Behind the tens of millions of dollars in gambling: Is Luna a Ponzi scheme?

Luna, whose market value has risen like a rocket this year, has recently become the focus of the industry again. Terra’s co-founder and CEO DO kwon and encrypted KOL Sensei Algod have opened up a million Dollar bet (post DO kwon asks for a raise to $10 million).

Terra, as one of the most powerful public chains in the past year, has high research and discussion value.

Mint Ventures also released its first research report on Terra in early August 2021, “Terra: The Rise of the Stablecoin Legion.” Since then, we have been following the development of the Terra ecosystem.

This article is our thoughts on Terra so far, and it’s just a guide.

opinion summary

Terra is not currently a Ponzi scheme in the traditional sense, despite its Ponzi shadow.

The real point of divergence for Terra in the market lies in the rationality of its public chain development model. Supporters believe that Terra’s high-interest deposits are similar to customer acquisition and retention subsidies in the Internet field. Although there are huge losses in the early stage, from the perspective of the total life cycle of users, the current subsidy money will be detoured from the long-term ecological prosperity in the future. Earn it back; Opponents believe that Terra’s development model of subsidy + public chain tokens & stablecoins is difficult to form a steady state, and will eventually die in a negative spiral of a Luna price crash.

One of Terra’s challenges is the insufficient “economic bandwidth” of its token, Luna, which makes UST more vulnerable than DAI.

The second challenge of Terra is that its business cycle of public chain + stablecoin growth may be interrupted by various internal and external factors, and the spiral turns from upward to downward. As an investor in Luna and UST, you need to pay great attention to these factors.

This article is only for discussion. There may be biases and errors in facts, data, and opinions. Please do not use it as an investment basis. We also expect more investors to provide differentiated views and participate in the discussion.

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Before debating whether Terra is a Ponzi scheme, we need to reach a consensus: what is a Ponzi scheme?

Section 1: What is Ponzi?

Ponzi is a financial model that pays old investors’ returns with new investors’ money. Its name comes from an investment scam set up by Italian-American immigrant Charles Ponzi. It made up an investment project, that is, it can use the funds raised to buy European stamps (very cheap locally) and sell them in the United States for an arbitrage (very expensive in the United States) to obtain income. Under the promise of high investment returns (40% return in three months), it developed more than 40,000 investors in a year or so, and finally the scam was revealed and Charles Ponzi was jailed.

The shape of a Ponzi scheme

Not all behaviors that eventually fail after raising funds and cause investors to lose money are Ponzi schemes. Even with the support of external funding, startup failure is still a high probability event in the business world.

Most Ponzi schemes can be classified into two types:

  • A Ponzi scheme with the purpose of defrauding

This subjective purpose is often reflected in follow-up actions. The most important point is that the project party did not put the money into the commercial project or actual operation it claimed. For example, Charles Ponzi did not really use the money to buy European stamps, and the well-known domestic fraud project Plustoken did not. Use the raised BTC and ETH for so-called arbitrage. Because this type of Ponzi fraud is not for the purpose of running a business, taking money to do these things will only increase the operating cost of the project for no reason.

  • It was a serious business plan at first, and then it turned to Ponzi fraud

In such cases, the project party did not raise funds for the purpose of fraud at the beginning, but the problems and failures of the business model pushed it to gradually embark on the road of Ponzi fraud. For example, the once popular P2P, long-term rental apartment projects with frequent thunderstorms in recent years, the founders of most projects did not intend to defraud at the beginning, and the investment funds and rent received by the projects were indeed invested in the operation, such as investment in For normal supply chain financial projects, or for the acquisition of moderately priced urban housing rental rights. However, due to a variety of internal and external reasons, such as fierce competition, flaws in its own business model, and deviations in its operating model, the project party began to actively or passively move towards fraud, and investing the money of investors and users in the long-term is simply unsustainable. model, or simply build a capital pool and implement a typical Ponzi with new and old to further absorb more public funds. In the end, if the project party cannot reverse this situation and return the project to a healthy business model, Ponzi cannot avoid the fate of collapse due to insufficient cash flow.

For the complete life cycle deduction of Ponzi finance, interested readers can read “An article to deduce the development and life cycle of Ponzi schemes” written by Alan, the author of the public account “Daiguan”.

The above two Ponzi development paths can also be summarized in the following figure:

Behind the tens of millions of dollars in gambling: Is Luna a Ponzi scheme?

Image source: “Ponzi Financing, Negative Interest Rates and Bitcoin | Token Watch”, public account: Daiguan

Section 2: Is Terra a Ponzi Scheme?

The author’s current conclusion is: Terra ecology has the shadow of Ponzi, but the author believes that it is too early to characterize it as a “Ponzi scheme”.

It is said that Terra has the shadow of Ponzi because it has enabled the classic behavior of Ponzi: attracting public deposits with high interest rates.

How much is Terra’s deposit subsidy on UST?

In the Terra ecosystem, the lending protocol Anchor, as a “state-owned bank”, promises an ultra-high demand yield of 19%-20% to absorb public deposits (in the form of UST). According to Coingecko data, the current total circulation of UST is 15 billion US dollars, the community pool of official funds has 2.1 billion UST, and the UST deposited in Anchor is 10.4 billion, accounting for 80.6% of the total market value of UST after deducting official funds. Most USTs come for the high interest of Anchor.

So how much does Anchor need to spend every year in order to maintain a 19%+ demand deposit income? We can do a simple calculation:

Anchor’s main income includes: loan interest + PoS reward income for loan collateral (currently bLUNA and bETH) + liquidation penalty

Anchor’s main expenses include: Deposit interest

We use the current (2022.3.17) Anchor deposit and loan amount and interest rate as the benchmark to calculate Anchor’s net expenses:

Behind the tens of millions of dollars in gambling: Is Luna a Ponzi scheme?

Anchor protocol deposit, loan and interest rate data, source: anchorprotoco 2022.3.17

Anchor’s annual net expenditure is: total income – total expenditure = (25.76*11.77%) + (42.73*7.15%) 1+ (10.47*4.8%) 2 -104.05*19.5%4=-13.7 (billion US dollars)

1 Anchor loan interest, APR please see

2 bLUNA’s staking income, see Terrastaion for APR

3 bETH staking income, see APR at

4 Anchor deposit interest, APR please see

It should be noted that, considering that Anchor itself provides high ANC token subsidies for borrowers, and Anchor is in a state of loss as a whole, in order to maintain the ANC token price, Anchor also faces additional ANC token price maintenance costs, That is, to solve the problem of selling pressure of ANC tokens.

In other words, Anchor needs to bear about 1.37 billion US dollars in annual expenses without considering the liquidation revenue, the maintenance cost of ANC token price, and the salary of team personnel.

Obviously, Anchor alone cannot afford this expense.

Just in February of this year, just as Anchor’s reserve pool was about to bottom out, Terra’s ecological fund LFG (Luna Foundation Guard) announced an allocation of 450 million UST for Anchor to replenish its reserve pool.

This confirms one point: Anchor, unlike other lending agreements, is essentially an integral part of Terra’s planned economy. Its current business operations are not for the pursuit of profit, but a subsidy for the expansion of UST with funds officially funded by Terra. The product.

The key point of Terra controversy: Can the two-wheel model of stablecoin + public chain succeed?

But just because “Terra is taking deposits with high subsidies” does not seem to be valid to say that Terra is a Ponzi scam.

Although the subsidy scale of 1.37 billion US dollars is huge, given Terra’s current market value of 30 billion+, the ecological fund has a short-term reserve of more than 3 billion US dollars, and the support of overt or covert institutions and consortiums, this expenditure will be short-term. Not unbearable.

As mentioned in the previous “Form of Ponzi Scheme”, to constitute a Ponzi scheme, either the initial objective is to defraud, and the funds raised are basically not invested in the business project it claims; Intent, but continues to invest and advertise even when its business model is already clearly fatally flawed , and to attract the public to invest in its projects or pay for its services.

Let’s first assume that Terra Labs and the real-name team behind the Terra ecosystem have no malicious intention of subjective fraud, which is different from pure encryption Ponzi scheme projects such as Bitconnect. The reason why this assumption can be made is mainly from:

The core team members use real names

The project ecology has visible growth and investment

The project is based on the public chain, and the financial information is relatively transparent and checkable (although the transparency of Terra’s on-chain data is still far from Ethereum, BnB chain, etc.)

Since its establishment, the project has received continuous attention and capital injection from well-known funds around the world

Of course, the above conditions still do not fully prove that the Terra team has no subjective intention to construct a Ponzi scheme, but greatly reduces the possibility.

If Terra is not a subjective Ponzi scheme, does it meet the second point of a Ponzi scheme: continue to invest and advertise even when its business model is already fatally flawed, and attract the public to invest in its projects or pay for its services ?

We believe that this is the key point of the current controversy, and everyone has disagreements on Terra’s public chain development model.

Supporters believe that Terra’s high-interest deposits are similar to customer acquisition and retention subsidies in the Internet field. Although there are huge losses in the early stage, from the perspective of the total life cycle of users, the current subsidy money will be detoured from the long-term ecological prosperity in the future. Opponents believe that Terra’s development model of subsidy + public chain tokens & stablecoins is difficult to form a steady state, and will eventually die in a negative spiral of a Luna price crash.

This is actually the core point of Terra founder DO kwon and encrypted KOL Sensei Algod whether the price of Luna can stand in the million-dollar bet of more than $88 in one year.

So, what is Terra’s business logic?

To put it simply, Terra is a public chain ecosystem built around stablecoins. Its business goals can be summarized into two points:

Promote the large-scale adoption of its stablecoins represented by UST, replacing centralized stablecoins such as USDT and USDC

Promote the prosperity of the Terra public chain and provide a platform for developing the Web3 economy for open finance and other applications

Regardless of whether it is a stablecoin or a public chain, project parties can benefit from its development and indirectly tax (rent-seeking), which is why stablecoins and public chains are always the most popular tracks for entrepreneurship in the crypto business field.

However, unlike most separate stablecoin projects and separate public chain projects, Terra deeply binds its own stablecoins to the public chain business. Specifically, it is reflected in:

Terra’s public chain ecology provides initial application scenarios for stable coins and solves the biggest problem of stable coins – cold start

Stablecoins such as UST need to be minted by destroying Terra’s token Luna. The larger the issuance scale of stablecoins, the larger the scale of Luna deflation, and the smaller the total supply. On the contrary, when UST is reversely redeemed for Luna, the supply of Luna will increase.

Luna is essentially an invisible collateral for stablecoins such as UST. The higher the market value of Luna relative to the stablecoin and the better the transaction depth, the more sufficient the collateral, the less the risk of de-anchoring the stablecoin, and the greater the cost of maintaining consensus. low and vice versa

Based on the above three points, we can conclude that UST is the engine of Luna, and Luna is the stabilizer of UST. When the two interact, when the trend is good, it is easy to form a positive spiral, otherwise, it is easy to fall into a death spiral.

  • Luna’s Vulnerability: Insufficient Economic Bandwidth

The robustness of Luna as the stabilizer of the Terra stablecoin system is determined by its “economic bandwidth”.

Economic bandwidth is a concept proposed by Bankless founder Ryan Sean Adams. This concept emphasizes that the key to the competition of public chains is not “TPS”, but economic bandwidth. The economic bandwidth is determined by the circulating market value, transaction depth and degree of decentralization of the public chain token. The ability to carry a larger economic ecology runs on it.

We can compare the economic bandwidth of the top public chains with market capitalization:

Behind the tens of millions of dollars in gambling: Is Luna a Ponzi scheme?

From the above table, Luna is already at the forefront of crypto assets in terms of total token market value and trading depth, and its recent trading depth has even surpassed that of BNB, which has twice the market value.

So, how does the above economic bandwidth compare to Terra’s $15 billion UST issuance scale?

We can compare DAI, which is currently second only to UST in issuance scale, with UST:

Behind the tens of millions of dollars in gambling: Is Luna a Ponzi scheme?

We found that in terms of stablecoin/collateral ratio, although UST’s 0.463 is 16.4% lower than DAI’s 0.627, it seems that LTV (lending rate) is lower and safer, but combined with the economic bandwidth concept we mentioned above, DAI The economic bandwidth of the main collateral assets of UST is much better than that of UST’s collateral assets.

Among DAI’s collateral, ETH accounts for more than 40%, followed by USDC, accounting for more than 34.4%, and then WBTC.

Behind the tens of millions of dollars in gambling: Is Luna a Ponzi scheme?

Collateral composition of DAI, source: Daistats

DAI’s comprehensive assets composed of stable coins such as ETH+WBTC+USDC have a much higher economic bandwidth (total asset market value and transaction depth) than Luna. From this perspective, the security of UST is indeed inferior to that of DAI.

However, the problem with DAI is that the assets controlled by centralized institutions account for a relatively high proportion of its collateral. Whether it is USDC or BTC’s encapsulated asset WBTC, they are guaranteed and controlled by centralized institutions. In the face of supervision, there are more obvious vulnerability.

However, if regulatory factors are excluded, and only the anti-pegging ability of stablecoins under huge market fluctuations is considered, UST is currently significantly inferior to DAI. The fundamental reason is that Luna’s economic bandwidth is insufficient.

  • Improving Economic Bandwidth: The Business Cycle of Stablecoin + Public Chain

So, how can Luna increase its economic bandwidth?

In the author’s opinion, Terra and its token Luna, like most public chains, determine its total market value and transaction depth are the breadth and depth of its consensus, and the breadth and depth of consensus is driven by the narrative, which is based on the following Layer build:

Quantitative narrative – core business data: TVL, the number of active and non-zero asset addresses on the chain, the number and value of transfers, the number of web3 projects and the number of developers, these objective data build the basic narrative of the narrative, and it is easy to compare horizontally .

Qualitative narrative – various stories and logical reasoning: For example, with the development of the Comos ecosystem, Terra’s stablecoins are easier to apply in the big ecosystem; for example, UST enters the Aave lending market, resulting in more financial scenarios, etc. .

In order to promote the narrative and build stronger economic bandwidth, Terra has built a set of self-reinforcing business models based on its stablecoin + public chain two-wheel model, in the following order:

  1. First, create DeFi scenarios in the public chain and provide subsidies (represented by Anchor), which shapes the demand for stablecoins
  2. Demand drives UST’s foundry scale and users begin to be introduced
  3. Improve the data performance of the ecology, such as TVL, number of addresses, transfer activity and the number of projects participating in the ecology
  4. Metric boost reinforces luna narrative appeal
  5. Based on the improvement of consensus and fundamentals, it is possible to promote cooperation with more leading projects
  6. Enhanced narrative and consensus, boosting Luna’s deal breadth (number and area of ​​investors) and deal depth, and progressively higher prices
  7. The actual controller obtains funds by cashing out or destroying Luna
  8. Continue to subsidize [Link 1] with cashed-out funds to promote the above cycle

In this cycle, the main expenditure link of this business model is [Link 1], and the main income link is [Link 7]. As long as the revenue of [Link 7] is enough to support [Link 1], the cycle can continue and help Terra Towards its two major business goals:

Promote the large-scale adoption of its stablecoins represented by UST, replacing centralized stablecoins such as USDT and USDC

Promote the prosperity of the Terra public chain and provide a platform for developing the Web3 economy for open finance and other applications

And the better these two goals are achieved, the lower the cost of maintaining the above cycle, the external third-party scenarios for stablecoins begin to increase, and the acceptance scope expands; more native Web3 projects and developers pour into the Terra ecosystem and build spontaneously More applications attract more users.

  • Potential risks: Where might Terra’s business loop get stuck?

The main challenge in maintaining Terra’s business cycle is that there are problems in the narrative construction process of links 3-6, that is, the maintenance cost of the Luna token price is getting higher and higher, resulting in insufficient income and funds in [Link 7] to support [Link 1] subsidy.

Possible factors causing this problem include:

Crypto asset prices collapsed. The narrative value and valuation of the entire track project have been hit hard, and the stablecoin and public chain where Terra is located have not been spared.

Unexpected events within the project (e.g. Abracadabra affected by scandal). The incident caused the price of Luna tokens to plummet and lose liquidity, which in turn triggered a potential under-collateralization of UST, leading to a death spiral that the team could do nothing about.

Regulatory shock. Regulation limits Terra’s access to more financial means to maintain the operation of the project and respond to emergencies, or regulation itself is an emergency.

The above business cycle has not actually attracted enough developers and users to enter the Terra ecosystem, the market’s narrative view of Terra has turned negative, or the current public chain value evaluation framework has undergone major changes.

If you are an investor in Luna or a holder of UST, you need to be very vigilant about the above.

  • Terra’s Response: Launches Protector Fund, Increases Non-Luna Reserve Assets

If we summarize the current core issues of Terra, there are two main ones:

As the collateral for the ecological stable currency UST, Luna is relatively fragile compared to the current UST market value of 15 billion and is still growing due to insufficient economic bandwidth.

Both the stablecoin and the Terra public chain ecology depend on its business cycle of “stablecoin subsidy – narrative and consensus strengthening – price boost – cash out \ mint profit – continue subsidy”, but this cycle may interrupted by unexpected events

Terra apparently also has a deep understanding of the above issues and has already started a series of actions, such as:

Established Luna Foundation Guard (LFG)

In January of this year, Terra established the Luna Foundation Guard (LFG), the “Luna Protector Fund”. The funds of this fund come from Terra’s official Luna grant on the one hand, and also to external institutions such as Jump Crypto and Three Arrows Capital. , Republic Capital, GSR, Tribe Capital, DeFiance Capital for financing, the financing amount is 1 billion US dollars. According to the news released by LFG on March 15 this year, its existing total reserve assets include 2.2 billion US dollars of non-Luna assets and 8 million pieces of Luna, with an estimated total value of about 3 billion US dollars. The main goal of LFG is to expand the Luna ecosystem and maintain the anchoring of stablecoins such as UST. We can understand this ecological fund as a more flexible special fund account, and Terra can use it more flexibly to deal with various business issues.

Begin to include more diverse asset classes for stablecoins to alleviate the problem of insufficient economic bandwidth in Luna

Through the LFG mentioned above, Terra began to add assets other than Luna to the reserve pool. For example, the $1 billion financing received by LFG in February this year will allocate reserves denominated in BTC. Subsequently, on March 5, LFG announced that it would burn and mint 5 million Luna in the reserve into UST worth $4.50, which will be used to buy BTC as a reserve. Just 10 days later, LFG stated that its fund committee voted to destroy another 4 million Luna minted UST to purchase exogenous reserve assets. In addition to LFG, Terra’s founder and CEO Do Kwon has been stating that he will continue to increase his BTC holdings, making Terra one of the largest holders of BTC. He said on March 14 that he would provide more than 10 billion BTC for UST. The value of BTC reserves, on March 17th, the encrypted media Cointelegraph further verified the matter with Do Kwon, asking the purpose of this part of BTC reserves, Do Kwon said that it will be used for “short-term redemption of UST and as a more decentralized asset reserve” .” Obviously, incorporating BTC into UST’s reserves and redemptions will alleviate the problem of insufficient bandwidth in Luna’s economy.

Of course, as a participant and investor in the Terra ecosystem, as well as a holder of UST, you may also need to pay attention to:

In addition to the simple work of making reserve funds for Anchor, can LFG effectively deal with more and unexpected complex situations?

Including BTC into UST’s reserves and redemptions, how does this work? Will the asset address be disclosed for community supervision?

All this still needs to be observed.

Section 3: Summary

In my opinion, Terra is not a subjective Ponzi scheme, but an ecological adventure of a group of radical and daring experimenters. The sustainability of Terra’s development model is what we should pay attention to and discuss.

Terra opens a business cycle of “stablecoin subsidy – narrative and consensus strengthening – price boost – cash out \ mint profit – continue subsidy” with the new model of stable currency + public chain. In the bull market, this cycle worked well, making it the 7th largest encrypted asset in the world in just one year, and its stablecoin UST also surpassed DAI to become the largest decentralized stablecoin by market value.

But despite this, compared to DAI’s collateral, Luna’s total market value, transaction depth, and economic bandwidth corresponding to the degree of decentralization are still insufficient, which is particularly dangerous and fragile in a bear market with a shortage of liquidity and low market sentiment. .

Therefore, investors in Luna and UST, in addition to the overall price situation of the crypto market, should also focus on the changes in UST reserve assets and redeemed assets. At present, the Terra team has begun to incorporate BTC and other crypto assets with higher economic bandwidth into the Stablecoin reserves, but implementation details have not been disclosed.

In addition, we also need to pay close attention to the actions of supervision on the Terra ecosystem, and the introduction of Terra’s business cycle to real users and developers. If the above problems are not properly handled, Terra may still face the interruption of the current business cycle and enter a negative spiral in the face of huge market fluctuations or other unexpected situations, and eventually be covered with a “new type of encryption pan” The Scam” chapter.

Whether Terra finally goes further and successfully establishes a “stablecoin + public chain” two-wheel-driven model ecology, or stranded and fails in the adventure, it provides a very good observation sample for crypto entrepreneurs and investors .

As one of the group members was discussing Luna, I saw a group friend say: “Fake it, until you make it”.

Section 4: References

Ryan Sean Adams:ETH and BTC are Economic Bandwidth

Generation Views: A Ponzi Research Series by Alan

Model currency principle analysis and prevention guide | Ponzi research

This article takes you to deduce the development and life cycle of Ponzi schemes | Ponzi Research

Ponzi Funding, Negative Rates, and Bitcoin | Token Watch

*If there are obvious facts, understandings or data errors in the above content, please give me feedback and I will revise the research report.

Research institute: Mint Ventures

Researcher: Xu Xiaopeng

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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