Where Crypto Went Wrong, Satoshi's Mission, LUNA, and UST

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"However, our forefathers grew arrogant and stiff-necked, and they refused to heed your orders. They refused to listen and forgot all the wonders you did among them. They stiffened their necks and picked a leader in their resistance to return to servitude." 9:16-21 (Nehemiah)

The genesis block of Bitcoin is significant not just because it contains the first 50 bitcoins, but also because it had a message encoded in the hash code: "The Times 03/Jan/2009 Chancellor on verge of second bank bailout."

This reference to the 2008 financial crisis by Bitcoin's creator, Satoshi Nakamoto, is widely interpreted as an indirect mission statement: the financial system could be reformed, money could obey immutable laws inscribed into code, and finance could flow freely. Bitcoin would be decentralized, untouchable, and immune to manipulation.

However, rather than creating a trustless and egalitarian digital economy, it appears that the crypto business has been plagued by infighting. We've constructed a technological replica of the Old System, in which profit-maximizing techniques were complicated and risky.

That is, without the advantages that come with power.

TerraUSD (UST), which was once the third-largest stablecoin by market capitalization, was once famed for offering a 20% annual percentage yield on deposits in the Anchor protocol, and was once expected to make a lot of people extremely wealthy, appears to have completely collapsed. There will be no taxpayer bailouts this time.

The collapse of Terra, combined with an 8.3 percent consumer price index, has prompted selling across the crypto markets. Bitcoin has sunk below $30,000, and other coins have fared no better as investors sold into BTC or cashed out.

The price of UST moves in lockstep with the price of Terra's native cryptocurrency, LUNA, according to its algorithmic architecture. The bank run that destabilized UST's peg to the US dollar also caused the price of LUNA to plummet by almost 99 percent in two days to less than a cent. UST and LUNA had a combined market valuation of $60 billion earlier this year, but it's now under $7 billion.

The fallout has just barely begun. There are yield aggregators that employ UST as collateral, and who knows what other complicated financial strategies based on UST are now in jeopardy. There are tears and depression because people have lost their life savings.

Last year, Do Kwon, the cocky CEO of Terraform Labs, was named to CoinDesk's Top 10 Most Influential list. People thought UST was one of the most beautifully constructed financial products, and because it was successful, he had the reputation of a cult hero, just like other bright tech entrepreneurs.

It's still unclear how or why UST went down. But, with a strategy outlined earlier this year to make UST one of the world's premier stablecoins by draining liquidity from rival projects on the decentralized finance tool Curve Finance, Kwon made powerful opponents. He made matters worse by using Twitter to throw his weight around.

Indeed, Kwon staked a multimillion-dollar bet on the price of LUNA, predicted that rival stablecoin DAI would "die by my hand," and called a critic a slur for pointing out flaws in UST's architecture.

It's little surprise, then, that blockchain experts are already uncovering proof that the UST crash was triggered in part by sabotage. Terraform Labs appears to have dumped $84 million in UST exactly one minute after withdrawing funds to fund its new "4pool" on Curve. This contributed to UST deviating from its peg, which triggered a wave of panic selling and liquidations.

Kwon and his team are currently working to find a solution. Many say it is unsalvageable, especially because traders will long and short UST all the way back to dollar parity, if it ever does.

Daniele Sestagalli, the founder of Wonderland Money and a well-known crypto developer, comes to mind when I think of Kwon. A succession of liquidations, along with the revelation that his business partner was a convicted felon, caused his enterprises to lose all credibility. Sestagalli is yet to return to the game.

The industry would do well to recall Satoshi's original message: cryptocurrency is designed to improve things. It's designed to provide consumers with a way to preserve and increase their money without having to rely on third-party actors who have repeatedly failed, such as Do Kwon.

I'm not stupid enough to believe that today's teachings will result in a kumbaya situation in which the proverbial lions will lay down with the lambs. However, we are seeing bitcoin's strength and the belief that it, along with other high-quality assets, can endure this assault and, as a result, Satoshi's dream will live on.

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