There was no 'Attack' on Terra

According to CoinDesk's main insights columnist, conspiracy theories will not shelter you from financial realities.

I've been keeping a close eye on the terraUST (UST) algorithmic stablecoin system for the past six weeks, first writing about why it will fail, then watching as it happened. While Terra designer Do Kwon and his supporters may wish to dismiss the disaster as a minor setback on the road to success, a slew of civil and criminal procedures suggest that many people believe it was a case of fraud. The distinction between fraud and failure has become increasingly blurred, prompting analogies between Kwon and Elizabeth Holmes of Theranos.

Today, however, I'd want to concentrate on the other side of the equation. I've read allusions to UST losing its peg as a result of a "assault," a "planned attack," or even a "hit job." Those attempting to defend UST's fundamental soundness typically use this framework, despite years of warnings that algorithmic stablecoins are likely to fail.

The depegging of UST was almost certainly the consequence of a "attack," in the sense that substantial quantities of wealth were strategically invested to bring down the Terra peg. However, behind that tangible level, there is a disturbing deception. References to the prospective attackers being immoral or "more evil than Do Kwon" himself hint at that. It manifests itself significantly differently in unsubstantiated (and irresponsible) claims that the attack was carried out by a large hedge fund firm such as BlackRock (BLK) or Citadel.

"The collapse of UST wasn't a real failure since the big banks and Wall Street detest crypto and undermined us because they hate us," the subtext of these defensive tics goes.

This line of thought is so strange to someone who has spent a lot of time thinking about financial markets that it's difficult to name all the ways it's wrong. So it came as no surprise to me that a single tweet from an obscure, anonymous account nailed the logical errors better than I could.

In part, user @pitchbend stated, "There was no attack." "If the design is wrong, it deserves to fall apart as quickly as possible." A stress test was what you called an attack. And Terra fell short."

It's all about business

It's difficult to be more accurate. The thing about markets, to add on @pitchbend's bullseye shot, is that they have no morals. They have no mercy – but no malice, according to Scott Galloway, a marketing professor at New York University. The individual trading against you is only interested in your position, not who you are.

There are outliers, such as when activist investors Carl Icahn and Bill Ackman went to fight over the nutritional supplement company Herbalife. However, in finance, the only "attackers" are those who sense a chance to benefit on someone else's error. They don't give a damn if they're shorting a diamond mine staffed by Congolese child labor or a fund for widows and orphans. They strike when they smell money.

To draw the most obvious analogy to the Terra crash, in 1992, billionaire investor George Soros did not attack the English pound because he despised the UK. I have no idea if it was his thought process, but it doesn't matter. Because it would have had nothing to do with his appraisal of the pound's financial state, the profit potential of shorting it, or his chances of winning.

The profit potential in Terra's case was enormous. The exact figures are still being worked out, but one rigorous analysis put the profit at $800 million. To make that amount of money, you don't have to dislike crypto, Terra, or Do Kwon personally.

According to The Block's research director, Igor Igamberdiev, the figure is about in line with the $682.5 million Jump Trading was reported to have spent defending the UST peg (though the figures aren't exactly comparable). The idea of a mysterious conspiracy of malevolent attacks is also debunked by this spending: Why was Jump utilizing market mechanisms to defend the peg if there was something underhanded about it, something that contradicted the rules of the market?

Cryptography collides with reality. Reality triumphs

There are a few takeaways here. The first is a reminder of how little many people who are currently investing in cryptocurrency understand financial markets. This has always been a disturbing background issue for crypto: those who have been paying attention realize how experimental this technology and ecosystem is, and how frequently even well-regarded projects fail or fade away.

There's a natural desire to protect those who may not be aware of the dangers. At the same time, one of crypto's main promises was to open up financial markets to people who wouldn't be eligible to invest in a regular VC fund. Because of this transparency, many early crypto investors have become wealthy, and they have sponsored firms and projects that have further enlarged the ecosystem. With the same kinds of controls in place in equities markets, that wouldn't be possible. I've spent a lot of time thinking about it, but I don't think there's any way to chop that baby in half.

The second point is equally perplexing. Though speculations regarding BlackRock and Citadel are just that, it is extremely likely that the Terra depeg was orchestrated by a huge mainstream hedge fund. That would be a huge two-edged sword. On the one hand, it would indicate that crypto is considered as a stable and reliable ecosystem that mainstream finance is willing to take a chance on shorting it. More of these shorts would also improve the ecosystem in the long run by providing an economic motive for asking difficult questions about projects.

At the same time, it may signal the end of what will appear to be a decade of blissful crypto ignorance in retrospect. Mainstream finance has been content to collect cryptocurrency trading fees and invest in startups. Serious traders with large sums of money, on the other hand, may find a target-rich environment when they start looking for methods to profit by consuming crypto's weak and sick.

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