Zhao Changpeng reviews the LUNA incident, presents six viewpoints, and shares three lessons learned.

Last week, the market was mostly focused on the collapse of UST/LUNA. Binance founder Zhao Changpeng mentioned that he has been consistently asked about this issue in recent interviews. To clarify his position, CZ specifically wrote an article expressing his six views on the overall event and the lessons learned.

The content has been summarized here, for more details please refer to the original article: https://www.binance.com/en/blog/leadership/czs-faq-8–on-lunaust-and-taking-the-right-risks-421499824684903883

CZ stated that the UST/LUNA incident is regrettable, and Binance's primary mission is to protect affected users. Unfortunately, there was no outstanding solution that could satisfy everyone, and each community proposal had its own flaws.

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1. Lessons Learned

Design Flaws

CZ pointed out that when using a different asset such as LUNA as collateral and pegging it to another asset like UST, there will always be situations of under-collateralization or unpegging:

Even with overcollateralization by ten times, the collateral asset may still plummet more than ten times. The most foolish design flaw is the belief that minting more assets will increase their value. Printing money does not create value; it only dilutes existing holders. Multiplying LUNA exacerbates the problem. The designers should check their heads.

Overly Aggressive Incentive Mechanisms

CZ believes that driving growth with a 20% return through Anchor is not organic. While incentives can drive adoption, income is still needed to sustain it. Otherwise, the day the money runs out also signals the collapse of the protocol.

The concept of "income" in the Terra ecosystem has also been confused. The team has blurred token sales, LUNA appreciation, and income. He emphasized that users come for the 20% reward, and although LUNA has indeed appreciated, the ecosystem has not created any value.

2. High APY Does Not Equate to Health

Although Terra has an ecosystem with some applications, the pace of ecosystem growth and the incentive mechanisms to attract users are completely mismatched in speed, leading to hollow growth. Ultimately, the bubble bursts. CZ believes the first key lesson here is:

Do not blindly pursue high APY; observe the protocol and ecosystem fundamentals.

3. Delayed Unpegging Rescue Operations

CZ stated that the Terra team's use of reserves to rescue the unpegging situation was too delayed. If they had used the reserve when unpegging reached 5%, they might have avoided the collapse. Instead, the team attempted a $30 billion rescue after a 99% drop or $80 billion loss, which was futile.

This situation does not appear to be a scam but rather foolish—apologies for the lack of a more polite term. The second lesson learned here is that running a protocol requires extreme sensitivity.

As CZ emphasized earlier, communication between the Terra team and the community was slow and sporadic, weakening mutual trust. He also has mixed feelings about Terra's proposals. CZ does not support forks but will support community decisions. The third lesson learned here is:

Always communicate frequently with users, especially in times of crisis.

3. Will There Be Spillover Effects?

CZ bluntly stated that the collapse has indeed affected the overall crypto ecosystem. USDT temporarily unpegged, many projects were affected, and even Bitcoin dropped by 20%.

Note: Spillover Effects in economics refer to the phenomenon where an economic behavior often has external impacts on seemingly unrelated matters.

4. Resilience Displayed in the Crypto Ecosystem

CZ is pleased with the resilience shown in the crypto market. He claims that the scale of UST and LUNA is larger than the bankruptcy of Lehman Brothers at the time. However, Bitcoin only dropped from $40,000 to $30,000, around 20%, and overall, other projects also performed well. He explained the difference between banks and decentralized systems:

Centralized systems like banks operate similarly. When one bank collapses, it has a spillover effect on all other banks. In decentralized systems, all stablecoins operate in different ways, with no standard or reserve, so the failure of one project has a lower impact on others.

5. Should Stablecoin Regulation Be Strengthened as a Result?

CZ expressed uncertainty. While he received positive responses from a few regulators, most people he stays in contact with are quite friendly towards crypto, so there may be biases.

He mentioned what he believes is the best response:

We certainly need to pay more attention to algorithmic stablecoins. We cannot let the failure of one company kill the entire industry. We must continue moving forward.

6. How to Avoid Such Risks?

CZ believes there are no absolute answers and no risk-free options. Even fiat currencies have risks. He summarized the following points to reduce systemic risk:

1. For investors: Diversify investment portfolios; do not go all-in on a token just because it offers a high APY.
2. Stay away from high APY investments; these are hardly sustainable as high APY equals high risk.
3. Most importantly, keep learning about financial knowledge and explore all the content on Binance Academy. CZ: Sorry, I had to do some marketing.

CZ emphasizes the high resilience in the crypto space. While the LUNA case is regrettable, Binance remains committed to playing a role in creating a sustainable and thriving blockchain ecosystem for everyone.