The DeFi Edge: Ten Lessons I Learned from the LUNA Crash

Crypto researcher The DeFi Edge has released a post-mortem on the LUNA crash, detailing ten lessons he learned from the event. He credits his personal rules for risk management that prevented him from allocating more assets to UST.

Original post link: https://twitter.com/thedefiedge/status/1524782511783415813

Lessons learned from the Terra Luna crash:

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Firstly, this is not a “I told you so” article.

• I had a 5% investment in Luna.
• I held 15% in UST.

I exited with losses last night on 5/12.

What I want to share is how I will improve my crypto investment thesis based on the events of the past few days.

1. Avoid Excessive Personal Worship

These project leaders have become increasingly popular through charisma, power, and memes, with token price surges and stable strategic partnerships giving them greater credibility.

The issue lies in the narcissism and arrogance that come with success. We have seen this in Frog Nation, Solidly, Node Projects, and now in LUNA.

Leaders are not good at receiving criticism. They and their followers attack anyone criticizing their attempts to build things, leaving no room for healthy discussions.

We have seen Bankless, Jordi Alexander, Jack Niewold, Algod, and others heavily bombarded for criticizing Terra.

This creates an echo chamber with little debate or discussion, as negative voices feel it's not worth engaging with "crazy fans."

Note: The echo chamber effect is similar to the confirmation bias, where people tend to seek opinions that support their own theories or assumptions.

2. Risk Management and Building Systems

I am shocked by the number of people going all in on LUNA and Anchor.

Never go all in on anything. No asset, whether crypto or non-crypto, is absolute.

I have a rule: no token exceeds 15% of my portfolio.

My UST has never exceeded 15%. And if it weren't for this rule, I would invest more in UST and Anchor.

Establish rules to protect yourself from the influence of emotions and biases.

3. Ecosystem Blind Spots

• They hold LUNA.
• They hold stablecoins behind UST.
• They collateralize ETH and AVAX.

In their eyes, it's a diversified reserve, but they fail to realize their asset allocation is overly tilted towards the Terra ecosystem.

When Terra collapses, so does their asset allocation.

4. What Are Blue-Chip Stocks?

I used to think Luna and AVAX were blue-chip stocks, but I was wrong.

A token needs to survive more than two cycles and be in an upward trend to become a blue-chip stock. Currently, the only blue-chip stocks are Bitcoin and Ethereum. Don't get me wrong, I still love AVAX.

5. Avoid Trying to Catch Falling Knives

Luna dropped from $85 to $50, then to $20, and now its price is $0.07.

Trying to enter at a "cheap" price is tempting, but you may have bought at its historical high, so step back when the price collapses rapidly.

Note: The author retweets a criticized tweet from CNBC Crypto Trader host Ran NeuNer, who advocated entering LUNA when it was still around $10 on 5/11.

https://twitter.com/cryptomanran/status/1524258067600523264

6. Never Leverage

Everyone gets into trouble because of leverage, including borrowing, always believing they have the ability to pay off to maintain a healthy margin.

• We see how quickly Luna's price collapsed.
• Bank runs almost paralyzed the network.

Do not leverage, no exceptions.

7. Stablecoin Risks

My stablecoin holdings mainly consist of UST, USDC, and some Dai.

I should diversify my stablecoin allocation more, but I haven't because I want things to be simpler.

So I'm preparing to move some stablecoins to bUSD, Frax, and others. Each stablecoin has its own risks:

• USN: still very new.
• USDC: centralized.
• USDD: Sun Yuchen...

The best practice is to invest in different stablecoins and diversify risks. I set the upper limit for each stablecoin investment at 5%. Stablecoins will continue to be attacked, and some speculate this is a coordinated attack on UST.

If true, then more attacks are expected in the coming years. Centralized powers do not want decentralized currencies to succeed, so adjust relative risks in a timely manner.

8. Risks of Non-Anonymous Founders

Everyone knows the risks of anonymous founders, but I underestimated the risks of non-anonymous founders.

They may be doxxed for past dirty deeds done anonymously.

Note: The author mentions Terraform Labs TFL former engineer Hyungsuk Kang's disclosure that Do Kwon was the developer of the failed algorithmic stablecoin project Basis Cash.

9. "Too Big to Fail" Fallacy

• Terra is a top-ten token by market cap.
• It has strong backing from top-tier VCs, like 3AC/Jump.
• They have partnerships with AVAX, Lido, and countless other companies.

I thought Terra was too big to fail, especially after they defended the UST decoupling event and improved it on 5/21 last year.

10. Should You Have Been a BTC/ETH Maximalist Sooner?

This is the argument of BTC/ETH maximalists who see an opportunity to crush other blockchains while they are down.

Solunavax refers to SOL, LUNA, AVAX, and other L1 blockchains' incredible performance over the past year. If you invested early and cashed out, your capital would have increased significantly.

There are survivorship bias factors at play here, as it still depends on what you bought, when you bought, and cashed out. I like to use BTC/ETH as value stores, but not to maximize profits, depending on your investment style.

Want it simple?

Dollar-cost average into ETH, BTC, then forget about them for a few years.

Want to optimize profits? Higher risk

Buy into robust L1 blockchains and competitor coins on dips, then reinvest profits into BTC/ETH/stablecoins.

These past few days have not been easy; I've experienced several bull and bear cycles, and the current feeling is familiar. Crypto bull markets always return, the next cycle may not be with the same tokens, but the market always bounces back. If you survive this crash and are still in the market, you have accumulated valuable experience.

Learn this lesson well; investment legends sow in bear markets and reap in bull market cycles.