Analyzing Terra’s Aftermath

Three weeks ago, we saw one of the most incredible crashes in crypto history: the fall of Terra. In less than a week, over $40B of market capitalization vanished, and hundreds of thousands of people lost many thousands (or even millions) of dollars.

The response to the fiasco has shone a bright light on a few truths: that most crypto investors only really care about the money and that many crypto projects are not as decentralized as they claim.

It’s All About the Money

During Terra’s incredible bull run from $1 to $115, countless people were extolling the project's virtues, why it was going to revolutionize the financial system, and why it was the most innovative project in crypto (myself included by the way).

Once it crashed, it became painfully clear that few really cared about the project’s fundamentals (I like to think I did, as evidenced by the balanced nature of my prior story about Terra linked earlier).

What did people care about? “Bags go to the moon.” As the kids say. ;)

The sheer number of people who got caught up in this mania tells us how powerful the narrative of making money can be. And the uncomfortable truth is that retail investors are often the ones who are most likely to care about the money and nothing else. As much as we rail on the vulture capitalists of Wall Street for being predatory actors who only care about turning a buck, sadly the same can generally be said about retail investors too.

Long-Term Vision Gets Sacrificed for Short-Term Gains

Now, wanting to make money isn’t a crime by any means (it’s the primary reason I invested in crypto in 2021 too). The issue is when we delude ourselves into thinking we’re investing for something other than money when we really aren’t. And when the crypto builder community gets sucked up into the social vortex that is crypto bull runs, we lose sight of the goal and focus on short-term economics over long-term sustainability.

In fact, that was my primary criticism of the Terra ecosystem back when I wrote that article about Terra at the tail end of 2021: that they had lost sight of the long-term goal of an ecosystem of pegged stablecoins facilitating international commerce and DeFi and instead focused on boosting short-term UST supply, burning LUNA, and pumping LUNA’s price as a result.

Even Ethereum’s founder, Vitalik Buterin, echoed a similar sentiment recently about the dichotomy between the masses who often chase short-term gains and the “intellectual elites” who are more associated with a long-term technology focus and wanting to build something revolutionary:

That’s one of the things I’m looking forward to about a bear market: it’s going to give the crypto builder community an opportunity to shake out all the get-rich-quick people and re-focus on building useful tech that actually solves problems in the real world. I know I’m going to take the opportunity to learn how to build in the crypto space, and I hope to make some cool stuff while we go through this bear market.

The Competing Plans to Revive Terra and Their Implications

As the dust has started to settle on the Terra collapse, we see a new battle emerging: the burn vs fork debate. And this debate has implications around how governance is often more centralized than we’re led to believe, as well as pointing out some obvious short-term economic issues as I talked about a second ago.

Burn Baby, Burn

One camp in the Terra ecosystem broadly is advocating for a burn strategy that would see various techniques employed to burn the current LUNA supply (purportedly in a fair manner) through transaction fees. The goal: reduce supply so the individual LUNA token price rises.

The “Burn Camp” wants Terra to look like this. Photo by Matt Howard on Unsplash.

This illustrates a core principle that has rubbed me the wrong way ever since I heard people start to propose it: that burning supply is good for the price, so we should do it. This focus on burns is the definition of a short-sighted plan to boost bags rather than build something valuable.

Token burns are the worst decision a token community can make. You can quote me on that.

Now it’s unsurprising that the people most in favor of this plan are the ones who bought LUNA at really low prices after the death spiral, as they are simply looking for a way to make their inflated bags go up.

Of course, this plan can’t actually feasibly work anyways, as any plan that would involve enough LUNA burns to actually move the needle would likely have to affect everyone, diluting or eliminating any price gains with lost supply from burns. But I digress, they’re going to try it anyway.

Terra 2.0

The other camp in the Terra ecosystem broadly advocated for a re-invention of Terra as Terra 2.0: a fork of the original Terra ecosystem with UST and stablecoins stripped out. In other words, Do Kwon and the builder ecosystem want to preserve the L1 and builder network (plus all the code that was written to build the dApps that ran on Terra) with a new network, shedding the baggage of the old, and distributing the new LUNA tokens to holders of LUNA and UST from before the crash and builders from the ecosystem.

This new network went live on May 27th, and the new Terra LUNA token was listed on most of the exchanges that had the old one. For what it’s worth, I think it at least focuses on putting resources in the hands of builders and the community fund which I support in principle (as well as removing Do and TFL from the new LUNA funds).

But the sad thing is that Terra has lost the thing that made it interesting in the first place: the stablecoins. Without the network of stablecoins, Terra just becomes another ETH-clone L1 chain, albeit with a pretty strong developer network.

Governance Manipulation

What’s interesting in this debate that I haven’t seen mentioned anywhere was how the governance vote was actually taking place. During the middle of the Terra death spiral, TFL coordinated with all the validators to disable new staking in order to prevent a governance overthrow of the Terra chain (since it was getting trivially cheap to buy way more LUNA than had been staked before the death spiral began).

Even though that was a measure meant to prevent abuse, what it also did was effectively lock out any of the new investors who bought LUNA on the way down from governance.

Voting may not have been as fair as we’d like to admit. Photo by Arnaud Jaegers on Unsplash.

This speaks to an important issue: the Terra chain was never that decentralized apparently. If a single organization was easily able to coordinate among all the validators (who essentially run the network) and get them to do things like halt the chain, apply specific updates, etc., that’s clearly not a decentralized system.

Here’s the thing. I’m not saying this is a bad thing. Centralization, despite its flaws, is particularly good at one thing: getting shit done. Having a central leader or central leading voice is pivotal to getting the most ambitious stuff done in our history.

So if centralization isn’t inherently bad, the problem here is that there’s a lie that’s been told. This whole time, UST was supposed to be “decentralized money”, but that’s clearly not true.

Moving forward, I hope the builder community will tell the truth about whether the projects they build are properly decentralized or not.

Could the Terra Crash Signal a Bitcoin Crash Too?

One final comparison that we should make is between UST and Bitcoin. Both are unbacked currencies that essentially rely on (or relied on) favorable public sentiment to keep them liquid. Of course, UST had to try to maintain a dollar peg, but still, there are some strong comparisons to be made here.

The thing is that Bitcoin could very well suffer a similar fate, due to its unbacked nature. If enough people suddenly lost faith in Bitcoin, as has happened several times before, we can see its price drop precipitously as overwhelming selling pressure pushes the price down. Bitcoin has survived this onslaught a few times now, however, so it seems at least reasonably likely that it won’t go totally bankrupt any time soon.

But we ought to ask ourselves some core questions about Bitcoin: what is its real utility, and why should anyone want to buy, hold, or spend Bitcoin?

I plan to address those things in a separate story, but for now, maybe challenge yourself to try to answer those questions.

In the near term, the overall bearish market sentiment seems to be pushing Bitcoin selling pressure up, forcing down the price. As I’ve said before, I think we’re at the beginning of crypto winter, and I think it’s going to get worse before it gets better.

But don’t fret. A bear market is an excellent opportunity to buy assets at a discount and apply some patience.

Till next time.

As I am not a registered fiduciary agent, none of my advice is legally binding in any way, and choosing to follow or not follow it is a responsibility that lies squarely on your shoulders. Crypto is a volatile market, and a significant crash in values is a normal event in this space, just as a significant increase in values is. Treat the market as an irrational actor (which is what it is), buy the proverbial dip when possible, take some profits along the way, and enjoy the ride.