How the Anchor protocol helped sink Terra

Illustration by Alex Castro / The Verge

Someone would have had to invent Do Kwon if he wasn't there. He made bets worth $11 million that his token Luna would be worth more in a year than it was at the time. I don't debate the poor on social media.

Luna is worth less than a cent, while Terra is worth 6 cents. An investor, who told reporters from the news agency that he had lost 2 to 3 billion won, was arrested after he entered the apartment complex looking for the master of stable coin. Police protection was requested by Kwon's wife.

Terra Club is the luxury dining lounge at the Washington Nationals ballpark, and its logo is visible on the seats behind home plate. Terra paid $38.5 million for that advertising, which seems like it will outlive the protocol.

This isn't the first failed stable coin by Kwon. Basis Cash was supposed to be worth $1 and also capsized. He dodged two Securities and Exchange Commission subpoenas.

A number of retail investors were lured into Luna by Kwon's obnoxious personality, but they weren't the only ones taken in. Luna was bought into by Jump Crypto and Three Arrows Capital. A constant reminder that investing requires humility will be the tattoo on the head of the head of the head of the head of the head of the head of the head of the head of the head of the head of the head of the head of the head of the head of the head of the

The rise and fall of Kwon was rapid. In December, Luna emerged as a bright spot in the markets and reached its peak valuation, a touch over $116, in April. There was a lot of coin sliding during that time. Luna's popularity was due to a lending program that promised an annual percentage yield of almost 20 percent.

According to the white paper, the anchor protocol worked like this.

If I wanted a higher rate of return than I could get in a regular savings account, I would buy government bonds. I deposited $10,000 of Terra into the system. Anchor loans out my deposit to another investor. To make sure he is good for the loan, he needs to put down some of his own assets. Some of the yield comes back to me, as does some of his interest. Terra has deposits and interest.

This is not revolutionary, and it is also why I don't understand the 20 percent interest rate since borrowers were also getting rewarded for borrowing. Where did the money come from? There were warnings back in January that Anchor was unsustainable.

The most charitable thing you could say about the 20 percent rate is that maybe it was meant as a customer acquisition strategy, and the APY was going to be revised lower later. Other people said things. It looked like a Ponzi scheme, where money from later investors was paid to earlier investors as interest.

According to Decrypt, as much as 72 percent of Terra was deposited in Anchor. Demand for Terra was created by anchor. Terra was not directly backed by reserves. Instead, it was known as an analgorithmic stable coin, which attempts to stay at $1 through a process of arbitrage with a sister token, Luna.

Let's say I notice that Terra is trading at 99 cents. Oh, yes! I burn my coins and convert them to Luna. I raise the price by lowering the supply of Terra. I got too excited and the price is now at $1.01. The price of Terra was lowered to $1 when Lars came along and burned his Luna to get the equivalent amount.

The problem with stable coins is that they fail. They fail because they rely on things they can't control. In the case of Terra, it seems likely that a large withdrawal knocked the system out of balance. There was a death spiral after that, just like with Basis. Iron and Neutrino have tanked in the past. I've learned that no one is interested in history, even very recent history, if there's one thing I've learned aboutcryptocurrencies over the years.

When Terra failed, people who had deposited their money couldn't remove it.

People who saw the warning signs, but didn't know better, did little to stop naive investors. Sam Bankman- Fried, the founder of FTX, listed Luna and Terra on his exchange despite having a pretty good idea of what was going to happen. He is talking about it on the Odd Lots podcast.

If you do zoom out, right, and you say, ‘This is a stable coin, backed by volatile assets, what’s gonna happen in a big market move.’ Right? Like, you know how this plays out.

A lot of people didn't know how this would play out. Stablegains, a Y Combinator-backed startup that promised to make earning with Defi simple and safe for consumers and businesses alike, had promised 15 percent yield. Users can continue to hold UST via Stablegains. UST might lose more value if the Terra and Anchor Protocol are not operational.

The lawsuit says that Stablegains lost money. Stablegains isn't the only one; investor Delphi Digital noted that it had concerns about Luna. It lost $10 million. The South Korean venture fund lost money. According to The New York Times, the holdings of the investor, who bought in at $3 million, are now worth $3,000.

There were winners, and they were also insiders. The New York Times reported that Pantera Capital made $170 million on an investment. Hack VC left Luna in December. The firm sold off in March.

People are mad at Kwon. He assumed the persona of a villain because he understood that being a villain guarantees more attention. It's hard to break type-casting when you're the villain. Y Combinator, Stablegains, Bankman-Fried, and others could walk away without a hitch.

In what seemed like an abrupt departure of tone, Kwon said on May 13th that he was "heartbroken about the pain my invention has brought on all of you." He's groveled since then. He wants the system to be back on its feet. He came up with a new proposal for doing so.

The proposal was rejected by the community of Lunatics. I think they were not crazy about it.