The Human Cost of Lunatic Hubris

Terraform Labs' Do Kwon and his collaborators sold a bad bet to thousands of everyday folks. We're beginning to see how immense the harm was.

By David Z MorrisLayer 2
May 13, 2022 at 6:28 p.m. UTC
By David Z MorrisLayer 2
May 13, 2022 at 6:28 p.m. UTC

David Z. Morris is CoinDesk's Chief Insights Columnist. He holds Bitcoin, Ethereum, Solana, and small amounts of other crypto assets.

As the collapse of the Terra ecosystem enters its final, definitive stages, signs of the real-world wreckage caused by the flawed virtual project are impossible to miss. On social media and message boards, former LUNA backers are reporting huge losses, despair and hopelessness. Secondhand reports suggest a rash of suicides and attempts.

It's a sobering moment for those of us in the crypto-watching business. I’ve spent a great deal of time over the last two years trying to highlight absurdities in the bubbly crypto market (including predicting luna’s failure), but I still find myself somewhat shocked by just how exposed civilians became to one of the most experimental projects in the industry. And to be explicit, the crypto industry is still best thought of as entirely experimental.

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The scale of the loss is, in one sense, easy to understand: It is total.

The Terra ecosystem has entered a hyperinflationary “death spiral.” This fallout was baked into the network’s supposedly stabilizing algorithm, and LUNA will continue to asymptotically approach zero. The UST algorithmic stablecoin price, currently at 18 cents instead of a dollar, will crumble towards zero as well. A "recovery plan" posted by Do Kwon this morning is an insulting joke. That wipes out roughly $68 billion, the combined paper value of LUNA and UST at the end of last week. Exchanges continue to facilitate trading in the tokens, a decision with murky ethical implications.

The scale and severity of individual losses is harder to grasp. As a thought experiment, cut LUNA/UST’s total supply cap in half to account for the internal holdings of ecosystem projects and assume outside investors held an average of $20,000 in UST or LUNA before the crash. Dividing $34 billion by $20,00 implies 1.7 million holders lost what 99.9% of the humans on Earth would consider a life-changing amount of money.

Those weren’t all real dollars because many bought LUNA below the May 12 price peak. But paper losses can still be devastating, and many folks did lose real money, particularly those who bought supposedly “stable” UST to farm the 20% yield on the system’s heavily subsidized Anchor lending protocol.

The signs of deep and widespread distress have been mounting all week. Matthew Graham, a crypto VC noted for his accessibility online, reports getting a wave of despairing messages from those caught in the broken system’s catastrophic unwinding. Police have reportedly been called to protect Terra founder Do Kwon’s home in South Korea, where angry investors have reportedly been threatening his safety.

The darkest reports are of people contemplating or following through on self-harm. In a tweet that is no longer public, one former LUNA partisan going by @terranaut3 claimed to know of at least eight people who have taken their own lives in the days since the unwind. The Terra subreddit is full of reports of suicides and attempts, links to mental health hotlines and dire reports of financial immolation. Most of that was posted before the forum was locked two days ago, when LUNA was still trading at hundreds of times its current price. CoinDesk hasn’t confirmed these stories, but they seem all too plausible.

Here to help

I am not a counselor, but for anyone in this position there is one key practicality: Declaring bankruptcy is a far better option than harming yourself. That’s particularly true in the U.S., where bankruptcy laws in some states could protect you from seizure of your home or automobile.

Crypto washouts aren’t new, but these reports of despairing LUNA holders are novel in one way: a huge number of “normies” appear to have been suckered into buying UST and LUNA. For most of the time that I’ve spent in crypto, the bulk of the money in the system came from people who were actively engaged with crypto ideals or technology, or from investors and traders with big risk appetites.

The 2020-2021 crypto craze was much bigger and had much wider retail reach, so its fallout will be fundamentally different from the deflation of the 2018 crypto bubble. We can certainly expect to see a rush of regulatory scrutiny in response, but crypto insiders should also take time to reflect on whether their behavior has put retail speculators at unnecessary risk.

High on the list of examples here is crypto fund manager Mike Novogratz, who famously displayed a huge LUNA tattoo in January and declared himself “officially a Lunatic.” Reports have since surfaced that Novo’s fund actually exited LUNA by March, but if he ever disclosed that walkback it didn’t get remotely the traction of his bullish flag-waving. From the outside, that looks an awful lot like pump-and-dump behavior, in spirit if not substance.

The other shift I hope to see out of this mess is a lot more humility, critical thinking and serious openness to contrary opinions. Before the death spiral began at the start of the week, about 17,000 CoinDesk visitors read my April 22 piece outlining the scenario for LUNA’s failure that ultimately played out. If just a few dozen of those readers took steps to protect themselves before that failure actually happened – heck, if even one reader did – that’s what I’m here for. The next time you see critics and skeptics dismissed as FUDders, attacked and dismissed, just remember: We’re here to help. Let us.

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David Z. Morris is CoinDesk's Chief Insights Columnist. He holds Bitcoin, Ethereum, Solana, and small amounts of other crypto assets.

David Z. Morris is CoinDesk's Chief Insights Columnist. He holds Bitcoin, Ethereum, Solana, and small amounts of other crypto assets.

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