[HN Gopher] Crypto-failure Terraform Labs to cough up $4.5B, liq...
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Crypto-failure Terraform Labs to cough up $4.5B, liquidate self
Author : PaulHoule
Score : 46 points
Date : 2024-06-26 16:26 UTC (6 hours ago)
(HTM) web link (www.theregister.com)
(TXT) w3m dump (www.theregister.com)
| bobthepanda wrote:
| > Terraform Labs was one such entity. But its protocol - which
| aimed to ensure TerraUSD's price would remain stable - failed
| miserably in part thanks to its underlying blockchain being
| unable to scale as scared investors sent demand for transactions
| soaring.
|
| Was this an actual technical problem or was this a bank run?
| erredois wrote:
| A bank run. Their system relied on having a stable coin pegged
| to the dolar. Someone with deep pockets did a speculative
| attack that broke the peg and it started a bank run.
| simonw wrote:
| Presumably the information about what that person did is
| permanently preserved on a blockchain somewhere?
|
| I'd find a forensic accounting investigation that explains
| what they did and how it worked quite interesting.
| vizzier wrote:
| It sounds a lot like this
| https://en.wikipedia.org/wiki/Black_Wednesday basically use
| short positions to trade against the real value of the
| currency while selling at the "pegged" price pocket the
| difference. If a G7 currency can't guard against this type
| of attack then can a crypto service expect to compete?
| mamonster wrote:
| Its very easy to explain (Im doing from memory so not 100%
| sure all the details are correct).
|
| Prerequisites: 1.Terra/Luna was "special" because it was a
| cryptocurrency(Luna) with its own stablecoin(Terra/UST),
| with the peculiar quirk of the collateral for the
| stablecoin being the crypto itself(unlike
| Tether/USDC/whatever else where each stable is backed by
| USD/treasuries/commercial paper and etc).
|
| 2. The 2nd part is that the peg of Terra to dollar is
| maintained algorithmically, via a pretty simple mechanism:
| One dollar worth of Luna is always worth 1 Terra(so 1 USD
| in crypto land). To convert between the 2, you either
| burn(Luna->Terra) or mint(Terra->Luna). The peg is
| maintained by arbing: If you see 1 UST = 0.9 USD, you buy
| the UST, mint 1 dollars worth of Luna and sell it to get 10
| cents of profit.
|
| 3. Anchor protocol was a lending protocol that offered 20%
| interest rates. You deposit your UST, Anchor lends it out
| to people who want to borrow it, life is good. There were
| other protocols that basically also offered ridiculous
| rates on UST(remember this is close to peak crypto bull).
|
| What happened: 1.From the above description, the biggest
| question is: What is the value of LUNA? Sure, it has a
| value with regards to arbing UST, but what is the value by
| itself(0, turns out). What ended up happening is that
| during the bullmarket people wanted both UST and Luna(you
| want Luna to bet on the ecosystem, and you want Terra to
| farm the 20% yield). For example, if people are buying
| UST(to put it into Anchor), UST price goes up. You are then
| incentivized to buy LUNA, burn it to get 1 UST, and sell
| UST for above a dollar. As you can see, this is a pretty
| classic flywheel.
|
| 2.The actual blowup: Most people blame Anchor cutting the
| interest rate. Basically, certain large accounts quickly
| dumped UST for USDT/USDC(actual stables), and this knocked
| off the peg. Here, under normal conditions, arbitrageurs
| would massively buy the discount UST, mint LUNA and sell
| it. There was one problem: LUNA was also massively falling,
| so it was impossible to do the arb. As a result, the price
| kept falling as no one was buying, and as the price of LUNA
| fell the peg could not be defended.
|
| tl;dr It was a stablecoin that was not backed by any actual
| assets but by another crypto.
| marcuskane2 wrote:
| This is completely misleading. Their "stable coin" system was
| doomed to fail from the beginning.
|
| They made up two new coins, which were algorithmically tied
| together so that coin A's value was variable and coin B's
| value was equal to 1 dollar, and the mechanism to maintain
| this was that users could convert between A and B coins at
| whatever ratio maintained the "stable" value for B.
|
| This means that as soon as the hype around the speculative A
| coin waned, it instantly went into a death-spiral of
| hyperinflation to maintain B's value.
|
| The "stable coin" was never backed by actual dollars or gold
| or bonds or equity in a business or anything real. It was an
| algorithmic peg between two different useless coins made up
| by the same people.
| erredois wrote:
| I was not defending it or saying it was stable. And I
| believe what you said is true about the weakness, but the
| fact is that the life of this project was still shortned by
| someones actions.
| jvinet wrote:
| This article tries to follow the action via the tweets emerging
| at the time.
|
| https://medium.com/coinmonks/the-40b-wipeout-the-fall-of-ter...
|
| The last laugh:
| https://x.com/FreddieRaynolds/status/1524139694388355072
| burningChrome wrote:
| Another reason not to get involved with crypto.
|
| People kept telling me, "These companies have billions of dollars
| invested in them, they're rock solid, its a great investment."
| And then you keep seeing these crypto companies who are valued in
| the billions continually going under and taking investors money
| with them.
|
| I've always admired what crypto was aiming to achieve, but stuff
| like this hinders their effort for people to take this stuff
| seriously and get involved.
| aurareturn wrote:
| Every crypto company will eventually fall. It's only a matter
| of time.
| smabie wrote:
| I mean probably every company ever will probably fail, it's
| only a matter of time
| nwiswell wrote:
| The timeline might be compressed for crypto, but this seems
| to be true for banks as well.
|
| Looking back to the financial history of the 1800s, it seems
| to be the case that it is only the massive intervention of
| government beginning in the 1900s and especially after the
| Great Depression -- in particular aggressive regulation and
| oversight, central bank systems, deposit insurance -- that
| prevents perennial banking failures. And it happens anyway:
| see 2008. Reportedly, even the recent failures of Silicon
| Valley Bank and Signature Bank threatened contagion before
| the FDIC made the extraordinary decision to protect balances
| in excess of $250k.
|
| So really, it appears to me that crypto is merely an immature
| financial system that is learning the lessons of legacy
| finance in an accelerated fashion.
| rurp wrote:
| I don't know if this comparison was meant to make crypto
| look better, but it really doesn't. The original pitch of
| crypto was to revolutionize global finance and replace it
| with something better. It seems the pitch has now devolved
| down to, "The current system, but less mature", which is
| about as unexciting as a technology pitch can get.
| nwah1 wrote:
| And that's the optimistic take.
| DANmode wrote:
| Those of us with minor technical interest in the space don't
| really have any love lost for most of the "companies"
| currently involved...
| tetha wrote:
| Maybe I'm naive and brainwashed and so on. But one of the big
| selling point of crypto was that you don't get "under the
| opressive control of banks and the state" and such. And, I can
| get the merit of that idea. Banks can have a massive amount of
| control over some peoples life.
|
| But at some point, a bunch of financial sharks got involved
| into the crypto pond. These guys have decades of experience at
| exploiting financial markets, and a bunch of the regulations
| and rules we have through banks and the state is to protect
| naive people like me from sharks like those. And it doesn't
| work beyond a certain state, sure. If you can pay millions to
| dudes finding loopholes to make billions, alright. But at my
| level of money I can trust the system to some degree. At least
| more than an unregulated market full of people with decades of
| experience at exploiting companies and people financially.
|
| And while I like the idea behind crypto, that thought has
| shaken my confidence into the idea beyond repair, to be honest.
| etrautmann wrote:
| Has there existed a time since 2011 when the crypto pond
| wasn't filled with sharks?
| stuffoverflow wrote:
| I think the biggest problem with crypto is the difficulty to
| get reliable information about pretty much anything. The vast
| majority of crypto related "discussion" on twitter or reddit is
| worthless. You have to dig pretty deep in to various developer
| communities (node, blockchain analysis, mev bot developers) to
| find people who actually have at least some basic understanding
| of smart contract interactions and can better assess the risks
| of different projects.
|
| I don't share the view that Terra or FTX are good reasons to
| give up on crypto. Terra's promise of 15-20% interest on
| staking a "stable coin" should have raised big red flags. Even
| at the time there were notable people warning of risks in such
| algorithmic stable coin, but their voices were drown out under
| the massive hype parade on twitter that then spread on to
| various news outlets and so the stage was set for regular
| investors to lose their money.
|
| FTX on the other hand was harder to predict but anybody
| following the age old mantra "Not your keys, not your coins"
| was safe from that fiasco.
|
| On a purely technical level I think it is incredible what
| Ethereum has succeeded to achieve. A decentralized ecosystem
| with decentralized exchanges, loan systems, staking, and so on.
| Scams, shitcoins are an unfortunate side-effect but I don't see
| how a decentralized system could ever avoid those.
|
| I personally use crypto whenever possible and think it is
| absolutely the easiest and cheapest way to transfer money to
| anywhere in the world. At its best it can also be a very
| convenient way to make online purchases.
| NoMoreNicksLeft wrote:
| Whatever your thoughts on crypto, bitcoin was an interesting
| idea with potential applications. But none of the new
| "cryptocoins" added anything to what it offered. Thus, it was
| clear they were filled with grifters. When people invest in
| something that has no clear use in an already saturated market,
| it's safe to say that this is a grift. Furthermore, one of the
| key features of bitcoin was that no one needed to use an
| exchange, the entire idea of bitcoin was centered around the
| obsolescence of banks. You could keep your own money safer than
| it would be in a vault at the bank. Thus it's safe to say that
| these are grifts too.
|
| If anyone goes into these thinking "they're rock solid
| investments", they don't know what _investment_ means, they don
| 't know what _rock solid_ means, and they understand absolutely
| nothing, not even the basics, about cryptocurrency. Saying that
| you 'd "invest in crypto" is like claiming you invest in dollar
| bills. If a person says this, they are a stooge. If you want
| crypto because you wish to buy something that the seller only
| takes crypto for, then crypto is a good thing. If you're
| "investing", then you're just a stooge that got caught by this
| scam first, rather than by some Nigerian prince.
| robertlagrant wrote:
| > is like claiming you invest in dollar bills
|
| Well - if you're currently living in Argentina, with ultra-
| high interest rates[0], you should invest in dollars.
| Investing in another currency is definitely a thing.
|
| The problem with crypto isn't at all what you're saying, to
| the extend you're saying anything. The problem with
| cryptocurrencies is the majority of the underlying value
| isn't "this country/group of countries uses this currency, so
| it's valuable". It's "other people who buy in later will
| allow you to sell for more than you bought".
|
| [0] https://edition.cnn.com/2023/05/15/business/argentina-
| intere...
| null0pointer wrote:
| A crypto "company" is fundamentally antithetical to the entire
| ethos of cryptocurrencies. Yet that didn't stop grifter and
| greedy "investors" pumping money into them.
| cchance wrote:
| Begs the question if they have 4.5b ... maybe that shit shoulda
| been distributed to investors and not as a fine to the
| government?
| adrianmonk wrote:
| I think that is what happened. From the SEC press release:
|
| > _As part of the settlement, Terraform agreed to pay
| $3,586,875,883 in disgorgement, $466,952,423 in prejudgment
| interest, and a $420,000,000 civil penalty._
|
| I had to look up disgorgement
| (https://www.investopedia.com/terms/d/disgorgement.asp), but
| it's repayment to those who lost the money.
| gosub100 wrote:
| I can't remember the name of that phenomena, but I just saw
| that word yesterday for the first time and not even 24 hours
| later here it is again.
| buggy6257 wrote:
| Baader-Meinhoff
| ChrisArchitect wrote:
| Two weeks ago news: https://news.ycombinator.com/item?id=40662293
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