What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing in late 2021 and early 2022, a new crypto system called terra, was taking the world by storm at the peak, its associated crypto coins had a combined Market cap of over 60 billion dollars, unlike many other altcoins, it wasn't just retail investors and meme traders pumping up the price, some of the biggest heavyweights in the institutional crypto space, including billionaire mike novogratz, and the trading firm jumpcrypto, were investing billions of dollars into the Project, it was run by a charismatic south korean technologist called do quan, who said that his project was already achieving mass adoption in korea and will rapidly expand across the globe. Tara promised to revolutionize the global financial system by cutting out inefficient middlemen and making it seamless. Where people transact with each other across national borders to make matters even better, they offer a way for people to earn 18 yield on their stable coins, which are pegged to the value of the us dollar. 18 returns with no risk.

I haven't seen a deal this good since bernard l made off investment securities, as you might have suspected. This turned out to be a massive scam. In a matter of days, the price of luna crashed from one hundred dollars to just point two: seven cents for all practical purposes of one hundred percent loss. This wiped out forty billion dollars of paper value ust, the stable coin, backed by luna, has fallen from its one dollar peg down to just 20 cents.

At the time of recording this video, it also looks like it's on the way towards zero, wiping out another 20 billion dollars. The epic collapse of such a high-profile crypto project, along with the 55 drawdown that we've seen in bitcoin's price since its all-time highs, have caused many analysts to believe that we are headed towards the next multi-year crypto winter. Tara supposedly used a highly sophisticated and foolproof tokenominix system such that usc could never diverge significantly from one dollar. So what went wrong in this video we'll look at what terra promised to do, why it was destined to fail from the beginning and why multiple billionaires fell for it.

Founded in south korea, by dou kwan tera was built on a mission to create a new financial system to replace both traditional fiat currencies and older cryptocurrencies like bitcoin. In 2019, they launched their coins, along with a white paper explaining their functionality, which we've linked in the description below. If you want to check it out yourself, there are two main components to the system: terra and luna, which are meant to represent the earth and moon. Terra is a stable coin.

Pegged to a fiat currency in the case of ust is paid to the us dollar. Luna is an auxiliary cryptocoin meant to stabilize tara's value, they call them luna and terra, because the supporting cryptocurrency luna stabilizes, the stablecoin terra, just like the moon, stabilizes, the tides on earth's oceans. So what is a stablecoin? A stablecoin is a cryptocoin that pegs its value to a fiat currency. The simplest way to peg the coin to the us dollar is to just buy a big stash of dollars to back up the value of the coin.

You can freely redeem your coin for one us dollar or pay one us dollar to buy a coin. Because of this exchange mechanism, the price could never diverge from one dollar for any significant amount of time, but do quan didn't like this idea? If you have to hold a bunch of us dollars to back your stablecoin, you are still intertwined with the traditional financial system. He had a better system to make it completely decentralized. Luna would give price stability to the stablecoin ust in exchange.

People transacting in ust would pay a transaction fee of between point one percent and one percent to the miners to mine ust. You must own luna, which provides the incentive for people to own luna, thus supporting its price. Here's how it works. If ust is trading below one dollar, you can buy one ust and exchange it for one dollar worth of luna.

If ust is trading above one dollar, you can buy one dollar worth of luna and exchange it for one ust. Therefore, if ust diverges from one dollar in either direction, there will be an arbitrage opportunity. Traders will exploit this arbitrage until usc gets back to one dollar. Thus, in the long run, ust must always be one dollar, as that's the only stable equilibrium when demand for usc is high, they sell usd to the marketplace and gain luna.

In return, they burn a portion of this luna to reduce the supply, which should increase the price of luna. The remaining luna is put into a treasury reserve which will be used to fund what they call fiscal stimulus. People who own luna can vote on various projects proposed by third-party developers. Their projects have the goal to increase adoption of luna and terra in the real economy.

Approved projects will receive luna to fund it. Based on the language that do kwan used in his white paper. He seemed to view himself as some kind of visionary. He talked about the terror community, adopting fiscal policies similar to how a nation state does he positioned himself as the founder of a new decentralized nation that transcended the traditional financial system and government borders? These delusions of grandeur are common among many entrepreneurs, especially ones who over promise and under deliver by this point, the tara system looks a little weird.

Why would you need one crypto to support another, but it doesn't look like a ponzi scheme, at least not yet remember that if ust ever falls below one dollar, they must print one dollar worth of luna to give it to you, let's say that luna was trading At one hundred dollars per coin, which it was up until about a week ago, if someone wants to redeem one ust they'll receive one dollar worth of luna or 1 100th of a coin. On the other hand, if luna is trading for 1 100 of a cent which is about where it's trading now, you will need 10 000 lunas to redeem one ust. Obviously, if the price of luna is low, any redemption of ust will be extremely inflationary. Thus luna is very susceptible to weimar republic style hyperinflation, given the risks.

Why would anyone want to own luna? This whole house of cards relies on demand for ust always increasing this way. There will be upwards pressure on the ust price, so people will be buying more luna to convert it into ust and up until recently this was successful. More and more investors wanted to own ust and the market cap steadily increased from 180 million dollars at the beginning of 2021 to 18 billion dollars at the peak. So why did so many people want to get their hands on the ust stablecoin? The crux of this game revolves around the anchor protocol, which they market as a simple way for ordinary investors to get instant stable yields in their marketing materials.

They say that inflation is eating away. People's savings and traditional banks only offer pitiful interest rates of about 0.5 percent. They are doing a great thing for the people by letting them finally get some significant yield on their hard earned savings. The majority of usc is held in anchor, which gives them a roughly 20 annual percentage yield.

This ust is lent out to borrowers who post luna or other cryptos as collateral. This doesn't sound too bad. It's like a bank. Some people lend money, while other people borrow it.

It makes sense that you would want to lend a stable coin and collect a 20 interest. Rate 20 returns with no risk, but why would anyone borrow at this rate? The reason is because anchor gives them anchor coins for borrowing the value of the anchor coins are worth more than the interest expense for borrowing you're paying people both to lend and to borrow so where does the money come from? Anchor takes the luna posted by borrowers as collateral and puts it into liquidity, pools to earn staking rewards. If the staking yields are high enough, they could theoretically make enough to pay the 20 interest rate to depositors. Many crypto traders did various financial engineering schemes whereby they would land and borrow luna and usc and have an insanely leveraged position in ust.

They deposit all this money into anchor and earn 20 yield on it, but they leverage it up massively to earn a much higher yield on their initial capital. In some cases more than 100 apy. To sustain this, they would have to own a huge amount of luna. As well, this only works so long as the price of luna is increasing, or at least stable.

If luna dips still be forced to liquidate. Putting more selling pressure on the coin. Dog quan and the other senior management team at luna knew that this was a big risk. If people lose confidence in the system and the price goes down, anker won't have enough money to pay the 20 apy.

As soon as they stop making these interest payments. There will no longer be any reason for anyone to put their usc in anchor they'll, withdraw their money, sell their usc, and the entire system will collapse to prevent this. They decide to make a war chest to prop up prices in the event of a panic. It's similar to how a central bank builds up reserves and foreign currencies to support their own currency.

To do this, they raised a 1 billion emergency fund by printing more luna. They use this money to buy bitcoin, but who would give them one billion dollars to the system? That looks like a ponzi scheme, as it turns out, there are some institutional investors who are unsophisticated enough to buy into such a crazy system. Mike novogratz is a billionaire investor. He used to be a partner at goldman sachs and ran a hedge fund called fortress investments which eventually failed.

He then turned his attention to crypto and started a crypto company called galaxy digital, we're not sure exactly how much galaxy digital or mike novogratz invested in luna was probably a significant amount. Novogratz got a prominent arm tattoo saying luna, referring to the cryptocurrency another large trading fund called jump. Crypto led the one billion dollar funding round, which tara used to make their emergency bitcoin fund jump. Crypto is a subsidiary of jump trading.

A massive chicago-based trading firm with 700 employees - this was less than three months before the project collapsed, starting in the beginning of may, the crypto market started to crash, as the fed's rate hikes caused a general risk off sentiment for both stocks and crypto. Crypto traders started closing their positions in luna and ust to reduce their portfolio's risk and avoid margin calls this created a death spiral where investors started redeeming usc to get lunacoins at the same time that other investors were already selling their luna. As the luna price went down, the redemptions became more and more inflationary. Pushing the price down even more luna became so worthless that you would need hundreds, then thousands, then tens of thousands of luna to redeem each ust at its one dollar pay at this point.

Ust fell below its one dollar peg and currently sits at about 20 cents, at least theoretically, this shouldn't be possible. Shouldn't arbitragers, be willing to buy ust for 20 cents and make a risk-free profit by selling it for one dollar of luna. Terra is now facing the same problem as weymar germany. After world war one, they owed a lot of money to foreign creditors which they didn't have enough money to pay, so they started printing trillions of marks which they exchanged for foreign currencies to pay the foreign bonds.

This works up until a point, but at some point the currency brokers refused to work with them with the mark, declining in values so fast, even if they get one billion german marks per franc or dollar by time they try to spend it it'll already be worthless. So you wouldn't give one unit of a real currency even for a billion marks. Ust is having the same problem. If you buy a ust and exchange it, you might get 10 000 lunas.

Even if you try to sell the luna immediately, the price is declining. So fast that by the time the trade settles, your luna may have fallen by another 50, so you'll be hesitant to buy a ust even at a significant discount to its theoretical one dollar value. Needless to say, all the investors suffered a total loss with their lunar coins now worth just a tiny fraction of a penny per coin. To make matters even worse jump, crypto just had another disaster.

This past february, they lost 320 million dollars when another crypto project they were involved in called wormhole was hacked after two catastrophic losses in the span of just half a year jumped crypto may be reaching the end of their road. It appears that these institutional investors did little to no due diligence before making their investments in luna even beyond the fact that terra's system was obviously unsustainable. Just looking at founder, doe kwon's track record should have been enough to disqualify any investment before tara. He created another algorithmic, stable coin, called basis cash that functioned in a very similar way as ust.

You might not be surprised to hear that it was also a complete disaster and now trades for 0.74 cents each. At the end of the day, tara was a ponzi scheme that would fail sooner or later, with almost 100 probability. It relied on more and more people buying into the coin. They lured investors in with a promise of 20 risk-free returns.

They obfuscated it by shifting the money around in multiple different coins and protocols to make it more complicated, no matter how many white papers with fancy equations, you write, you cannot make 20 risk-free returns. It just doesn't work when the dust settled investors in aggregate lost about 60 billion dollars in paper value. Coincidentally, that number is very similar to the 65 billion dollars lost by investors in bernard l, madoff investment securities, alright, guys that wraps it up for this video. What do you think about luna? Did it ever have any chance of working or was it a scam from the beginning? Let us know in the comments section below before signing out.

We want to share this gem with you. This is an interview with luna founder doe. Quan, just a couple weeks before his coin went to zero sure how many of these companies you think are entering the space just because it's hot and there's a lot of funding versus the ones that will still be here. You know like two to five years later, 95 are gon na die.

Yeah 95 percent are going to die yeah, but uh yeah, there's also entertainment in watching companies. Now too, there's entertainment? Oh man, that's that's! That's so evil. At least you get to learn from it. Right:.