:12:42.480 pyramid is so large that there's no way to recruit 0:12:42.559 --> 0:12:47.440 more people to pay into the system, and the whole 0:12:47.480 --> 0:12:50.000 thing starts to fall apart. And really the only people 0:12:50.000 --> 0:12:52.880 who make any serious money are the ones near the 0:12:52.920 --> 0:12:56.079 top layers, like maybe the first couple of layers, and 0:12:56.160 --> 0:12:58.080 the tippy top being the ones who make the most 0:12:58.080 --> 0:13:00.440 money out of the whole thing. Now relate into that 0:13:00.640 --> 0:13:05.280 are multi level marketing schemes. These aren't necessarily outright scams, 0:13:06.559 --> 0:13:10.439 they are not necessarily illegal, but they also rely heavily 0:13:10.480 --> 0:13:14.559 on recruiting new members, and sometimes they rely more on 0:13:14.600 --> 0:13:18.600 the recruitment side than they do with whatever they're actually 0:13:19.160 --> 0:13:23.160 supposedly selling or marketing. And there are tons of these, 0:13:23.240 --> 0:13:25.679 and they're known for selling all sorts of stuff. The 0:13:25.720 --> 0:13:30.360 classic example is cosmetics, where you have people who get 0:13:30.760 --> 0:13:33.560 pay into the system in order to get access to 0:13:34.320 --> 0:13:38.400 cosmetics supplies to sell to people, but very quickly they 0:13:38.440 --> 0:13:41.319 see that the real money isn't in selling the cosmetics, 0:13:41.320 --> 0:13:45.120 but recruiting other people to join in to sell these cosmetics. 0:13:45.559 --> 0:13:49.200 And once you really start stripping things away, it starts 0:13:49.240 --> 0:13:52.760 to look like the cosmetics are just an excuse for 0:13:52.880 --> 0:13:56.959 the organization to exist. The real money comes in looping 0:13:57.000 --> 0:14:00.800 in more and more people into the scheme until you've saturation, 0:14:01.480 --> 0:14:05.600 and then if the cosmetics can support that, if selling 0:14:05.640 --> 0:14:08.960 the cosmetics can keep the organization going, it's technically a 0:14:09.040 --> 0:14:13.080 legitimate organization. It's just that it's probably not making the 0:14:13.120 --> 0:14:14.880 same amount of money it was when it was in 0:14:14.920 --> 0:14:19.720 the recruitment phase, and it's still kind of questionable. And 0:14:19.760 --> 0:14:22.320 then we've got the crypto version, and these can take 0:14:22.320 --> 0:14:24.600 a lot of forms, but the basic sequence tends to 0:14:24.600 --> 0:14:28.720 be someone creates a new cryptocurrency, either on an existing 0:14:28.760 --> 0:14:32.000 blockchain or possibly through a new one, and they hold 0:14:32.040 --> 0:14:36.920 an initial offering of coins ioc Man. There's a lot 0:14:36.960 --> 0:14:40.720 of initialisms in this episode, and sometimes I stands for initial, 0:14:40.720 --> 0:14:43.760 and sometimes it stands for international. It's initial in this case, 0:14:44.240 --> 0:14:47.880 so in return for an investment, the investor gets an 0:14:47.880 --> 0:14:52.800 initial offering of coins or digital tokens that are awarded 0:14:52.840 --> 0:14:57.000 to them, and they are newly minted, fresh, crispy crypto coins. 0:14:57.840 --> 0:15:01.960 We'll talk about where this can go wrong after we 0:15:02.080 --> 0:15:15.160 take this quick break. Okay, an initial offering of coins 0:15:15.600 --> 0:15:22.240 where you jump in on a brand new blockchain offering, 0:15:22.280 --> 0:15:24.360 whether it's on a brand new blockchain itself or on 0:15:24.440 --> 0:15:27.840 an existing one. You want to be an initial investor, 0:15:27.920 --> 0:15:30.760 so you put some of your real money into the system, 0:15:30.840 --> 0:15:34.560 and you are awarded some digital tokens, some crypto coins 0:15:34.600 --> 0:15:38.680 that have been mented specifically for this purpose to attract investors, 0:15:39.200 --> 0:15:43.239 and so your investment now is represented by these digital tokens. 0:15:44.480 --> 0:15:48.560 There's nothing inherently wrong with that, right. There are legit cryptocurrencies, 0:15:49.000 --> 0:15:52.720 or as legit as you believe cryptocurrencies to be. That's 0:15:52.800 --> 0:15:57.040 kind of a sliding scale in public perception. But there 0:15:57.040 --> 0:16:01.280 are also schemers who would follow this exact same chain 0:16:01.360 --> 0:16:04.160 of events in order to rake in that investor money. 0:16:04.520 --> 0:16:08.479 They'd meant out cryptocurrencies that ultimately would end up being worthless. 0:16:09.000 --> 0:16:12.960 Once the whole scheme comes down and the ringleader runs 0:16:13.000 --> 0:16:15.920 off with the investment cash, and everyone else's left with 0:16:16.000 --> 0:16:19.320 digital tokens that don't hold any value, and due to 0:16:19.360 --> 0:16:22.600 the fact that crypto allows for a certain amount of anonymity, 0:16:22.680 --> 0:16:25.080 it can be possible for the same scam artist to 0:16:25.120 --> 0:16:27.640 pull the scheme again at a later date with a new, 0:16:27.800 --> 0:16:32.760 equally worthless crypto coin. It's also possible for a well 0:16:32.800 --> 0:16:36.600 intentioned person or group to fall into this trap of 0:16:36.640 --> 0:16:40.560 a Ponzi scheme because they found themselves in a tough 0:16:40.640 --> 0:16:44.400 spot that they hoped was just a temporary situation, and 0:16:44.440 --> 0:16:47.400 they start practicing the whole Rob Peter to pay Paul 0:16:47.440 --> 0:16:51.000 approach just as a way to stay afloat while still 0:16:51.000 --> 0:16:55.240 hoping to make a legitimate recovery and not have to 0:16:55.280 --> 0:17:00.560 continue that practice. And maybe sometimes that works. Some folks 0:17:00.640 --> 0:17:03.160 might be able to use creative accounting to stay above 0:17:03.200 --> 0:17:07.639 water long enough to regain stability, But it definitely doesn't 0:17:07.680 --> 0:17:11.600 always work right, because there are lots of examples where 0:17:12.040 --> 0:17:15.680 this kind of thing will ultimately lead to a total collapse. 0:17:16.200 --> 0:17:19.600 And I want to add that one of the factors 0:17:19.640 --> 0:17:24.280 that I believe really helps fuel this is the combination 0:17:24.440 --> 0:17:31.320 of high enthusiasm and low knowledge or experience that the 0:17:31.359 --> 0:17:34.520 promise of a huge return, which is a typical red 0:17:34.520 --> 0:17:38.120 flag of any Ponzi scheme can really excite someone who 0:17:38.160 --> 0:17:40.639 has some money that they would like to invest and 0:17:40.720 --> 0:17:46.080 see that money increase. And the fact that cryptocurrency itself 0:17:46.240 --> 0:17:50.960 is a difficult thing to describe and explain. It's hard 0:17:51.000 --> 0:17:53.600 to teach someone how it works in a way that 0:17:53.680 --> 0:17:58.919 doesn't make them go cross eyed because it is very complicated. Ultimately, well, 0:18:00.240 --> 0:18:04.560 lack of information can end up helping if you're pulling 0:18:04.560 --> 0:18:09.520 a scam because people just know, oh, cryptocurrency, that's something 0:18:09.560 --> 0:18:14.879 that can in some cases at least lead to massive 0:18:15.640 --> 0:18:19.720 increase in value. So I could get rich overnight by 0:18:19.760 --> 0:18:22.880 investing in this, And because they don't have a full 0:18:22.960 --> 0:18:26.359 understanding of it, they aren't aware of the potential risks, 0:18:26.400 --> 0:18:30.440 and that's what creates this perfect environment for running scams. 0:18:31.160 --> 0:18:34.359 I frequently say, if there's a lack of information and 0:18:34.480 --> 0:18:39.560 an overabundance of enthusiasm, that is an enormous warning sign 0:18:39.640 --> 0:18:42.040 and you should take a moment to really think things 0:18:42.080 --> 0:18:45.560 through before you jump in and participate. Doesn't mean that 0:18:45.560 --> 0:18:49.439 it's necessarily going to go bad, but it's just that 0:18:49.520 --> 0:18:52.400 conditions are perfect for that thing to kind of happen, 0:18:52.520 --> 0:18:55.120 So you need to take that step back and start 0:18:55.160 --> 0:19:01.359 asking questions and make sure that you understand can you 0:19:01.680 --> 0:19:04.880 evaluate the answers before you start making decisions? All right? 0:19:05.160 --> 0:19:09.560 This finally brings us to talk about Terraform and UST 0:19:10.240 --> 0:19:14.120 and Luna. So Terraform Labs would be the company we'll 0:19:14.119 --> 0:19:17.520 be talking about. And the co founders were Quan Do Jung, 0:19:18.560 --> 0:19:21.960 although in the crypto community he's known as Do Quan 0:19:22.680 --> 0:19:26.760 and his business partner Daniel Shin. Quan had previously worked 0:19:26.800 --> 0:19:29.159 for some big tech companies in the US before he 0:19:29.280 --> 0:19:31.800 moved from the United States back to his home country 0:19:31.800 --> 0:19:34.840 of South Korea. He went into business for himself, and 0:19:34.880 --> 0:19:40.800 then in twenty eighteen, he moved to Singapore and co 0:19:41.040 --> 0:19:46.320 founded Terraform Labs in January of that year. So he 0:19:46.800 --> 0:19:50.159 located in Singapore, and you might wonder why, and a 0:19:50.160 --> 0:19:53.240 lot of these crypto companies they will locate in places 0:19:53.280 --> 0:19:57.320 that have lax regulatory bodies in an effort to be 0:19:57.359 --> 0:20:01.680 able to do business without having two much interference from 0:20:01.840 --> 0:20:06.800 government agencies. So Terraform Labs then introduces the terra blockchain 0:20:07.400 --> 0:20:11.439 and ultimately would begin to mint two different cryptocurrencies, although 0:20:11.520 --> 0:20:14.800 not right out of the gate. These were actually unveiled 0:20:15.040 --> 0:20:18.560 in different times. But one I want to talk about 0:20:18.680 --> 0:20:23.359 is terra USD, which we usually just refer to as UST. 0:20:24.320 --> 0:20:29.280 That does get confusing because UST stands for terra us D, 0:20:30.480 --> 0:20:34.480 and then the other cryptocurrency is Luna. All right, even 0:20:34.480 --> 0:20:36.919 though it came out second, we're going to take Ust 0:20:37.280 --> 0:20:42.000 first to explain what it is. Terraform introduced Ust as 0:20:42.040 --> 0:20:46.520 an algorithmic stable coin. Now we need to break that down. 0:20:47.040 --> 0:20:51.720 A stable coin is a type of cryptocurrency that has 0:20:51.800 --> 0:20:56.120 its value connected or pegged, as they say, in crypto, 0:20:56.359 --> 0:21:01.720 to some other asset. This is why ideally would keep 0:21:02.080 --> 0:21:06.040 this particular type of cryptocurrency stable. The value of the 0:21:06.119 --> 0:21:10.520 stable coin, at least theoretically, would only change if the 0:21:10.640 --> 0:21:15.239 value of the pegged asset also changed. So if you 0:21:15.280 --> 0:21:19.240 were to peg your cryptocurrency stable coin to the US dollar, 0:21:19.440 --> 0:21:23.240 which is a pretty common thing, then in theory, as 0:21:23.280 --> 0:21:27.480 the US dollars value rises, so would your stable coin 0:21:27.520 --> 0:21:31.240 that's pegged to it. Or if the US dollar value decreased, 0:21:31.600 --> 0:21:35.080 then the value of your stable coin would decrease in kind. 0:21:35.600 --> 0:21:38.320 Typically we're looking at a one to one relationship when 0:21:38.320 --> 0:21:42.520 we're talking about fiat currency, So one US dollar and 0:21:42.800 --> 0:21:48.600 one Ust would be equivalent in value, assuming that everything 0:21:48.680 --> 0:21:52.600 is going correctly. Stable coins try to address an issue 0:21:52.800 --> 0:21:58.480 that non backed cryptocurrencies often encounter, which is volatility. Now 0:21:58.480 --> 0:22:02.199 you've probably heard me say way too many times that 0:22:02.359 --> 0:22:06.040 one of my big problems with cryptocurrencies like bitcoin is 0:22:06.040 --> 0:22:09.760 that their value can fluctuate so much that you are 0:22:09.840 --> 0:22:14.679 discouraged from using it as actual currency unless you're willing 0:22:14.720 --> 0:22:20.000 to encounter some potentially significant problems. For example, the value 0:22:20.000 --> 0:22:24.680 of some cryptocurrencies like bitcoin can change by significant amounts 0:22:24.760 --> 0:22:28.840 so quickly that when you start a transaction, you're exchanging 0:22:28.880 --> 0:22:33.040 a certain amount of value or purchasing power, but by 0:22:33.040 --> 0:22:36.440 the time the transaction is complete, that amount could have 0:22:36.520 --> 0:22:42.440 changed dramatically. So let me give you a very oversimplified example. 0:22:42.920 --> 0:22:45.359 This is one I've used before. So let's say you 0:22:45.480 --> 0:22:48.760 walk into a convenience store and you want to buy 0:22:49.119 --> 0:22:51.920 a candy bar, and the candy bar is priced at 0:22:52.000 --> 0:22:55.640 one US dollar. So you pick up the candy bar, 0:22:55.720 --> 0:22:58.760 you go to the cash register, you hand over your 0:22:58.840 --> 0:23:02.439 hard earned US dollar, and in return, you get to 0:23:02.440 --> 0:23:05.280 take the candy bar and leave the store. But right 0:23:05.359 --> 0:23:08.240 at the moment that you're doing this exchange, let's say 0:23:08.240 --> 0:23:13.000 that the value of the dollar changes wildly, and now 0:23:13.080 --> 0:23:18.040 that one dollar bill has five dollars worth of purchasing power, 0:23:18.600 --> 0:23:21.320 because now the value of the dollar has changed, So 0:23:21.600 --> 0:23:25.360 what you could have bought with one dollar before has 0:23:25.400 --> 0:23:30.359 increased by five times. Now like technically that one dollar 0:23:31.119 --> 0:23:34.119 is equivalent to the value of five candy bars, not 0:23:34.160 --> 0:23:38.199 just one. But now that means the candy bar you 0:23:38.240 --> 0:23:42.560 bought is way overpriced, right, because it should now cost 0:23:42.600 --> 0:23:46.760 twenty cents, because the presumably the candy bar's value is 0:23:46.800 --> 0:23:50.119 independent of how much a dollar is worth. It's not 0:23:50.200 --> 0:23:53.040 like a candy bar is magically one dollar. No matter 0:23:53.119 --> 0:23:56.640 how much a dollar is valued, a candy bar has 0:23:56.640 --> 0:24:00.720 its own intrinsic value, and that value the price should, 0:24:01.119 --> 0:24:04.239 in theory, fluctuate with the value of the dollar, at 0:24:04.320 --> 0:24:06.840 least at some point. It's probably gonna trail because these 0:24:06.840 --> 0:24:11.679 things are not instantaneous, but it will change. So it 0:24:11.720 --> 0:24:14.239 would mean that perhaps in the future you would come 0:24:14.280 --> 0:24:15.840 to that same store and now you'd see all the 0:24:15.840 --> 0:24:18.520 candy bars are valued at twenty cents, not a dollar, 0:24:19.400 --> 0:24:22.199 because the value of the dollar itself has changed. On 0:24:22.240 --> 0:24:25.199 the flip side, let's say that at the moment of 0:24:25.359 --> 0:24:29.400 purchase the value of the dollar decreases by half, which 0:24:29.440 --> 0:24:32.720 means you've got yourself a one dollar candy bar, but 0:24:32.800 --> 0:24:36.440 at the purchasing equivalent of fifty cents before this change. 0:24:36.480 --> 0:24:39.679 Now the candy bar company or the convenience store is 0:24:39.720 --> 0:24:42.920 hurting because the dollar they collected isn't worth as much 0:24:42.960 --> 0:24:45.800 as it would have been pre purchase. Now that's a 0:24:45.880 --> 0:24:48.760 very silly example, right, But that sort of stuff actually 0:24:48.800 --> 0:24:52.560 happens with cryptocurrencies because the transaction times can be long. 0:24:52.600 --> 0:24:56.120 With bitcoin, you're talking about potentially ten minutes, and the 0:24:56.200 --> 0:25:00.080 fees that you pay with transactions are fairly high, and 0:25:00.080 --> 0:25:05.320 then you pair that with the currency's volatility. People end 0:25:05.400 --> 0:25:10.879 up being discouraged from actually using cryptocurrencies as currency because 0:25:10.920 --> 0:25:13.520 you could end up losing a huge amount of money 0:25:13.560 --> 0:25:17.160 just in the process as you're completing a transaction. However, 0:25:17.200 --> 0:25:22.439 stable coins, because theoretically they lack volatility, they can be 0:25:22.520 --> 0:25:26.840 more useful as digital currency. You could actually buy into 0:25:26.880 --> 0:25:29.800 a stable coin and be relatively sure that your money 0:25:29.920 --> 0:25:33.080 will be good wherever you spend it, and you don't 0:25:33.080 --> 0:25:35.800 have to worry about massive fluctuations and value. You can 0:25:35.920 --> 0:25:38.160 use it as a currency. Now, a lot of people 0:25:38.280 --> 0:25:42.160 use stable coins to move money into and out of 0:25:42.880 --> 0:25:48.000 non backed cryptocurrencies. Right, so instead of just immediately withdrawing 0:25:48.040 --> 0:25:52.560