UST is not a Ponzi scheme! SBF believes Terra should not be labeled as bad blood: not all bad things can be generalized.

LUNA's storm continues to rage, and Terra blockchain founder Do Kwon is also under public scrutiny. Many believe that Do Kwon has deceived the public, with the article by the foreign media "CoinDesk" even comparing Do Kwon to Elizabeth Holmes of the Silicon Valley unicorn scam "Bad Blood." FTX founder SBF has something to say about this.

"Not all bad things are the same bad things."

Elizabeth Holmes is the founder of the blood testing company Theranos, claiming to provide "fingerstick" blood tests for diseases such as cancer, cholesterol, and diabetes using their patented blood collection device and blood diagnostic testing system (miniLab) to diagnose within half an hour.
This groundbreaking technology attracted numerous venture capital funds. In 2014, Theranos' valuation reached $9 billion, making it one of the most prominent unicorn companies. However, just a year later, this blood testing company was proven to be a scam. The company dissolved in 2018, and Elizabeth Holmes was convicted in 2021.

Advertisement - Please scroll down for more content

Columnist David Z Morris of "CoinDesk" believes that Do Kwon, who introduced TerraUSD (referred to as UST), is the blockchain version of "Bad Blood," promising investors something very cool (decentralized stablecoin) without innovative and solid methods. [Note*1]: "Bad Blood" was published in 2018 by author John Carreyrou, depicting the unicorn scam of blood testing company Theranos.

SBF: UST is Bad, but Not Blockchain's Version of Blood Testing Fraud

FTX founder Sam Bankman-Fried believes that LUNA/UST (referring to TerraUSD) is a bad deal with an unfavorable outcome.

Although both scenarios are bad, Elizabeth Holmes' Theranos company is different because the mechanism behind LUNA/UST is quite transparent.

SBF thinks that LUNA/UST is bad, the outcome is a failure, and it's not good. However, the main criticism of Elizabeth Holmes is not about the failure of Theranos, but her lies. "Especially Elizabeth Holmes repeatedly claimed that Theranos was innovating technology, but in reality, it wasn't. Elizabeth Holmes was a fraud, deceiving investors with false reports, but LUNA is different."

SBF believes that Do Kwon did not distort the mechanism of LUNA/UST to the public; he did not claim that UST is backed 1:1 by the US dollar. On the contrary, Do Kwon clearly stated that the reserve behind UST consists of "unstable assets."

"Do Kwon did not tell everyone that UST is 1:1 backed. Instead, he clearly stated that the reserve behind UST is some unstable assets. It is obvious that these assets are likely to fall in price, and once the assets drop, other consequences follow. I want to emphasize again that I am not exonerating UST; I also think they were wrong, but UST and Theranos are different."

Many people may generalize the UST incident as "all blockchain is a scam." SBF believes that there are indeed some Ponzi schemes on the blockchain, like Plus Token, but UST is not a scam. Strictly speaking, SBF believes that the marketing of LUNA/UST has failed because it failed to convey the correct mechanism and risks to the public.

"Most bad investments are not Ponzi schemes. Some losses are due to being deceived, some are due to bad luck, and some are both. Here are some investments that have fallen by more than 50% since the beginning of the year: 1 NFLX, 2 LUNA, 3 AMC 4, ARKK."

10) But most bad investments aren't ponzi schemes. Some are fraud, some are bad luck, and some are somewhere in between.

Here are a set of investments that would have lost > 50% since the start of the year:

1) NFLX
2) LUNA
3) AMC
4) ARKK

— SBF (@SBF_FTX) May 14, 2022

FTX Community Partner Sun Binsheng: The Debt Ceiling Issue with LUNA

For the blockchain industry, UST is an interesting experiment. Looking back, what went wrong with the UST mechanism?

FTX Community Partner Sun Binsheng believes that the issue lies with the "debt ceiling" setting.

He used Maker's stablecoin DAI as an example, stating that DAI has a designed debt ceiling because Maker understands that in the event of a large-scale liquidation, the system still needs to rely on the liquidity of collateral to stabilize. Therefore, it sets limits for each type of collateral, such as Ethereum (ETH) with better liquidity having a higher debt ceiling.

He believes that even after large-scale liquidation events like 3/12 and 5/19, DAI remained unscathed, indicating that Maker's risk control mechanism is undoubtedly successful.

However, LUNA is different.

LUNA does not set a debt ceiling for the system but instead has a flywheel effect. This flywheel effect stems from UST's mechanism: if there is demand for UST in the market, it will be purchased and LUNA will be burned to generate UST. Terra continuously attracts external funds into the system with Anchor's 20% annualized interest rate, causing the issuance of UST to skyrocket along with the price of LUNA. However, when the issuance of UST becomes too large, and the buyer liquidity of LUNA is insufficient to support its price anchoring mechanism, it will ultimately lead to destruction.

Comparatively, Maker can accept multiple asset collaterals when minting DAI, and the overall system liquidity does not solely rely on internal coins, making it much safer.

Sun Binsheng likens LUNA to company assets, with UST being liabilities. Apparently, the official did not limit the debt ceiling, leading to a high asset-liability ratio.

"At the highest market value of LUNA, it was approximately $41 billion, while UST's market value was about $18 billion, with debt accounting for about 40% of assets. In addition, there is a significant disparity between the market value in the crypto market and buyer liquidity. It is obvious that LUNA's liquidity is insufficient to cope with such a debt ratio."

[Note*2]: The flywheel effect refers to when the gravity and momentum of the flywheel become part of the driving force once a certain critical point is reached. At this point, you no longer need to exert more force, and the flywheel will continue to spin rapidly.

He pointed out that the Terra team also recognized the issue of UST's overreliance on LUNA, so they began to introduce external liquidity and reserve assets to enhance UST's risk resistance, including purchasing Bitcoin as a reserve and building liquidity pools on Curve Finance. However, unfortunately, they ultimately failed due to the lack of a debt ceiling: "To some extent, Terra is like parachuting from a high altitude. It has a parachute on its back, which is the application and protection mechanism of UST. Before crashing, Terra needs to prepare this parachute well. Unfortunately, the parachute did not open before landing. If Terra is willing, they could link the debt (UST issuance) ceiling to the market value of LUNA (such as 1/10), sacrificing the space for market value growth in exchange for a higher safety factor, so that the entire system can be sustainable and have the opportunity to open the parachute before a hard landing."

In addition, Sun Binsheng also gave his opinion on the recent chaos surrounding LUNA.

He believes that the media, influencers, and KOLs (Key Opinion Leaders) do not need to spread cases of getting rich overnight in the LUNA crisis, as these cases are mostly unrepeatable and involve a significant element of luck.

Undeniably, every major event has cases of getting rich, and the LUNA event has evaporated billions of dollars in market value from the entire industry, with more people losing money than earning. There is no need to increase market anxiety when most people are losing money, or even losing their entire fortune.

"There is absolutely no need to pay attention to posts about getting rich by buying $LUNA at the bottom, it only adds to anxiety. During the decline of $LUNA, how many people thought $10, $1, $0.1, $0.01 were cheap enough to buy and ended up being buried? The number of people who lost money buying the bottom of $LUNA is much higher than those who made money, including those who were liquidated in long positions or had their grid trading reset; these people have become the escape route for $UST." Finally, he also reminded investors to pay attention to the "risk coefficient" of investments.

Before the death spiral of UST occurred, many KOLs were promoting the fixed annualized return of UST. Regarding this matter, Sun Binsheng believes that although many people have explained the risks, whether these explanations are sufficiently complete and provide clear indications for investors to exit, he remains cautious.

He mentioned that he did not promote UST because for the average person, understanding its system risks and real-time monitoring of UST-related data is too difficult.

As for how ordinary investors can distinguish investment products?

Sun Binsheng suggests at the very least understanding the average interest rate that the industry can provide and being vigilant about excessive rates. "For crypto investors, an unreasonable interest rate that exceeds the market average is inevitably accompanied by restrictions. For example, suppose the average annual return in the market is currently 5%, but there is an exchange offering 12-15% annualized return, with a deposit limit of $2,000, the intention behind it is to attract new users. If today there is a 20% annual return, but there is no deposit limit, then you must understand the underlying risks."