This Is How the Terra Stablecoin Actually Imploded

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:17)

Tracy Luna, Terra, stable coins, crypto, crashing stuff.

Tracy Alloway (0:23)

I'm gonna throw something else out there.

Roman history. Let's talk about classic history.

Joe Weisenthal (0:28)

Wait, what's the Roman history part?

Tracy Alloway (0:30)

It's Rome sacking Carthage. Have you not heard about this?

Joe Weisenthal (0:32)

Oh, the memes?

Tracy Alloway (0:33)

Yeah.

Joe Weisenthal (0:34)

Is that what's going on? Is Carthage being sacked right now?

Tracy Alloway (0:37)

Well, that's actually, yeah.

I mean, that's kind of what we're going to talk about. So we're going to be speaking with someone who has framed himself as Rome in the historic parallel going after Carthage, which would be Terra and Luna, the algorithmic stable coin slash cryptocurrency.

Joe Weisenthal (0:53)

This is such a wild story. I mean, like, I think, you know, look, crashes, hacks, ponzies, rug pulls, they happen all the time in crypto, right? Like, it almost is like boring and most of the time, they're not even worth reporting on or talking about because they're like a daily occurrence.

But the Terra ecosystem, the UST stable coin, the Luna token had gotten so big, so valuable and so many major backers of crypto were invested in it or had invested in it in some way that this is not just like another coin that crashed.

Tracy Alloway (1:31)

I think that's absolutely right. So two things here, one, a top 10 coin, right? It's not every day that you see something like this happen to a top 10 coin. Secondly, the marketing. So everyone knew it was an unusual experiment, an algorithmic stable coin, and we'll get into exactly how it's supposed to work.

But even with that said, it was pitched as a stable coin, as something that is supposed to maintain a peg one-to-one with the dollar. And people are supposed to be able to use it to get in and out of more volatile cryptocurrencies.

And clearly that's not what's been happening because we've seen the peg has crashed. I think it got to as low as like 0.3, is that right? Yeah.

Joe Weisenthal (2:17)

No, I mean, that's exactly right. So it's a stable coin. The interesting thing is like stable coins, there are many different flavors of stable coins and people have been skeptical about them for a while.

Most of the discussion about vulnerable stable coins was focused on tether, but this was a so-called algorithmic stable coin. They had some collateral backing. It's sort of complicated. We're going to get into it. But the point is that, yes, it is sort of this classic example of the thing that blows up is the thing that has to maintain a peg, which is a lesson that in the TradFi world is understood for a long time, which is often the sorts of big sources of big risk are the things that on the surface appear to have the least volatility.

Tracy Alloway (2:57)

Here's the other thing that makes the story so interesting. It's the people involved. You mentioned some of the big funds, like Galaxy slash Novogratz, who were invested in Terra slash Luna.

Joe Weisenthal (3:09)

Novogratz has a Luna tattoo.

Tracy Alloway (3:10)

Yeah, which I thought was fake when I first saw that photo, but it is in fact real. But the other thing is there are strong personalities attached on both the pro-Luna, Terra side and the sort of against or warning about Terra slash Luna side. And that's where that Rome versus Carthage analogy comes in. You had the founder, Do Kwon, and I don't know if anyone follows him on Twitter, but he is incredibly, I guess, outspoken.

Joe Weisenthal (3:39)

Confident, cocky might be where it is.

Tracy Alloway (3:41)

Yeah, this is putting it all very, very politely, but people would come out with criticisms of the entire algorithmic stable coin idea and people would highlight vulnerabilities in the system and he would just bat them away.

Joe Weisenthal (3:55)

Or he would just say, you're poor, I don't want to converse.

Tracy Alloway (3:57)

You're poor, I don't need to talk to you.

Joe Weisenthal (3:58)

So what is going on? We are going to be speaking with a perfect guest. When everyone was like, Odd Lots has to do an episode on Luna, obviously. And everyone, my DMs flooded with, this is the guest you have to have on because he's been warning about it for a while. We're going to be speaking with Kevin Zhou. He's the co-founder of Galois Capital, which is a crypto hedge fund that was launched in 2018