Galois at the Gates

Will: 0:01

Welcome to the Parsec podcast.

Fudzy: 0:03

This is where we interview founders, traders investors to take a deep dive into the crypto ecosystem and its market structure. This show is brought to you by Parsec, which is the premier NFT and defi analytics hub. So today, we are happy to have Galois capital, Kevin, from Galois capital on the show kind of the champion of this whole event. And yeah, I think we've been pretty good accounting of the flaws of Luna, from your Twitter and from a lot of people were talking about last week, but it really just want to kind of go through what happened, maybe in kind of different phases, and kind of the different like, inflection points, and kind of any any, like, design flaws that came out to that. But yeah, I mean, I've looked at like here about just the start of it, you know, this like Saturday night, about a billion dollars of UST were sold on curve and as well as other like venues, would love to hear like, just from your seat, what that kind of initial trigger looked like.

Kevin: 1:04

Yeah, definitely. And I think, you know, just want to first say that, thanks for having me on. And Fudzy, I really like the hat. That's a great hat, I should get one

Fudzy: 1:13

For those who can't see it. It's a Rekt hat. I was thinking about taping a little Luna on top, but, uh, for another time,

Kevin: 1:20

right now for sure. So, you know, I guess to start, you know, it's Saturday night, and basically, we saw the beginnings of a very small depeg on UST and we also saw some liquidity start drying up on three pool on curve. So, you know, for us, we were farming anchor at the time. And, you know, if they're giving out free money, why not? Right? So we're farming it for a while now. And then finally, we're like, Okay, well, now, this is the point. And we, we always had the intention of unwinding this thing, you know, at some point, because if we saw any sign of weakness, then we would just run for the exits. So it seemed like a good time. But at the time, we didn't know that this thing was going to fully collapse. So it could have just been a false alarm. And, you know, if things held steady again, we might have even put money back on anchor for a little bit. But at least this was starting to be alarming enough that it was possible that a bank run was starting. So we pulled out of anchor, and then we got out I think it was like 99 cents .997, I think was what we got out at. So you know, paid up 30 bps for that, but not too bad, given more things, when so then, you know, there was an unfortunate series of events along the way, you know, afterwards were not for us. But you know, just for the market in general, where, you know, everything just started kind of collapsing the peg really deviating they, they really were able to support the peg in the very beginning. But then over time as panic and fear started to sew among all the holders, then there was basically a run for the exits. And basically, it happened, unfortunately, during the time where they were doing a migration between three pool and four pool, and they were pulling all of TFLs liquidity, moving it over. And during that time, there was one large clip of 85 mill that was sold. That was not us. But there was somebody that sold 85 mill crushing a lot of the remaining liquidity, and then inspiring more fear in other people. And then everybody started racing for the exits after that. And this is also during a time where, you know, funds moved over to binance, I think was like 100 mil or something moved over, UST moved over to buy binance. And then, you know, there was probably dumping over there too. So the peg was very strongly breaking. At that point, they recovered it, I think, multiple times, at least to some extent, and the later ones, but it just wasn't enough and the exogenous collateral that they had in Bitcoin that they'd bought from way back when just wasn't quite enough to defend the peg. Now, I want to talk about one thing, which is on this point, which is that, you know, there's been a lot of like, these conspiracy theories out there, right, where it's, oh, this was like Black Rock, or, you know, this was like a citadel or something like that, you know, there was Galois capital that didn't Oh, it was FreddieReynolds. Guys, you know, it's like, well, you know, it wasn't us, but, you know, I feel I find it funny that literally, there's a 4chan post right? And then like, literally Black Rock and Citadel actually have to respond. Because somebody some rando, Anton made a 4chan post. I mean, this is just hilarious.

Will: 4:16

Yeah. Yeah. It's pretty wild they, like didn't check the chain and like you said, there was a big $85 million sell. So it's like the first kind of eight hours after the initial liquidity pull from TFL. There's about a billion dollar sold by curve like the wormhole pool. And it's big actors. You know, it wasn't one entity, but it was kind of larger actors like yourselves and I think intuitively makes sense. Like, okay, we have a risk control here and anchor, we need a certain amount of liquidity out there, get out fast you're out and then kind of I think another thing I would like the one your opinion on is curve. It didn't look that bad because you know, it's at 99 cents maybe after those billion dollars of sales but was curve kind of hiding the situation? Because I think the situation is was actually a lot worse than then people think at that point.

Kevin: 5:07

Like, what do you mean by that? How they were hiding the situation?

Will: 5:10

Not hiding it, but just harder to tell how bad it was and how imbalanced everything was just because you're looking at a price versus liquidity imbalance?

Kevin: 5:18

Yeah, I mean, I would say it just depends on people's understanding of the curve protocol, I mean, you're definitely going to get some slippage. And especially when you hit the kinks on the bonding curve, right? Like the current bonding curve is not like a smooth bonding curve like uniswap, at least v2, right? There's are there certain kinks and the flatness of the main part of the curve, which is the central part of the curve is governed by an A factor, right? So like, all these things matter, when considering just how much liquidity you can exit out of, like, when the pool gets very imbalanced, up to the kink point, anything afterwards, you're taking severe, severe slippage, right? Everything before you're taking very light slippage, right? So it's just like, yeah, there is some bit of illusion, as to the final remaining amounts, when you're on the kink part of the curve, just how much you can actually get out. But prior to all of that, you know, there's still quite a bit of good liquidity. So it just, I think it depends on people's understanding of the underlying protocol and what the shape of the bonding curve looks like, for the stable swaps, they particularly make it flat near the middle part, which I think is important to know. But you know, in any case, I just feel like, you know, this whole thing could have just been an accident, right? Because there's 85 mil seller into the curve pool, it could have just literally been that there was some big whale that didn't know that the migration was happening that day. And then they saw liquidity get pulled, depending on everybody else was pulling liquidity. And I thought, well, I'll get out too. So like, Wouldn't it be funny if this giant stampede, you know, out the door was just because like, somebody just had no idea that migration was happening, like that would be just be hilarious. You know, if it all happened by accident,

Fudzy: 6:44

I think it was interesting. The first time there was a little bit of concern over the peg, most of the flows were going through the MIM pool. And at the time, the A parameter was 2000. Compared to this time, the wormhole pool was only 200. So I'm wondering, like going back, if just that one parameter was almost able to save them, you know, the first time obviously, the size of anchor and UST was not nearly as large. Just going back into the process, was there like a conditional checklist that you guys were kind of focusing on in terms of importance, saying like, you know, or the, you know, the curve pool imbalance? That's what we're, we're laser focused on? Or what what was kind of that process?

Kevin: 7:26

Yeah, it's actually just some very quick back of the napkin math. So we looked at the different curve pools with all the different factors. And then on top of that, the liquidity in the actual books on decentralized exchanges, right. So when you combine all that together, you get a sense of how much is left, before you start paying up a lot more and slippage, right. And before like depegging is actually happen. So like, we actually waited a while we were not the first ones out, because we weren't sure if it was just going to come back or not. But we also didn't want to be the last ones out either right? In that period. So we were somewhere in the middle, you know, we waited for it to be like, Well, this looks pretty serious. Now, the chance of an actual depegging is material enough that we might as well pull our funds. So that's kind of the the concept that we had over there. I think, you know, afterwards, we started, excuse me, when we started shorting, Luna, I don't want to say exactly what price but it was pretty high. And then since then, there were a lot of plays that were made, but into those positions, I don't want to really get into them, because some of those are still ongoing. So I'm waiting for kind of the dust to settle. And I'm actually happy to talk to you guys about them at some point, or anybody about them at some point. It's just that I don't want to disadvantage my traders by by leaking their positions, right?

Will: 8:40

Yeah, no, of course. I mean, so. So you had this like, first first proper depeg on Monday, and then kind of like, came back overnight. But then that from my, you know, from my seat, that was kind of when the shorts kind of entered the scenario? And how much of how much of a factor do you think Luna shorts, were to the speed of the demise here? And like, obviously, that should be part of the game theory, but it, it seems like it turned out to be a pretty significant part of it.

Kevin: 9:06

Yeah, you know, I think that's a that's a great question. Um, at the end of the day, I don't know. But I imagine it is pretty significant. You know, within the market, it is impossible to tell if someone is literally just selling their bag, or someone is actually shorting right, just from the information that's available, it looks identical. And what I would also say is that some of the selling is just like maybe these people hedging their UST exposure right on the perps. And the perps are then dragging down the spot market, right. So all of these effects are all going in the same direction. People have different motives and different reasons for putting on a selling position or shorting position. But you know, some of it could just be a hedge some of it is actually trying to profit some of it you know, is this thing or that thing? Some of it is fear you know, there's there's a combination of all those things but they all point the same the same way.

Fudzy: 9:52

Yeah. And were you guys paying attention to Degen box liquidations during this time where you know there was You know, it started to pretty much unwind. That's UST, of course.

Kevin: 10:04

So we are familiar with the degen box. I don't know if my traders were looking directly at degen box, but we were looking very heavily into anchor liquidations. And that also compounds things right? You look at like when things go bad when it rains it really pours, right? Because then liquidity is supposed to price even further down, further decreasing confidence in the entire system, right, further drawing down Luna's market cap, which is the endogenous collateral to the system. And there's contagion effects and correlation effects to the Bitcoin exogenous collateral, which also goes down, and equity markets are in freefall, right? I mean, like, everything was just pointing in the same direction, and then like, be bLuna, look on the network, when that starts unbonding, then you know that, you know, 24 days later, there's gonna be selling pressure. So might as well get out now before those guys get to sell. So it's just like, when when when shit hits the fan, everything just goes in the same direction. Like all of these things just compound these effects, right. And then like all the longs, there is they're getting margin called right? Because the ones that are that have leverage on are the ones that are put on, on futures or perps. Well, then they get margin calls, they get liquidated, there's like a long squeeze, everything just gets forced down even more triggering even more panic. The whole thing is super reflexive. And it's a giant feedback cycle that basically spirals out of control.

Will: 11:17

Yeah, I mean, I think part of the issue here was that you have this like on chain mechanism on Terra around like the rate limited Luna UST minting and burning. But that that kind of that functionality didn't really come into play until later on, because of all these kind of external liquidity curve and binance. Primarily. It's strikes me that the mechanism didn't matter until the end, when it made things worse. Is that kind of your read on on the actual mint redeem scenario? Like what what factors did that play?

Kevin: 11:50

Yeah. So what I would say is that that was a much more material later on, especially as they release the gates and uncapped. I think at some point, it was like you could do a million units of Luna per minute. And then after that, I think there was a point where they just completely uncapped it, and let it go into hyperinflation, the, you know, super hyperinflation. So like, I wouldn't say that it was particularly bad in the sense that they're stuck between a rock and a hard place, right? Either you get hyper inflating lunar, you get severely to peg UST, the question is, Who do you really want to favor and then who you favor is only on the short term, because both are going to be spiraling to zero. It's just in a temporary situation, the more that you gate it, the more that ust will take the hit first, and Luna will take the hit second, and the less that you get it, the more that Luna takes the hit first, and ust takes the hit second, right. So what my contention is, is that whoever is in control of these decisions of whether to favor the UST holders, or the Luna holders themselves have a lot of power, right? Because if they know that all of a sudden the policy is going to change, then they can just go put on the correct short themselves, right to try and recover some lost profits. Right in their in their war council in their war room. You know, a lot of these guys, they themselves are very big bag holders of both UST and Luna, but in different proportions, some of them may hold more UST, some may hold more Luna and, you know, whoever's kind of in charge and whoever gets influenced that decision, you know, they all they all kind of benefit. I mean, they're gonna argue over who to say first, but they, but they all kind of benefit and having that kind of information. And who's to say that in the final death throes of Luna, ust it wasn't their own investors that were shorting the ship down to zero, right, given that the information,

Will: 13:28

right. Yeah, I mean, so after this kind of purported deal, like bailout deal fell through and everyone learned that it fell through, they kind of made the decision to kind of sacrifice Luna right, in exchange for saving UST . Do you think that was the right choice? And would you have made a different choice? If you had, you know, if you're the dictator of Luna?

Kevin: 13:51

I, you know, I feel that I would have at least telegraphed it to the public. It's always hard because you need to discuss within this council for the policy going forward. And even the discussion of it, when people seem to have formed a consensus. That's enough information for one of them to leak it to their trading desks to then go put on these plays. Right. But I would say that no matter what they chose, I think it's, it's it's over anyway, like, both are going to zero anyway. So like, which one you favor doesn't quite matter. But at least I think, you know, being more transparent about it would have at least helped, right, and then also revealing just exactly how much LFG reserves were left. If it's zero, it's zero, but people need to be able to make informed trading decisions, right? If if they only burn through like half a yard of Bitcoin, and there were still like two and a half yards left. I mean, that's a different final settlement price for ust than if they burned through it. All right, because like, you know, it is a choice to stop defending the peg and I can even understand it from a trading perspective. It kind of makes sense. From a mandate standpoint, that doesn't right, because the whole job of LFG is to defend the peg so they really should just, they should have done what they did. witches burn all of it. Right? But, you know, let's say they were willing to, you know, violate the mandates a little bit just for the sake of you know, it just being a lot better financially, well, then at least that should be revealed, right? It should at least people should know what exactly how much the reserves are. So they themselves can calculate what the residual value of UST is, the market itself is the public is trading blind, but you have all these insiders who know exactly what's going on, especially these two market makers, who are the ones that are doing all these OTC trades and doing the peg defense with the reserves. They know exactly how much recovery value there is in UST. So like, at the end of the day, when finally UST is around 10 cents and as popping down to five cents is going up to 15 cents, you know, and swinging around wildly. I mean, there's huge ARBs to take by these people who know exactly what the reserves look like. Right. So I think that's one part that was not done correctly. Now, in terms of the actual motions of whether or not you know, to save the reserves for later or, you know, to hyper inflate Luna at the expense, you know, at the expense of Luna holders versus trying to, you know, let the UST default. You know, I think those decisions are not as important. I think I can see reason in doing it many different ways there.

Fudzy: 16:08

And as you mentioned, you know, this great deal of like information flow. Do you think the LFG just being more transparent in everything would have helped? I mean, once all those funds gets sent to by binance, you know, nobody knows, right?

Kevin: 16:25

Yeah, exactly. And a lot of the trace of it is gone until later. And maybe we'll put up the binance exports to show exactly what these trades were. But who's to say that, you know, when the Bitcoin was being used in these clips, because it wasn't a continuous like, we just gonna twap like one bitcoin every five seconds, right? It was just like, there were some times it was heavily defended, sometimes it was allowed to collapse. Sometimes it was stop and go, because you have stop and go execution. It's like who's to say that it wasn't the market maker dumping their own bags into themselves using LFGs balance sheet on one side to bid and their own balance sheet and the other side to offer and then just basically doing the wash and then getting themselves out at because they know the exact timing, the bids get posted up? Right

Will: 17:08

because it was alone, right? Can you just walk through the mechanics of theLFG Reserve? I think I'm still a little fuzzy on exactly the I think everyone's little fuzzy on the timeline. But in terms of mechanically, what happened with the funds?

Kevin: 17:20

Yeah, so initially, there was a quote unquote, loan of 750 mil dollars worth of bitcoin and some of them 750 mil of ust which really didn't factor into this equation at all. But anyway, there was a loan that was given to a market maker. Now what I asked on Twitter is, what is the how is this loan constructed? Is it a loan in which the loan of 750 million worth of bitcoin and they owe you back exactly those same number of Bitcoins? Or you're loaning them 750 million Bitcoin In that they're going to do agency execution for you? And it's on your balance sheet? Because those things matter? Right? These market makers are smart, right? They're not going to try and lose their own money. I mean, I can't imagine they get past their own risk committee, right? Like, if they have a crypto arm and they have a trading arm, you know, they don't want the trading arm, the trader is going to protect their bonuses, they don't want to take on the p&l from trying to defend maybe possibly a faulty peg, they're not as invested as the venture crypto arm, you know, as as they are in their own books. Right. So it's like, Would these market makers have been actually willing to take it and take the principal risk of having it on their own balance sheet? Or is it that they're just trading on behalf of LFG? I still have not gotten full clarity on it. But I think that's a very important note, right? Because then we can see if there were conflicts of interest, right.

Will: 18:37

So today, they said that they swapped this another amount of BTC for UST, what was that piece of it? Or is that part of the same initial loan?

Kevin: 18:50

Yeah, I mean, it maybe it was, maybe it was like the second clip. But in any case, like, did any of that BTC actually hit the open market? Like we don't even know if it was an OTC deal between the LFG and the market maker where the market makers was just bailing out their own bags because maybe they saw like, maybe here's how it played out, right? This is This is crazy. This is still conspiracy theories. So like, but you know, at least worth exploring, right? These guys invest into, you know, into Luna, and you know, their VCs, right? And then they get a whole bunch of Luna, they convert all that Luna to UST, they're holding that UST, UST starts depegging. They're feeling really bad. They, they somehow convinced LFG to give them an OTC deal to buy back the UST but instead of on the open market, it buys it back from their own balance sheet and shifts all the toxic assets over to LFGs balance sheet, and then they get back all the good Bitcoin that they initially paid for the LUNA anyway. It's basically they just paid themselves basically like, is that possible? Yeah, it is possible. I don't think that that is what they would do. I don't think they would be that egregious. But I think that at least that's a possibility. And until we know better, we should at least consider it as a possibility and we should try and put some pressure on TFL and LFG chi to actually show the records and have the market maker come out and say what happened and show the records of what happened. I think that people really want to know.

Will: 20:11

Yeah, I mean, because if it was OTC, then you have a confidence game and UST and Luna in general. And you know, those orders actually hitting the books gonna be strictly superior to some sort of back backroom OTC deal.

Kevin: 20:23

Yeah. But what I want to say is like, what if the market maker in the War Room was threatening, they're like, Hey, you guys got to do this OTC with us? Because we got 2 billion worth of UST, we're gonna dump it straight into the market. So you do this OTC with us? Give us this Bitcoin, and then that's going to reduce the selling pressure. But you know, maybe it was kind of like a bluff. Right? Like, maybe it was just like the whole idea of they just wanted to get out at more privileged and priority prices than the rest of the public market. Right. So we don't know if that's true, right? We don't know if any of this is true, until we can actually look at the books, and we can actually see what actually happened with the trades were?

Fudzy: 20:56

Yeah, that's really interesting. You know, I wonder if there was a lot of, and I'm sure there was a lot of talk between, you know, the large ust holders, because like, the distribution is so heavily skewed to, you know, the massive funds. And at that point, I mean, me and Will were watching the book live, it almost looked like they were just making decisions, probably algorithms for the most part, to basically say, Okay, we're almost better off letting this drop a little bit more, we can make more money if it actually drops more than trying to support it, you know, if they believe that it's going to these levels. Right. And you know, if they have an Okay, from the largest ust holders saying, hey, look, let's see how much we can weather this don't sell out. You know, like, I wonder how much of that came into play?

Kevin: 21:38

Yeah, I mean, you definitely see a lot of stop and go behavior in the peg defense, right? Yeah. Well, isn't it more continuous? Why was it so choppy? The choppiness itself allows for foul play? Right? And at the end of the day, why is it that it requires the agreement of some of the largest ust holders? Why why are they the ones that are considered these whales? Right? What about consideration for the small guy who has no idea, you know, when things are coming? Oh, relief is on the way, but you know, is it really is it stop and go? Is it continuous? Nobody knows. Right? But they just want to get permission from the largest ust holder. I mean, this just, it just smells bad. The whole thing just smells bad.

Will: 22:12

Well, especially that was the big difference between this crash. And you know, whatever happened last May, and about a year ago, is that in that case, they kind of can fully parameterize, the UST holder, especially the whales, but then this time, they had large holders like yourselves, as well as others farming anchor that were a lot more cynical and willing to get out quickly. I mean, it certainly that was maybe one of the differentiating factors.

Kevin: 22:34

Yeah, definitely. And to be fair, we weren't that large of a ust holder, because we also thought that big size will be hard to move, right? Like we always we size it appropriately thinking that we always want bigger guys that are more stuck than us. We can always wiggle our way out when it comes to be right. So but yeah, I mean, I agree. There's definitely different characteristics. I mean, honestly, it really it should have even failed much earlier. But you know, there's just a lot of capital backing this kind of stuff. And even for them, I'm not even sure if they fully understand the extent of the risk, right. Like they understand they all understand the risk. They're all smart. Right. But do they understand like the just the extent of it, right? It's just like, because I think like, at some point, it's just not worth it to buy discounted locked Luna and hedge it with the perps. Right, no matter how big the discount is. Because under a true hyperinflationary scenarios, no amount of discount is going to be even close to the funding that you have to pay on the short leg of it. Right. So it's like, I don't think they thought it could get that bad. I thought they thought there might be some risk. But overall, it's plus CV, I don't think they thought it could be that bad. And there was just so much capital backing it causing all the risks to be pushed out to the tails, right? It just basically like a Taleb turkey. Everything just looks fine. Until when it isn't because you put so much risk there, then it's just catastrophically bad.

Fudzy: 23:53

I mean, looking at some of the the large people who partner or the small people that participated in the Luna raise, it made no sense to me when you can get multiples of that discount, just longing the perp? Like it, just the risk just just didn't make sense. And I don't know, they might know more things than I do. But I just thought that was interesting from a funding rate perspective.

Kevin: 24:17

Yeah, definitely. I mean, if you think about the funding rate, one of the reasons the short is hard to put out put on is because the opportunity cost of putting on the short is farming anchor, right? The higher the yield, the higher the short costs will be right. So this is why we were particularly careful about not putting on the short too early because being too early, it's just as good as being wrong. And we just we performed it to the last day basically. It was it was it was pretty maximal in terms of value gotten there. But But yeah, I mean like there's so many dynamics there too, right because it's sort of like not only is there pressure from the opportunity cost on the on the funding from the from anchor, but there's also a lot of locked Luna, which is being hedged with these investors are being are hedging, and also being willing to pay, you know, 20 30% or whatever, just because they're already in the money like 10x 20x, or whatever. Right. So that also causes, you know, pressure on the funding rate, you know, for this kind of stuff. So like, all of those things, I think, are important to consider. Which also means then that they're basically passing on part of the discount to the public market, because like you said, fudzy, at that point, you're just getting paid to go along, right on the funding. So then effectively, they're giving you some of the discount, and some of that flows on to the market to the public. Right, then everybody participate in a wait on this discount. Right.

Fudzy: 25:40

Yeah, it's it's pretty interesting. Just just from the the lockup, and the the funding and the trading perspective. And I wonder if let's just say you we're not going to name names, redacted market maker in this scenario, do you think they put up the the right defense? I know, it's easy to say now that this has unfolded? Would you have done it any differently? Like, in my mind, I almost feel like they gave the easiest out, they put liquidity into the easiest out, whereas maybe if they were backing Luna, even though the the slippage might have been much higher, that was just a harder process, because of using the redemption mechanism, it might have been able to slow down the unwind, if that makes sense.

Kevin: 26:24

It is possible. Yeah, I think it's hard to say what we would do in that situation, in my opinion, I don't want to blame the market makers too much here, because there's just not enough external collateral, that the whole system is so insolvent, that no matter what they did, it's only a matter of degree of how much reduction and damage they can they can do, you know, like this thing gonna collapse no matter what they did, in my opinion, but it's just like, yeah, maybe they would have been a little bit more efficient with the funds, and less people would have lost as much. But beyond that, I mean, I think it was pretty much inevitable. Yeah. And Luna, but you could be right, it may have actually been better to defend Luna than it could have been to defend UST. But but but hard to hard to say you'd have to think through exact mechanics because the underlying amm considers ust at worth $1. Right. So, you know, probably defending UST is better now, I think, probably defending UST is better.

Fudzy: 27:19

Just think in terms of, you know, the retail traders, they see one ounce of green in a in a book where everything else is red, they might just start buying Luna and then you get a little extra protection.

Kevin: 27:31

Yeah, what I would say is then you're just roping in people into the slaughter for later. This thing was insolvent by so much, right by so much that it's like it just it just, you know, it just I don't think anything would have saved it.

Fudzy: 27:45

BEst case scenario delay. Yeah.

Will: 27:47

Yeah, with the Bitcoin collateral, it always struck me as a bit of a strange choice. Because positively correlated with Luna? I mean, is there any story there where, you know, if the collateral was like, a short Luna position, or like Luna puts or something, this changes it? Or is it still just a matter of degree, and that basically would have still had to add up to whatever the UST outstanding was?

Kevin: 28:09

Oh that would have helped a lot. Really, to be honest. I mean, that really would have helped a lot to just have it just be like an inverse position on Bitcoin or an inverse position on US equities even because everything in crypto so correlated to that. Right, right, or just inverse Luna, right? All of those things, or even a luna put? I mean, we don't even want the convexity there. But like, let's just say like, short Luna position, right? Like, at the end of the day, like it breaks narrative, because how do you even have short positions that are decentralized? At scale? Right? It's pretty hard, right? So I understand, but at the same time, like, is it better to have solvency or is it better to have decentralization? Right, like, at some point, you gotta, you gotta be honest with yourself, face yourself in the mirror and ask that very serious question. This is a question that I don't think they ask themselves, because I think they still had hoped that it would work. I think, I think this thing probably was just pretty grifty at the beginning. Eventually, they started believing their own bullshit, they thought it could actually work. They could you could actually work in and at that point, you know, they they were high on their own hopium. And, you know, they, they weren't very serious about the very, very tail, you know, very rough kind of consequences in the bad cases.

Will: 29:15

Yeah, yeah, I definitely agree. I think the one thing that I definitely underestimated was the, the speed with which everything unfolded and the speed with which Luna became the consensus short, like, I think that trade really got piled on, which I think there's no protecting the downstream effects of that. And I feel like it's a lesson in these like unchained mechanisms like that. Really, the mechanism doesn't matter. It's the same thing that happened with Fei, Fei had this like, you know, discount you had to take if you wanted to sell but people just want to round it to another exchange, but, like, do you think these games around like, algorithmic redemption are just broken and like, they just don't work? But let's be like arbed around

Kevin: 30:00

Yeah, well, I do think that they're broken for the most part. And the the over collateralized, stable coins are, I think completely different. But I think these pure algorithmic stable coins, they're all they all reduce down and are isomorphic to the same mechanism, which is that when supply is too high, and the price is too low, you want to contract it. And when supply is too low, and the price is too high, you want to expand it, like regardless of how many steps you take to get there, no matter how many assets you loop through, no matter what kind of weird, crazy, you know, open market operations, interest rates or whatever. In the end, the idea is that you want to expand or contract the monetary supply. And that effectively is isomorphic. To all other mechanisms, which do the same thing. That's, that's my opinion. But you know, I think at least there were some things that could have been better, like I think, I think like, for example, if they just capped ust issuance to like five to 10 Bill, things would have been a lot better if they kept ust market cap to less than 10% of Lunas market cap, things would have been better, right? Like one of the big issues is that you have this like super reflexive endogenous collateral. And even for non reflexive collateral, the selling of $1 of any asset reduces its market cap by more than $1. There's a multiplier effect right? Now, historically, in stocks, it's been like three to 8x. Right? Now for crypto, we're probably on the higher side, because it's a newer industry. And on top of that, there's the reflexivity. So my guess was actually 10. And I actually was being a little bit too aggressive. Turned out, it was around about nine, it was about 9x. Right, so like, if they actually kept UST to less than 11% of Lunas market cap, let's say even without external collateral, maybe it would have been like okayish right. Now, so but that's like the kind of level of, you know, collateralization with endogenous assets that that's necessary, if you just collateralize it with Bitcoin, but 1x is enough, right? Or maybe not 1x is a correlation effects. But let's say you correlate with, you know, the inverse index on s&p, maybe 1x off but but still, like, that's the kind of order of magnitude difference when you have endogenous collateral, you know?

Will: 32:13

Yeah, yeah, that makes sense. Yeah, I think that's not very intuitive to a lot of people, and probably a lot of participants. And that's one thing I wanted to touch on is like these other chains, like near and Tron that are kind of running this playbook or did start running this playbook. Do you think that contributed to the downfall? I mean, I think something kind of similar happened with OHM where the copycats came in. And then kind of the, the power of the the origin of the original system kind of broke down and then kind of scattered. Do you think like, there's an effect there. And I've also heard the theory that like the Tron and USDD, that some of the capital rotate over there. And that was kind of one of the triggers as well. Do you have any thoughts on that?

Kevin: 32:58

Yeah, I think there is a small mechanical sort of effect there. But I think a lot of it is just psychological too, right? Because one guy comes out with a 20% coin. Next guy, does 30 Next guy that does 40, right? Eventually, somebody's coming out with like a four digit interest rate coin. And then people really start to wonder like, What the fuck is really going on like this actually, though? It just becomes obvious it becomes more and more obvious that it doesn't make sense. Right? So I think like a lot of it is just kind of psychological. But what I would say is that even mechanically it would have really hurt them. If things have played out for longer in the next coming months as USDD as USN started building up greater market cap, right. And as it started challenging, all the mercenary capital in anchor, and some of the capital start to flee, you know, Luna and UST would have collapsed Anyway, what I'm saying is that we it was so early on that they never faced that real competition from all these other algo stablecoins. Right. So like, you know, it never really gotten mechanically that affected but what I'm saying the way the reason I think this thing was faded, right is that even if it didn't collapse, just recently, like by the time like us, USDD and all these other things start to get bigger, like Luna and ust are a victim of their own success, the more that they seem like they actually do work, the more that they're gonna get competition, which then competes with them for mercenary capital, and also reduces the narrative because it starts looking absurd once the rates start going absurdly high. Right. So like, they were basically going to kill themselves anyway, you know

Fudzy: 34:26

that's a great way of putting it, it's like a longer Luna went on, there was more of an education process within its community saying like, Oh, wait, how does this work? Where's the yield coming from? You know, you know, I feel like this, you know, redemption mint, you know, burn is this kind of form of alchemy, where people didn't really understand it, you know, it was like, Is this sell pressure? Is this buy pressure like, do you think that played a part and kind of, you know, how Luna functioned?

Kevin: 34:54

Definitely, I think it was obscured on purpose, right, because every collapsing algos stable coin causes the next design to be basically the same thing but more obfuscated, right? Mechanically, it works about the same, but it's just a little bit more confusing to reason through. So it's just like, oh, it probably can work this time, right? So it's just like by abstracting the stability concept through a secondary volatile asset to the mint redeem process. Now, in order to make sense of this thing, you have to understand how order books work, right? Because you have to understand this idea that as you sell down something, it reduces the market cap by more than that, which is why it's only symbolic that there was a point at which ust market cap flipped Lunas market cap, it was well insolvent before that, even when Lunas market cap was like 3x or 5x, USTs market cap, it was already insolvent, it was just not apparent, because it's harder to reason through. And second, because there was a huge supply sink on Anchor, right, that was the only thing that would that was the one screw that was holding this whole thing together. And once that starts to loosen a little bit, or even this time, it wasn't even that because the outflows weren't even that high. It was just exogenous shock, the whole system was super fragile to exogenous shock from the equity markets falling, right? So it's just like, the whole thing was fragile. And there was one screw that was holding everything together. And it was a little bit harder to reason about than the last crazy contraption that people came out with. That's basically it. I mean, there's not much beyond that. I mean, it's really relatively simple. You know, I think like, you know, every contraption is just a few more gears and a few more knobs and a few more screws, and that's about it. But it's the same. It's the same contraption.

Will: 36:28

Yeah. And I think another thing that that Luna added on top was the fact that it's an L1 one blockchain and people, you know, L1 ones are pretty highly valued. And people have kind of agreed that they're valuable. And they kind of slap that on top as this kind of like, mysterious premium that they could kind of attach to the collateral. But ultimately, like you said, I think it's just adding another mechanism.

Kevin: 36:49

Yeah, I definitely agree with that. Well, I mean, I think it's just like, it's for the narrative, and l ones were so hot, and that, you know, any project if you just if you are an L1, you just had massive premium, right? And then you'd you'd always spin this story about, well, you know, when this becomes adopted, then everybody will start using it. And it self fulfills itself to be true, it just sounds so nice. Right? It sounds like exactly what a VC wants to hear. Right? So it's just like, yeah, and it's hard to it's hard to calculate, right? It's just like, what is the actual use case of ust that's circulating within this economy, right? What is the velocity? What is the actual natural demand for this thing? Besides pure speculation? Well, I imagined like less than 1%. But I don't think it's a super easy to concretely say, and if you don't have the evidence for it, and you say on Twitter, oh, nobody's actually using this one. Then they say, Oh, well, there's like a million Chai users, you know, and it's like this thing and that thing. And then it's just like, it was starts to get really hard to argue very concretely about just how much demand is driven. What is it? 1%? Is it 10%? Maybe it's even 50%? Like, nobody really knows, you could throw around any number, and you can justify it, right? I mean, that's the that's the idea of narrativ,e narrative is that you can always create narrative on things that are nebulous. When you concretize things, and you actually look at physical numbers, well, then it's just hard to actually drive narrative, right? So like, that's why narrative is almost always created on things that are nebulous, right. And what is more nebulous than these mythical users, which are naturally demanding ust really is brilliant, right? If you think about oh, grift was Brilliant

Will: 38:20

Yeah, and the whole ecosystem of dapps was basically built around the the nexus of anchor, and so like stripping anchor out kind of destroys all the value that they were kind of ascribing to theL1, which is circular. Yeah, one thing I want to ask you as exchange like centralized exchanges, there was lots of drama around Binance, turning the books off, turning them back on, you know, they've been getting a fair amount of heat. I think for, you know, keeping things listed and keeping the leverage up. Do you have any take on that?

Kevin: 38:52

For the sake of our binance account? I have no take on that. absolutely zero opinion on whether they did the right or wrong thing there. Yes.

Will: 39:09

Fudzy, do you have anything else to ask?

Fudzy: 39:11

Yeah, I think, you know, we even saw I can look it up on the App Store that Alice right, it's this users make deposits allows them to access the Terra blockchain. I'm just amazed at how much stuff got built on top of anchor and we're also hearing horror stories of, you know, dapps and projects that had their reserves in anchor. And it just amazes me I don't think I'm the brightest person out there. But like, Where was someone telling these people like? No, no, you know, it's it's just crazy how no one stepped in and that's why I give you props for being so vocal about it. But what are your thoughts on that?

Kevin: 39:52

I think it has a lot to do with herd psychology, because it is actually very hard to be a bear and to be a short and you're basically going to take like alot of Flack and a lot of slings and arrows from all these lunatics who shut anybody down. And same thing for like all these other coins who have their, you know, Link Marines or whatnot. So like, I think like, at some point people religious cowed into consensus, and that's extremely dangerous. That's exactly what causes systemic risks. And you know, you see this on the cap tables too, right? Like, you have all these VCs and, you know, sometimes, you know, people are asking, Well, who else is in this deal? You know, and it's just, oh, they invested? Well, this must be a good deal, right? It's just like, it's just like, more of that, and less like, independent thing. You know, and it's, and it's brutally hard, I think, to be a short, which is why I don't want to go on another crusade on this kind of stuff anymore. I think someone else should take that up and do some public service. I think, you know, it's really hard to I don't, I don't want to be just known as the short person, you know, I'm just, uh, you know, I'm mostly we just, we've done more long plays than we have done shorts, you know, so it's like, you know, I think if everybody you know, this is what I said, on, on, Jason choi podcast, which is that, you know, everybody just needs to do at once just at if every single firm sticks their neck out just once on something non consensus, then we will survive as an industry, right. And if, if everybody is just willing to do one deed of public service, that's all I'm asking from everybody, everything else, focus on your bottom line, do what you need to do businesses business, but just one time for every firm, do some public service. And I think that would go a long way to the maintenance of this great Republic,

Fudzy: 41:25

it's one thing to make the underlying, you know, play, it's another thing to, like you said, stick your head out and be so vocal about it. Which is true. I think a lot of people are shunned and, you know, they, you know all this Fud and on Twitter or wherever, have you on forums. It's such an interesting dynamic. Like you said, the herd mentality.

Will: 41:49

Yeah, I mean, I think you definitely, you definitely did your time and earned the respect from this trade and call I mean, one thing I do want to ask is the whole Rome. Rome analogy, I want like one of the origins that I'm just curious.

Kevin: 42:06

Oh, you know, so the Origins is, you know, it comes from the saying Carthago deLenda es, right, which is basically Cato the elder would end all of his speeches with Carthage must be destroyed. And a history of that is basically, Carthage is very wealthy city, you know, close by, to Rome. And then they fought the First Punic War, where basically, it was kind of no one was kind of Rome's fault, they kind of invaded, because, you know, they wanted to loot Carthage and whatnot. Second one, Carthage rose up, because they had some historical grievances, right. And then they, you know, they started getting stronger, they rose up and attacked Rome, but they also lost. And then the third time, this is right before the third time, the Third Punic War, which is the final one. And then basically, Cato is just saying that, for the very last time, we need to burn the city down, because it's going to cause a lot of problems for us there, they've already grown too wealthy, they've already gotten too big, this is going to cause serious problems for Rome security in the future, and we must go burn it down for the third and last time, you know, we we made peace with him all these other times. But this is the last time and for the sake of, you know, the entire Republic, we need to get that done. And it was not that popular in the beginning. But over time, he was able to eventually convince people. And that's kind of how I saw this journey. Because I think it's not enough to just short this thing. Because in order for it to happen quicker, we need to get everybody on the same page. So there needs to be some kind of effort to get people on the same page to educate people and explain what this what this position is, and to win people over to our side. And then, and I would also say that, you know, I think that that analogy was particularly apt because of like how, how things have played out. And you know what, what it represented, like, it wasn't just that we needed surrender, we needed full mental capitulation and complete burning of this concept, right? Like it's not in my opinion enough that you know, that you Luna and ust fail early, and we contain the damage, but it's that we need to think twice before doing the same thing in again, I mean, in the long term, it's it's it's basically inevitable, but to have that be as long as possible and error of peace for as long as possible to burn it out of people's minds that this is a good idea. That is really what the truly the quest is right. And I think that's why that's why I analogize it to Carthage rather than just the city that was captured by rope. Like they literally raised it to the ground. They're like we don't even want your resources. We're just going to sell the land and burn it. Like you guys will just come back and cause problems. Fourth Punic War fifth Punic War, it'll never end we just need to. So that's what that's why I drew the analogy.

Fudzy: 44:45

And it was bigger than just making a short position right if it it brought the markets down a little bit but it could have been much worse and I think that was Dos kind of end game was and Larry touches on this. He wanted to be as big as possible to Almost thr eatened and everyone's like, don't touch me, you know?

Kevin: 45:03

Yep. Exactly. And, and that's scary. Well, I mean, tyrants don't meet with a good fate. But But yeah, I think I think like this is the sort of thing where hopefully, there's just been some learning, because the only way that we can be a self regulating industry, which I'm very much in favor of, I don't think the regulators should step in and stifle innovation is that we need to build our own immunity to these kinds of things. And that can only happen from learning, right, and from going through this and it will be slow, because in the beginning, if there's a lot of finger pointing, they're gonna blame other people, eventually, people need to reflect anymore and take personal accountability for their finances. And that's the only way that we can move forward. As much as I would like to blame Do. What I would say is that maybe at most half of it, half of the blame rests on, you know, the developers, though the team, the investors, that sort of thing. And most if not less than that, I think, if at least, if we can get to the mentality that everybody should be responsible for their own independent thinking. And when they put money into a box, and it blows up, it is their own fault. If we can get people to that kind of mentality, then I think we will have that kind of immunity where we won't need regulation in the space.

Fudzy: 46:13

Well said man

Will: 46:16

Well, I think that's a good spot to leave it. Thanks so much for coming on. Really appreciate like all the work you did on this, you know, on the keyboards over the months in the books, you know,

Fudzy: 46:26

give the fingers a rest.

Kevin: 46:28

The pen is mightier than the sword at the end of the day, you know exactly. But I appreciate you guys having me on definitely. And it's been a been a fun time enjoyed the conversation.

Fudzy: 46:37

Yeah, it's been awesome, Kevin. Thanks.