How to Run a Crypto Scam and Have Everyone Feel Sorry for You

The Rise and Fall of Terra (in a compressed nutshell)

Just when we thought we’d seen it all, Terra sought to smash through the glass ceiling of spectacular crypto crashes with a fervor of a teenage boy attempting to impress his first crush by showing off his latest Lambo-destined NFT.

What a show Terra was, wasn’t it? I won’t have to spell out its rise and fall since there has been plenty of coverage (surprisingly, even outside of niche crypto media), but in case you’ve dodged the media bullet or chose to stay under the rock of ignorance (hey, I do that a lot too, so it’s no insult), here’s the quick and dirty on how a cryptocurrency project by the name of Terra imploded in a week and, in doing so, became the natural scapegoat for the current crypto crash:

1. On 7 May 2022, over $2 billion of Terra’s stablecoin UST was unstaked and dumped in the millions.
2. UST immediately lost 9% of its value, unpegging itself from the US dollar.
3. Arbitrage traders moved in to exchange UST for LUNA, Terra’s other crypto used to mint/swap for UST, since 1 UST could always be exchanged for $1 worth of UST.
4. Oops. Traders find out the swapping cap was $100 million a day.
5. Bitcoin and crypto are down, UST is not regaining value, traders are panicking, and no one is going to wait for that daily cap to replenish. So they head straight to exchanges to dump UST.
6. 9 May 2022. Terra’s guardians sit on $3.2 billion in Bitcoin reserves, held to defend the UST peg in such a scenario. They loan out $1.5 billion of that Bitcoin and some more over the next few days.
7. Didn’t work. UST peg was never restored and kept losing value. 1 UST only fetched 50 cents.
8. 11 May 2022. Terra reinforces the burning, allowing 4 times the limit. 1 UST sold for 20 cents. LUNA also crashes.
9. Less than $1 million in Bitcoin reserves remained. The peg is truly and utterly lost.
10. 12 May 2022. Terra blockchain shuts down. LUNA and UST start a mass delisting exodus from major exchanges. Dumpers couldn’t even dump. LUNA is worth less than 1 cent.
11. 14 May 2022, Terra CEO Do Kwon throws in the towel. that the UST stablecoin project had failed. By May 12, LUNA wasn’t even worth 1 cent, down 99.99% from its all-time high of $120 just weeks earlier.

Still with me? Great.

The latest and the greatest of crypto scams yet

When you’re penciling out a new draft on Hacker Noon with the latest editor, the empty field has a writing prompt: “Write something nice”.

I’ll be honest. I tried to start off with something nice but it’s impossible to do so considering the events that surround Terra.

British economist Frances Coppola was not alone in criticizing Terra’s self-correction algorithm -- using smart contracts and direct interventions that would contract or expand the supply of its stablecoins to meet the US dollar peg -- saying that they were prone to failure as soon as token holders engaged in panic dumping.

Now, I’m not a big fan of traditional money experts and economics. After all, they are usually the first to underestimate sentiment, hence predictably blind when it comes to expecting the huge market crises that we’ve witnessed over the past several decades. Prediction models and old-school economists simply don’t understand that Black Swan events render all models useless.

But Coppola had a point. A point that has been proven multiple times by the vast number of failures of algorithmic stablecoins since at least 2020. One would have thought that such public stablecoin failures like Dai or Mark Cuban’s complete backfire in the Iron Finance debacle would have taught us that.

Of course, Do Kwon responded as he famously did, dismissing the criticism and insisting that he wouldn’t enter into debate with the “poor”, saying:

“I don't debate the poor on Twitter, and sorry I don't have any change on me for her at the moment."

He actually loved calling people poor…

https://www.youtube.com/watch?v=4iPnDZNjVqA

Detour: Terra shouldn’t take the fall for the crypto crash

I would like to take a step back to talk about the broader Bitcoin and crypto market.

Bitcoin, the grandfather of crypto and the godfather of them all, plunged to depths it hadn’t seen since 2021, dropping below $26,000 in the week of Terra’s demise. It’s still struggling to break $30,000, down almost 60% from November 2021’s current all-time high.

$600 billion was wiped out in the crypto market in the same week, as traders made lemming lines all across order books to dump and recoup in fear. Glassnode estimates that 2 in every 5 Bitcoin investors is currently in the red.

So first of all, let me say that the situation is bad. Sentiment has never been so fearful and trading overall is cooling off. Coinbase posted a Q1 loss, and its stock has dwindled by over 70%. It’s also lost about 20% of active customers.

So yes, it’s bad. But the scapegoat shouldn’t be Terra. We should have expected this.

Bitcoin and crypto’s correlation with the global stock markets is a known and repeatable phenomenon. Now, I’d love to say Bitcoin is a different class of asset (it is), and then it is an alternative store of value (it also is) but it does tend to behave in skewed patterns of extremes. When the global economy is doing well, Bitcoin does much better. But on the other hand, when economies and stock markets are in crisis, as they are now, Bitcoin also tends to flounder even worse.

Black Thursday of 2020 in March should serve as a stark reminder of this. Stocks plunged. Oil went to negative (that means you’d get paid to take oil off the hands of some brokers) and Bitcoin broke $4,000 support. Remember that?

Then you’ll also remember that by the end of 2020, Bitcoin was back at its 2017 ATH of $20,000. And within a year, it almost breached $70,000 as the economy recovered.

So, really. Terra was bad for crypto, let’s not dismiss the effect of mass panic on imploding crypto that had crypto’s third-largest market cap at some point. But Terra alone was not to blame for what’s happening right now as we enter what looks to be a long crypto winter.

And it will get better.

That Bitcoin has taken such a beating and still posts half a trillion in market capitalization barely a decade after emerging as a coin worth almost zero, is an achievement of unimaginable proportions.

Bitcoin ain’t going away. Crypto ain’t going away (even if it’ll lose hundreds of coins this year, next year, and the year after.

Once the fear and speculative interest is purged and the mists of hype clear to reveal the ever-present, ever-growing foundational strengths of Bitcoin fundamentals: growing utility, swelling mass adoption, against a backdrop of a rotten core of global monetary systems.

The greatest trick of the devil was to believe it didn’t exist

Right, back to the Terra issue. I probably misquoted this headline but I’ll run with it as a simple summary of how Terra has gotten away with running something it had to know would fail, and then avoid accountability for it.

One of the worse things about the entire debacle for me is that not enough people are outraged with its founder/co-founders. Okay, sure, we’ve had some prominent people speak out and question the way its billions in Bitcoin reserves were handled (Changpeng Zhao and Vitalik Buterin, for example).

And yes, I think it’s great that people are questioning, but apart from the investors who were directly impacted, we’re seeing a general lack of outrage over Terra’s handling of the whole situation.

Ignorance and arrogance are, at worst, what were blamed. ‘Terra didn’t know this could happen. ‘Do Kwon tried his best and could never predict the outcomes of the market crash’. ‘The Bitcoin reserves should have been enough’. It is a litany of excuses coming out of their camp, and even from others on their behalf.

Why shouldn’t we buy any of these excuses? Because according to this Coinbase report, this was not Do Kwon’s first algorithmic stablecoin rodeo. In fact, only months before, in November 2021, a group of anonymous developers launched a remarkably similar algorithmic stablecoin called Basis Cash.

Coinbase spoke to former Terra employees who admitted that they, along with Do Kwon, were the ones who founded Basis Cash. Like Terra, it also lost its peg and is completely dead. It never made the news as it only lost about $54 million. The ex-employee claimed Basis Cash was just a pilot project and they were never sure it would work.

Well, it didn’t. And yet they went ahead and pushed out a near carbon copy in Terra. That’s not ignorance that it wouldn’t work. That’s full disclosure that failure was inevitable.

When Mt Gox crashed all those years ago, its owners and operators were swiftly put through the justice system. Of course, the passage of the process has been anything but swift, with compensation for investors largely still in legal limbo till even today, eight years after the fact.

But at least that negligence and possibly theft were dealt with diligently. The funds are committed and have the court’s watchful eye, especially after sentencing its CEO Mark Karpeles to two and a half years of prison. Sure, he’s out now and running a new company, and has even issued NFTs to former users, but he won’t be able to do anything funky anymore with so much attention and monitoring of his activities

There is hope that Terra’s founders and operators will be put to the sword. Already, a South Korean politician has called for Do Kwon to hold a parliamentary hearing on Terra (he’s based in South korea). I hope this happens, I hope it leads to an inquiry and court process. Exchanges in the country that were also culpable for their part in the crash may also be summoned, and I hope this happens.

But if the prevailing sentiment for Terra and Do Kwon is that of sympathy, then it means that no one is willing to acknowledge and call out Terra for what it was. A scam. If a founder that is malignant and malicious in intentions is not possible, then a scam was never the intent and is impossible to fathom.

And if being heartbroken relieves him of any moral imperative to allow a full and transparent post-mortem, then I can’t see this happening. Truly, we have been led to believe that the devil doesn’t exist.

Knowing crypto and its appetite for undeserved second, third, and nth chances, I am inclined to be a skeptic.

Terra is dead. Please don’t invest in undead Terra

Now, what happens when the architect of an obvious scam or, at the very least, a negligent and irresponsible purveyor of dreams, isn’t called to accountability? What happens when devastated investors clutch at straws to try and chase their losses?

Well, you have an opportunity for the swindler to squeeze out the very last bits of juice from a deceased lemon.

As I speak, Terra has been revived, and plans are underway for it to re-emerge as a new contraption that promises to recover and make every Terra investor whole again.

Don’t fall for it. I won’t even bother to go through these different plans, forks, airdrops, or whatever gimmick Do Kwon is coming up with.

And, if you’re tempted to go in now for what looks temptingly like a super smart investment, to pick up several hundred thousand Luna for a few hundred dollars. Please allow yourself the time to drill these numbers into your head:

• The Luna supply has massively exploded from 360 million to 6.5 trillion. That’s over 18,000 times growth. UST is still not reached its $1 peg.
• Buying now to have the same benefit pre-crash equates to spending more than $5 pre-crash on Luna, just about 4% of its ATH at $120.
• Luna minting is already hyper-accelerated and this will be super boosted. This will be worse than the Dogecoin or Floki supply growth. We’re talking about Luna reaching millions of trillions (that’s quintrillions if you really want to know) in supply.

I probably will never say this again but this is financial advice. Stay away. Don’t even think to “test” $50 to enable this scam a second life.

Don’t give up, there’s always a way out

Now don’t get me wrong. This isn’t at all an article intended to belittle the obvious anguish and sorrow that thousands of innocent normies must now be experiencing. I’ve been to Reddit and on Twitter, and in that week of mayhem, there was post after post of people staring down an abyss of hopelessness.

There have also been -- unconfirmed -- reports of self-harm.

I cannot comprehend just how terrible this must have been and continues to be for them, even as Do Kwon continues to pour aimless cringey tweets out there, ostensibly to help soothe his broken investors. He claims to be “heartbroken”. But heartbroken doesn’t even begin to describe how the situation must be for anyone who believed in Terra and backed their belief with their life savings.

And so, as much as this post is a denouncement of projects and developers like Do Kwon, as much as this hopes to be a warning to prevent as many people as possible from getting duped into another Terra, I hope that in some small way, this post reaches out to those affected by UST, LUNA and Terra to tell them that this too shall pass.

I can’t speak on behalf of everyone involved in crypto, but I can for certain say that there is a shared motivation that we all wanted to have a better life, and we all wanted to seek out an alternative path. And that path is fraught with dangers.

This is not the end. It never is in crypto. And I know it’s scant comfort to offer you the mantra of “All of this has happened before, and all of this will happen again”. But what they also don’t mention is that in between all of these cycles of “been there done that will do it again”, there is always a period of recovery, growth, and rebuilding.

If Terra has affected you and you feel you are at risk of harm. Reach out. Talk to professional help. Just look up national hotlines on Google. If you can’t, talk to someone. Anyone. We’ll help you find help.