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SBF and Benson Sun on UST: Debt ceiling issue, not a scam

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"Not all bad things are the same bad things" (not all bad things can be generalized)

The LUNA storm has continued to this day, and Do Kwon, the founder of the Terra blockchain, has also been pushed to the forefront of public opinion. Many people think that Do Kwon has deceived the public, and an article by the foreign media CoinDesk even compares Do Kwon to Elizabeth Holmes of the Silicon Valley unicorn scam "Bad Blood". In response to this, FTX founder SBF has something to say.

Elizabeth Holmes is the founder of the blood testing company Theranos, which claims to provide "fingertip blood" to detect diseases, whether it is cancer, cholesterol, or diabetes, can use its patented blood collection device, blood diagnostic testing The system (miniLab) diagnoses within half an hour.

This world-shattering technology has attracted countless venture capital funds. In 2014, Theranos was once valued at $9 billion, making it the most high-profile unicorn company. But only a year later, the blood testing company was proven to be a scam. In 2018 the company was dissolved, and in 2021 Elizabeth Holmes went to jail.

CoinDesk Columnist David Z Morris Think launch TerraUSD (hereinafter referred to as UST )’s Do Kwon is the blockchain version of Bad Blood¹, also promising investors really cool stuff (meaning a decentralized Stablecoin), but with no innovative, down-to-earth approach.

[Note*1]: "Bad Blood" was published in 2018 by John Carreyrou, describing the unicorn scam of blood testing company Theranos

SBF: UST is bad, but not the blockchain version of bad blood

FTX founder Sam Bankman-Fried thinks LUNA/UST (meaning TerraUSD) is a very bad thing, and the ending is also very bad.

But as bad as it is, Elizabeth Holmes' Theranos company is different because the mechanism of LUNA/UST is quite transparent.

SBF believes that LUNA/UST is terrible, the ending is a failure, and it is also very unbearable. But the main criticism of Elizabeth Holmes isn't that Theranos failed, it's that she lied.

“Especially Elizabeth Holmes keeps saying that Thearanos is innovating technology, but in fact it is not. Elizabeth Holmes is a fraud, defrauding investors with fake reports, but LUNA is different."

SBF believes that Do Kwon did not distort the LUNA/UST mechanism to the public, and he did not claim that UST has a 1:1 USD reserve. On the contrary, Do Kwon clearly stated that the reserves behind UST are some "unstable assets".

“Do Kwon did not tell everyone that UST is 1:1 support, on the contrary, he clearly stated that UST’s reserves are some unstable assets. Obviously, these Assets are likely to fall in price, and once an asset falls, other consequences follow.

Again, I am not exonerating UST, I think they are wrong, but UST is not the same as Theranos. "

Many people will say that the UST incident has expanded into "blockchains are all frauds." SBF believes that there are indeed some Ponzi schemes on the blockchain, just like Plus Token, but UST is not a scam. To put it bluntly, SBF believes that the marketing of LUNA/UST has failed because there is no way to convey the correct mechanism and risks to the public.

"Most bad investments are not Ponzi schemes. Some losses are due to being scammed, some are bad luck, some are both .

Here are the investments down over 50% since the beginning of the year: 1) NFLX 2) LUNA 3) AMC 4) ARKK. "

1) Not all bad things are the same bad thing

—SBF (@SBF_FTX) May 14, 2022

FTX community partner Benson Sun: LUNA’s debt ceiling is a problem

For the blockchain industry, UST is a very interesting experiment, so from the perspective of after-the-fact review, what went wrong with the UST mechanism?

FTX community partner Benson believes that there is a problem with the setting of the "debt ceiling".

He used Maker’s Stablecoin DAI as an example, saying that DAI has a design debt ceiling, because Maker understands that once a large-scale liquidation occurs, the system still needs to rely on The liquidity of the collateral, so it has a cap on each type of collateral, for example, the better the liquidity of ether (ETH), the higher the debt ceiling.

He believes that even after experiencing large-scale liquidation events such as 312 and 519, DAI was safe in the end, and Maker's risk management and control mechanism is undoubtedly successful.

But LUNA is different.

LUNA does not have a cap on system debt, instead it has a flywheel effect². This flywheel effect comes from the mechanism of UST. If there is a demand for UST in the market, LUNA will be purchased and destroyed to generate UST. Terra uses Anchor's 20% annualized interest rate to continuously attract external funds into the system, causing the issuance of UST to skyrocket along with the price of LUNA. However, when the issuance of UST is too large, the buyer's liquidity of LUNA is not enough to support its price anchoring mechanism , will eventually lead to destruction.

In contrast, when Maker minted DAI, it could accept a variety of assets as collateral. The liquidity of the overall system does not depend solely on the coins within the system. The security is much higher.

Benson compared LUNA to a company’s assets, while UST is a liability. Obviously, there is no official limit on the debt ceiling, resulting in an excessively high asset-liability ratio.

“When the market value of LUNA was the highest, it was about 41 billion US dollars, and the market value of UST was about 18 billion, and the debt accounted for about 40% of the assets. In addition, the currency circle There is a big gap between the market value of LUNA and the liquidity of the buyer, and it is obvious that LUNA’s liquidity is not enough to cope with such a debt ratio.”

[Note*2]: The flywheel effect means that after reaching a certain critical point, the gravity and momentum of the flywheel will become part of the driving force. At this time, you don't need to exert more effort, the flywheel will still rotate quickly

He pointed out that Terra officials also realized that UST is too dependent on LUNA, so they also began to introduce external liquidity and reserve assets to improve UST's risk resistance ability, including buying Bitcoin as a reserve and building a liquidity pool on Curve Finance, but unfortunately, it eventually lost to the unlimited debt ceiling:

“In a way, Terra is like skydiving. He has a parachute on his back, and this parachute is the application and protection mechanism of the UST. In Before falling to his death, Terra had to complete the parachute, but unfortunately, the parachute landed without opening.

If Terra is willing, they can link the upper limit of debt (UST issuance) to the market value of LUNA (for example, 1/10), sacrificing the room for market value growth in exchange for more A large safety factor, so that the entire system is sustainable, and there is a chance to open the parachute before a hard landing. "

In addition, Benson also gave his opinion on the recent LUNA chaos.

He believes that there is no need for the media or Internet celebrities and KOL (opinion leaders) to spread cases of getting rich in the LUNA crisis, most of these cases cannot be replicated , and has a lot of luck.

It is undeniable that every major event has a case of getting rich. The LUNA incident has evaporated the market value of tens of billions of dollars in the entire currency circle. There are more people than making money. There is no need to increase market anxiety when most people lose money or even lose their net worth.

“There is absolutely no need to pay attention to the bottom-buying post of $LUNA getting rich. , $0.1, $0.01 are cheap enough to rush in and be buried. There are definitely more people who lose money than those who make money by buying the bottom $LUNA. exit."

Finally, he also reminded investors to pay attention to the "risk factor" of investment.

Before the UST death spiral occurred, many KOLs were promoting the fixed annualized compensation of UST. Regarding this matter, Benson believes that although many people have explained the risks, they have reservations about whether these explanations are complete enough and clearly remind investors of the timing of exiting the market.

He said that he has not promoted UST, because it is too difficult for ordinary people to understand its system risk and monitor UST-related data in real time.

How do ordinary investors identify investment products?

Benson suggested that at least understand the average interest rate that the industry can offer, and be alert to those excess interest rates.

“For investors in the currency circle, an unreasonable average interest rate that exceeds the market must be accompanied by restrictions.

For example, suppose the average annualized return in the current market is 5%, but the annualized return on a trading platform is 12~15%, but the deposit limit is $2,000, the idea behind that was to attract new users.