The Ponzi Meltdown

First up. If anyone is heading to the All-in summit next week and wants to hang, hit me up.


A guide to not getting rekt

I hadn’t planned to write about Crypto today. I had originally planned to write about the collapsing public and private markets, and what that will probably mean for us all for a while.

But then, just like that, the crypto gods just gave me a tidal wave of doom-porn to watch, and now I can think of nothing else. So we’ll just have to wait on the other stuff.

twitter doom tidal wave


I guess we should chat about Luna and UST first​


You probably know already, but just in case here is a quick overview of what it is and the massive collapse happening as we speak (and the scary unknown consequences coming from it).

UST is an algorithmic “stablecoin” that is supposed to be pegged to $1 using a sort of buy/sell algorithm to maintain its peg. As of just a few days ago there was a mind boggling $18-billion worth of these things in the world. LUNA is its sort of sister coin that supported most of the peg, and it had a market cap of about $30-billion a week ago.

Well, things change fast. As of this writing the UST “stablecoin” is now at $.62 and is rapidly changing by the minute, and LUNAs market cap is down to “only” about $1.5-billion.

I’m not going to fully explain this whole mess, but here is a pretty good Twitter thread on how it works if you’d like to understand the whole mechanism. If your crypto-speak isn’t up to par don’t worry, ignore the lingo, it doesn’t matter. Just focus on the basic explanation.

A simplified TL;DR is that the herd believed that LUNA had some value, and the protocol allowed users to swap their LUNA for its current dollar-value, paid out in UST, so that made UST have value… because it was backed up by Luna… which people believed had value.

Here is a precise diagram of how it all worked

How UST works
So why did anyone do this? All it took was bribing UST holders a little bitty 20% APR for staking their UST.

Thankfully, I never participated in this giant game-theory contest. It always felt like picking up pennies in front of a steamroller.

However, I can see how so many people found it attractive, especially considering how long it had been around. The longer it’s around, the safer it is… right?

Let us never forget the Turkey Problem.


The Turkey Problem - Nassim Taleb
What was the LUNA/UST endgame?

On one hand (and thanks to hindsight), it seems clear that UST & LUNA could never work over the long term. On the other hand though, I can see what they might have been trying to achieve, hoping to reach a certain size where gravity alone would cement its authenticity.

I’ve called this “meme’ing its way into legitimacy”

This is kinda what Tesla did in my opinion. It was this little company that happened to create a pretty neat first car, but that financially never really made any sense. But Elon is the master of all masters when it comes to rallying loyalists and boosting up stock prices.

He just played the game to perfection. Perfectly timing Tweets, announcements, unveilings, promises, etc to keep the stock price going up. It went up so damn much that Tesla was able to raise more money, build new factories and products and tech, which raised the stock price some more. Rinse, repeat. Eventually they did it enough so that the company became super legit and sells a crap-ton of cars each year on a global scale.

I won’t comment on the current valuation (y’all know) but it’s undeniable that his game worked.

Elon meme’d the company into legitimacy.

$AMC also did this by playing into the r/WallStreetBets crowd. The AMC execs played good games to pump the stock high enough where they could issue hundreds of millions in new stock, thus shoring up their balance sheet actually making them legit again.

As for UST and Luna, in the later stages of the project I have to think that they were trying to do the same. Fake it until they could make it to safety, and then diversify away (and also make themselves filthy rich).

Matt Levine in his always lovely writing had a much better way of saying it than “meme’ing it”.

“The basic structure of the trade is (1) Ponzi, (2) acceptance, (3) diversification, (4) permanence.”

Even though I find it all a bit foolish, I don’t necessarily hate on the LUNA team for doing this. They were providing the game that the ponzi-players were looking to play. Just like $AMC did with r/WallStreetBets, just like Adam Neumann of WeWork did for Softbank. They provided what the (crazy) market wanted.

Even if it’s not something you particularly like (I actually hate it), it’s hard to deny it.

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How I dodged UST?

Back in my early DeFi days I was lucky enough to be a participant in one of the first “seigniorage” algo-stable games called Empty Set Dollar ($ESD).

It was similar in nature to UST, except that instead of paying 20% APR a year, it would pay stakers something like 3% every 8-hours whenever the price of ESD was over $1. Absurd.

And instead of a LUNA token to backstop the $1 peg, it had “bonds”. If the price of ESD dropped below a $1, then users could sacrifice their ESD for bonds that would pay off extra $$ once the peg returned to $1. This would both reduce circulating supply of ESD and create upward buying pressure for the token, both of which would bring the value back to the peg.

In theory.

Only in theory. In reality the peg-mechanism kinda worked once or twice, then everyone got scared and ran for the door. You can see how this experiment worked out.

ESD - Empty Set Dollar
I was new to these sorts of games and got incredibly lucky thanks to the guidance of friends and a healthy dose of skepticism. It was a wildly profitable venture for me, making multiple 6-figures in only 2 short weeks. BUT, if I had stayed in for only 1 more week, it would have all gone to zero. I repeat, I was very lucky.

I didn’t ignore my close call though. I evaluated it. I watched, I learned, and more specifically, I paid very close attention to those in the space who just always seemed to win.

There are always some new grand crypto projects promising the world, with huge hype, high expectations, and kingly valuations surrounding them. How is it that some people that I knew just consistently seemed to do well time after time. And to invert it (always invert), how is it that some people just always seem to get screwed (the normies)?

I found some answers that work for me. Here are my own personal rules on how not to lose (how to win is another topic). These have served me incredibly well these last few years, especially in DeFi. Note that I only used these in crypto, not for real-world stuff.

Don't drink the crypto Kool-aid

1. Don’t drink the Kool-Aid

Take advantage of opportunities you may spot, but don’t believe a damn word of it. Just because the market says something has value, doesn’t mean it actually has value. Almost all narratives in the crypto space can be popped if someone thinks about 2nd and 3rd level consequences for even a few minutes (but most people never will). BTC and ETH could be argued for.

2. Always get out earlier than you’d like to

Once you’re doing great and things seem too good to be true, it’s probably because it is. Escape when it still feels like you’re leaving money on the table.

3. Nothing in this space is permanent

From now on, I’m just going to be an ICO trader”. I heard a friend say this in 2017. We know how that went. Same thing over and over. Blue chips, DeFi yields, L1’s, NFT’s, etc. It’s always the same, the game changes. Don’t try to hold on.

4. Don’t try to value-invest

It looks cheap here” is a lie. There are no proper valuations in this space. 98% of all projects have zero fundamental value, and only have value based on crowd sentiment. If they don’t pay cash, they don’t have a fundamental value. Trying to figure out if something is “underpriced” if it will never pay cash is silly. You’re just guessing on the mobs narrative. Once there is a crack in a narrative, it’s usually over.
how to not lose money in crypto investing
This all might sound a little dark, and I wouldn’t argue that claim, but that doesn’t change it all. Remember, tokens are not stocks that can eventually be based on some sort of cashflow (keyword: eventually). The rules in crypto are different. Traders and insiders rule crypto.


So what’s going to happen to UST and LUNA?

I haven’t a clue, but usually once a collapse starts it is really difficult for it to ever come back. Who would trust it again when there are other options? I know where I’d lay my bet.

Although these things really suck for a lot of individuals, who knows if this is even a bad thing for society at the end of the day?

Maybe the ecosystem needs failures like UST and ESD in order to grow, getting the speculative ponzi-mess out of the way so that more legitimate uses for the tech could come to fruition. In theory, LUNA was trying to create a true decentralized stablecoin that didn’t have to be over-collateralized (like $DAI). At least we now clearly know something else that does not work.

Or, perhaps, maybe the masses just want another ponzi to try and get easy money again? Who knows? ?‍♂️

Stay safe


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