The Heartbeat of Cardano.

A Few Thoughts on the Luna Fiasco

Things that can break will eventually break – SHOCKING!

This post was adapted from a thread originally posted by @Flantoshi on Twitter

To tell you the truth, I’ve been struggling to write about the Luna fiasco. Not because there isn’t anything to be said about a tier-1 cryptocurrency falling from the top 10 to meme status within a day or two, but because what can be said seems obvious, especially in hindsight.

Things that can break will eventually break.

There is nothing profound to be said there – the sun rises in the East and sets in the West, and after a full moon, there is darkness. It’s simply the way of things. 

Luna, the cryptocurrency, imploded within a few days and dragged the rest of the market down with it. They tried to perform alchemy by transforming lead into gold, transforming people’s trust into money and failed.

So, why are people acting all surprised when the inevitable inevitably happened?

In this article, we will be exploring the Luna crash and its aftermath to perhaps trying to make sense of things.

Once in a Blue Moon

It’s easy to dismiss Luna investors as stupid and ignorant, but that’s taking the coward’s way out. Let’s properly look at them and then look back at us – are we really that different at the end of the day?

Sure, there’s a bunch of people who will say they came to Cardano for its humanitarian angle, but more often than not, these same people are the ones that get the angriest when there are market downturns. While we’re on our introspective journey, let’s be frank as well, we are mainly in crypto because of greed.

Wanting the world to become a better place, while important, is a distant and secondary concern that pales in comparison to not having to worry about paying rent, getting a Lambo, or whatever your mark of success is.

Hence, there’s no surprise that there is community overlap between Luna and Cardano holders. Both were drawn for different reasons to something that seemed to be asymmetric bets – “heads, I lose a bit; tails I become rich.”

The difference though is that Cardano is not only standing (and has stood in the top ten through bull-runs and bear-markets just the same), while Luna collapsed spectacularly within its first year of being in the top ten.

Cardano survives because of its simplicity, there are very few moving parts that can bend far enough as to cause a system failure. On the other hand, Terra had Luna, the TerraUSD coin with an algorithmic peg (as well as other fiat currency stablecoins), a lending protocol offering an unsustainably high yield that was “guaranteed and safe”, a treasury system that holds other cryptocurrencies as reserves to defend the peg, and a complex interrelation between all parts.

You need a flow chart just to get a good handle on how everything works with other pieces.

However, it’s unnecessary to understand how everything works for us to understand why it failed: If you back a supposedly stable asset with an unstable reserve, it’s inevitable that at some point you’re out of the money, and a bank run happens when people lose faith.

It doesn’t matter how elegant or sophisticated these things are, eventually they break. It’s akin to your grandma’s precious and fragile dinner plates. No matter how much she takes care of them, sooner or later, they will shatter.

Luna’s collapse wasn’t an unpredictable event, me and a bunch of other people said as much several months ago, but it was admittedly an unlikely event, something you would only see once in a blue moon. Yet here we are.

Something being improbable does not mean that it is impossible. In fact, if the time horizon is long enough, any improbable event is a certainty.

Howling at the Moon

If you look at Twitter at the time of writing, the Luna community is in shambles. Many of the people in the community were overinvested as they had been promised that this was a secure thing. Kwon, the founder of Luna, has asked for police protection, or at least his wife has, as people started tracking him down and threatening him.

On the more productive end of the spectrum, people have come up with ingenious but foolhardy ways to put Humpty Dumpty together again. But despite all their best efforts, all the king’s horses and all the king’s men, won’t be able to put Humpty Dumpty together again. (Side note: who the FUCK lets a horse try their hooves at putting together a puzzle?)

Even assuming that they manage to fix the death spiral mechanism which causes hyperinflation in the protocol’s tokens, and they manage to find an investor rich (and crazy) enough to pour billions of dollars to rescue it, the trust in Luna is finished.

Despite people degen day trading on top of Luna’s corpse by playing hot potato with the hyperinflated tokens, I don’t see it ever-rising back up. It’s like going to the dodgy part of town because there’s a good restaurant there – you might visit downtown, but never live there.

Same issue with potential investors. Would any sensible person decide to build a project on Terra from here on out? Would any investor fund such a venture, especially when there are smart contract platforms that have never had such a cascading failure?

Eventually, even the projects that had already built on Terra will cut their losses and build elsewhere. So it becomes a vicious cycle where it doesn’t have any users because there’s not enough adoption to be worth building anything that would attract users. 

The absolute best-case scenario they can hope for is to copy-paste the code, fix the death spiral mechanism, call the blockchain “Saturnia” or somesuch astronomical object, and airdrop the new token to their original users.

But that hardly counts as saving the patient. That’s akin to cloning someone and leaving the original patient to die.

It’s also worth noting that when you howl into the night, there are other threats that might hear you…

Asking for the Moon

It’s no secret that governments of the world are increasingly aware of crypto. They’re looking for every possible angle to strangle it, but the problem they encounter is that it’s somewhat difficult to tie a noose over crypto’s head, as it’s a multi-headed hydra, where some of its heads die off and entirely new and different ones take their place.

The one thing that hasn’t majorly changed though, and is the most immediate threat for the powers that be, are stablecoins. While there are hundreds of stablecoins out there, they roughly fall into three camps:

  • Off-Chain Collateralized – backed and redeemable to assets outside of a blockchain (Fiat money, stocks, bonds, real estate, etc); 
  • On-Chain Collateralized – backed by crypto assets; and
  • Purely Algorithmic – held up by fairy dust and magic, purely willed into existence by the demand and belief of a community.

The first two are the most immediate concern to authorities, mainly because they compete directly with “actual” money (yeah, yeah, before you start in the comments, I’ll consider crypto actual money when I can buy a sandwich with it and it’s not a novelty). Given that they are easily convertible into real world assets, they’re the most likely vector for crypto contagion.

Some financial juggernauts have even gone as far as saying that stablecoins pose a severe risk to the wider markets, or as the Bank of England put it “Unless adequately regulated, stablecoins could undermine public confidence in money and payments and in the financial system as a whole.”

Now, the interesting question is whether the latter statement is genuine concern about crypto assets affecting real-world finances, or if it’s more that the moneymen fear that people might begin to ask by what means their “real” money is backed, other than the threat of violence?

Whichever it may be, regulators will use Luna’s crash as an excuse that the space needs to be regulated. It’ll be done, as any good authoritarian power grab is done, in the name of protecting the innocent.

Basically, what you do is use a manufactured or real event as a wedge to enact far-reaching regulation you would’ve otherwise never had had the support to get. For example, after 9/11, everyone in the Western World lost a portion of their freedom and privacy.

The regulations of surveillance passed in haste over an issue that affected a tiny fraction of the population are still in operation today. And there aren’t any real signs of them being loosened, quite the contrary.

There are many theories about whether Luna was attacked by some powerful force for profit or to make a political point, or whether it was simply people independently routing and losing trust in the system. To me it’s an irrelevant matter, what is important is the end result: regulators now have a reason to say they need to protect the public and enact regulation that solidifies their power for years to come.

At the end of the day, the regulators will ask for the moon. They will demand a pound of flesh and the crypto community will have to give it to them, as self-regulation is clearly not working. If it’s not scams, it’s protocols collapsing in on themselves, and the level of knowledge that is just assumed as a given for the larger public to need in order to operate is simply intolerable.

Crypto will have to evolve as an industry and mature.

Happy Full Moon Eve♡ | Memes, Popular memes, Cute

New Moon

While I no longer label myself as a libertarian, I sympathize with many of the talking points. Among them, there is the desire to keep the grubby arms of regulators, taxmen and politicians at bay. Unfortunately, I don’t think this is tenable in the longer term.

As much as we like to pretend that crypto can operate independently because of its decentralization, it still needs to work in jurisdictions where they need the blessings (or at least not the outright hostility) of the powers that be.

In Rome, there were the Secessio Plebis, a series of large social movements where commoners would abandon the city en masse in protest and leave the elites to themselves. In this way, the plebs would show their worth to the society and therefore rework the social contract to be fairer.

While perhaps less dramatic, crypto is our modern Secessio Plebis, where we can present a meaningful enough threat to the powers that be, to the point that we can negotiate better terms. We might not get our blockchain utopia, but it will be better than our present status quo.

I think it’ll be a dance – on the one hand, crypto will claw back much of the power and privilege that was reserved only for elites in decades past, while crypto will have to abide by certain standards and follow a constitution of sorts.

So Luna might end up being the hair that broke the camel’s back. Regulators had already signalled great interest in going after us, and now they have ample excuses to do so. 

For the time being, crypto at large is not ready to receive these blows. We’re too much up our own asses to realize the dangers. 

We cannot let the elegance of a system, or the promise of “guaranteed returns” blind us from the fact that we live in the real world, where every action carries with it an opposite and equal reaction.

Crypto is going to pay dearly for its hubris.

Conclusion

The future is decentralized crypto, of that I am certain. More I can’t say.

I wish I could say that Luna’s collapse was just an unexpected speedbump on our flight to the moon but it was neither unexpected nor likely to be the last *COUGH*Tether*COUGH*. Unfortunately, I think it might be to crypto what Gavrilo Princep was to the Austro-Hungarian Empire via WWI – Luna is likely to be our “shot heard around the world”, which starts a set of machinations that completely upend the status quo.

Even without the worsening macroeconomic picture, I’d have said crypto is in for a tough few years, but the regulator’s crosshairs more or less guarantee it. 

I love the Wild West of crypto, it allows no-name people like myself to rise up and make a living, irrespective of who we are. But I don’t expect things to last – institutions will be formalized and structured according to their operating jurisdictions.

Over the decade there will be a dialectic between the old world and the proposed new one. In their interactions and conflicts with each other, there will be a synthesis, an entirely new version incorporating both proposals.

Whichever form it ultimately takes, I believe it’s likely to be better than what we have now. But we can’t begin until we get the dialogue properly started. Perhaps, with a bit of luck, Luna’s collapse inadvertently opened the communication channel between the old world and the new… 


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