How Far We’ve Fallen: Lessons Learned in the Aftermath of the Terra (LUNA) Ecosystem Crash | Nasdaq


By Frank Corva Much ado has been made about the Terra (LUNA) ecosystem collapse , and rightfully so. LUNA, TerraUSD (UST) and other tokens in the Terra ecosystem had a total market cap of more than $60 billion, close to Enron’s market cap before it filed for bankruptcy. Inevitably, many have been hurt in the…

By Frank Corva

Much ado has been made about the Terra (LUNA) ecosystem collapse , and rightfully so.

LUNA, TerraUSD (UST) and other tokens in the Terra ecosystem had a total market cap of more than $60 billion, close to Enron’s market cap before it filed for bankruptcy.

Inevitably, many have been hurt in the wake of the Terra network’s failure.Some went all-in on LUNA and UST and lost most of their net worth as a result.A handful of these people have posted online about their suicide attempts, divorces and other tragedies they’ve experienced in the wake of the crash.

It’s difficult not to feel sympathy for these people, but it’s also difficult to imagine why they would put their net worth into assets that are a part of a relatively new, untested cryptocurrency network.

There are many lessons to be learned in reflecting on this crash, as it’s not just the prices of the old version of LUNA — now Terra Luna Classic (LUNC) — and UST that have tanked, but also our ability to educate newcomers of the risks associated with investing in this class of asset.

We continue to manipulate blockchain networks in ways that the founder of the technology and inventor of Bitcoin, Satoshi Nakamoto, didn’t seem to intend for us.

Before proceeding, I’d like to disclose that I owned some LUNA and UST at the time of the crash.When I use words like we , I’m not referring to the royal we , rather I’m referring to myself as a former owner of these assets.

I also use we to describe myself as someone who has invested in the crypto space for years and who has helped to educate others about it.

LUNA to the moon-a! It’s no secret that people get caught up in the “get rich quick” hype that surrounds crypto.And when people see industry leaders like Mike Novogratz, CEO of crypto investment firm Galaxy Digital, going overboard ( see tweet ) with his love for LUNA, it’s no wonder most thought LUNA was headed “to the moon,” crypto speak for rising in price both exponentially and quickly.

Let me bring you up to speed on the price action of the old LUNA (now LUNC).It went from trading at $0.65 in January 2021 to trading at just over $119 at its peak in April 2022.And then, as of March 2021, you could earn more than 19% on your UST via Anchor Protocol, the “gold standard for passive income on the blockchain,” according to Anchor’s white paper .

What wasn’t to like? You could get rich holding LUNA, but not be too much of a gavone by storing your wealth in a “risk free” asset like UST that seemingly, magically offered a return of nearly 20%.

It sounded too good to be true.

And it was.

Post-crash, LUNC now trades at a fraction of a penny, while UST trades at just over a penny.

LUNA 2.0 On May 28, 2022, the old LUNA chain — again, now called Terra Luna Classic (LUNC) — hard forked, setting a new Terra (LUNA) blockchain, “LUNA 2.0,” into motion.

New LUNA was airdropped to former and current holders of old LUNA (now LUNC ) and UST when the new blockchain commenced.

Investors have been on the fence about whether to buy or sell, as LUNA’s price has been volatile since its inception.

Part of the reason that LUNA’s price has been so volatile is that investors don’t know what the underlying value of the asset is.

Now that LUNA is no longer burned or permanently destroyed as a means to mint UST, which is its original purpose, the new hard-forked Terra (LUNA) chain remains missionless.

LUNA 2.0 hard fork isn’t the same as the 2016 Ethereum hard fork Many newcomers to the crypto space don’t know that in 2016, the Ethereum ecosystem experienced a major hard fork, similar to this LUNA hard fork.

After the Ethereum DAO hack , an event in which a hacker exploited a flaw in the code of a smart contract that contained more than $150 million in Ethereum, the Ethereum community opted to hard fork the chain as a means to retrieve the Ether (ETH), the native asset of the Ethereum blockchain, that was stolen in the hack.

The new chain is the Ethereum (ETH) blockchain that most know and use today, while the old chain is the Ethereum Classic (ETC) blockchain.

Similarly, in May the new LUNA chain retained the “LUNA” ticker while the old LUNA chain added “Classic” to its name.

It may sound like what happened to Ethereum is playing out for LUNA, though this isn’t quite the case.

Ethereum remains a far more dynamic network than Terra (LUNA), which existed almost solely to support stablecoins like UST.

The Ethereum network branded itself as “the world’s decentralized computer” and has been far more versatile in its capabilities, even in 2016, than the new LUNA chain is today.

Plus, when the Ethereum community retrieved the stolen ETH, they didn’t return it to its rightful owners with a two- to four-year vesting schedule attached to it, as the LUNA community has done for 70% of the tokens it will return to the victims of the Terra collapse.

This again plays into how far we’ve fallen.

When Satoshi Nakamoto created Bitcoin, the first cryptocurrency, he envisioned a permissionless network in which participants could freely transact with their tokens and code was law.Now, we not only roll back blockchains when something bad happens, but we also disable network users from using or selling their tokens as they please.

Some argue that the actions the Terra community has taken to return some value to customers are a way to keep regulators from clamping down too heavily on the industry.Others are highlighting the need for self-policing within the industry as a means to keep regulators at bay.

Calls for self-policing Crypto industry leader Ryan Selkis of Messari — a firm that provides data, research and tools for crypto investors — has called for the industry to step up its self-policing .Another industry leader, Nic Carter of the VC firm Castle Island Ventures, warns the industry will draw unwanted attention and the ire of regulators because it hasn’t policed itself better.

While self-policing sounds like a good idea, history shows that it often fails miserably.

In the 1980s, when mortgage-backed securities (MBS) were the hot new product on Wall Street, Lewis Ranieri, then executive at Salomon Brothers and founder of mortgage-backed securities, assembled a team of Ivy League PhDs to police the quality of the loans packaged in these securities.

This policing went well enough for years — until Ranieri and his team were fired from Salomon Brothers in the late 1980s.

Then, as Michael Lewis outlines in the classic Liar’s Poker , no one sufficiently monitored and regulated the quality of the mortgages that went into these MBS products.

Fast-forward about 20 years, and the “unpoliced” subprime loans stuffed into many MBS products triggered the 2007–2008 global financial collapse.

The lesson is that if Selkis’s calls for self-policing are to be taken seriously, then the policing, like crypto assets themselves, will have to be sufficiently decentralized.

Prominent, in-the-know members of the crypto industry who work for a variety of different institutions would have to have the power to not only sound the alarm when they see fit but to take action as well.

This is to say nothing of the fact that people on such a policing board could abuse their power in efforts to squash their competitors’ products.

In closing If regulators aren’t already planning some overly heavy-handed regulation of the crypto space, then those of us who are more familiar with this space will have to step up our efforts to educate newbies, while those who are really in the know may have to play a “law enforcement” role, as futile as those efforts might end up being.

Over the years, we’ve fallen away from the ethos of the blockchain, an open-sourced, permissionless technology through which people can transact freely and peer to peer.

It’s time to revisit the basics of what Satoshi Nakamoto gave to us and to share with newcomers that it’s best to start with smaller, safer bets in this space, like allocating no more than 1% to 2% of your wealth to a digital asset like Bitcoin.


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