WBD508 Audio Transcription
Why Terra Luna Collapsed with Jonathan Wu
Release date: Wednesday 1st June
Note: the following is a transcription of my interview with Jonathan Wu. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
Jonathan Wu is head of growth at Aztec network. In this interview, we pick over what happened when the stablecoin UST crashed, how it linked to the Terra blockchain and Luna governance token, the issues with recursive lending, and the need for financial disclosure in the industry.
“The larger these stable coins are, the more adoption there is, and the more stable they’re likely to be. But then the worse and more contagious the effect is if it fails. It’s almost like you have to be really big, in order for it to be stable. But once you get that big, the cost of failure is immense.”
— Jonathan Wu
Interview Transcription
Peter McCormack: Jonathan, how are you?
Jonathan Wu: I'm doing great, Peter.
Peter McCormack: Thank you for coming to do this, because it was quite short notice.
Jonathan Wu: Of course, I'm in the neighbourhood, so it's a pleasure.
Peter McCormack: Perfect. Okay, I saw your thread about Terra, and strangely enough the whole Terra LUNA thing kind of mostly passed me by, because I mainly focus on Bitcoin. It mainly passed me by until all the news came out that they were buying a shit ton of Bitcoin. But even then, I didn't pay too much attention to it, and then I was with Pomp, I was on his show and we started to talk about it. He explained it to me, and there was just something about it that felt a little bit Block.one, a little bit shady, a little bit like someone's found a way for them to accumulate a load of Bitcoin. But I had no idea that the fundamentals of the algorithm for their stablecoin were completely broken.
The reason I care about this a lot is because I spend a lot of time with Alex Gladstein, I talk to him a lot, and whilst people want to promote Bitcoin to those living under high inflation or under authoritarian rule, he actually says that stablecoins are actually a better tool for people in these regions; they need price stability, especially if they are generally cash poor, they don't need a fluctuating asset. So, I accept stablecoins are useful and important.
But at the same time, if there are stablecoins designed in a way that are super-risky, I mean we know with this Terra situation and LUNA, a lot of people have lost a lot of money; so, if they're super-risky, I think it's really important for us to understand which stablecoins are best and why. So, there's the setup, but before we get in it, can you just introduce yourself, because I'm not sure if everyone will know who you are?
Jonathan Wu: For sure. John Wu, I am Head of Growth at Aztec Network. Aztec Network is a private ZK rollup on Ethereum, so I'm in the Ethereum ecosystem. I came up in the world, TradFi guy, very suited, was a management consultant, worked in private equity, I went to Harvard Business School. Not the typical anti-institutional rebel-with-a-cause type person who gets into crypto, but I really fell into the rabbit hole, because I had a couple of friends from 2018 who were investing, and they said, "Maybe you didn't really understand Bitcoin when you bought it and sold it for a loss in 2013", I had that story like many others, "but you might be interested in this decentralised finance thing; you know, you come from a TradFi background".
So, I began by studying Uniswap, the world's largest decentralised exchange. I was lucky enough to work there very, very briefly in business development, and I just really fell down the rabbit hole, specifically around permissionless finance, and that's what got me interested in the space. And, I decided to work on privacy infrastructure, because the space being very values-oriented, one of the things that we need going forward is privacy. If we're ever going to get to self-sovereignty and financial independence, I think privacy is a critical part of it.
But I've kept up with the entire space, and specifically stablecoins, because I've been so interested in stablecoin mechanisms for a long time. So, yeah, I've been covering this stuff for over a year now.
Peter McCormack: And, are you still a Bitcoin person?
Jonathan Wu: Yeah, I own Bitcoin. I wouldn't say I'm a Bitcoin maxi by any means, I work in the Ethereum ecosystem. I think the amount of impact that crypto has to offer for the world requires more programmability, but maybe for later in the cast.
Peter McCormack: Yeah. I mean, it's a Bitcoin show. Occasionally, I have Lane Rettig on the show, a couple of times.
Jonathan Wu: Yeah, Lane's a friend.
Peter McCormack: Yeah, great guy. I'm probably going to see him this week. I like talking to him about alternative currencies, because I think he's very honest. He's very honest about the situation with Ethereum, or any other alternative protocol. And whilst it's a Bitcoin show, and I am probably kind of a Bitcoin maxi, I don't mind Monero, I'm not as hateful on ETH as I used to be in that, again, I'm trying to understand stablecoins. It feels to me that they're best placed on other protocols. On the Bitcoin protocol, I know we had Tether on the Omni layer before, but that had certain issues with it. I'm mainly out of my depth with this stuff.
But at the same time, if there are products out there that people can access and use and that means they can access dollars, I certainly need to pay attention to it, be aware of it, appreciate what it is. But we can debate Ethereum another day. I definitely want to get into the whole Terra LUNA thing, because I thought your thread was brilliant; we'll share it in the show notes, let people read it.
Jonathan Wu: I appreciate it.
Peter McCormack: But two things stood out to me. As I was going through I was like, "Oh God, I've got so many questions". And secondly, most people in the world I don't think want to have to understand the complexities of these products and these algorithms to be able to hold a dollar, so for me in its simplest form, a fully-backed dollar is probably one of the best scenarios, as long as you know it's backed, and I know there are questions around that. These algorithmic stablecoins seem to have some fundamental issues.
Now, if we're going to design new dollars, they need to be stable; and calling them stablecoins, when they can crash and lose tens of billions of dollars in a very short amount of time, is very scary. Also, to be honest, I've read a lot of stories about people who've been completed fucked by this.
Jonathan Wu: The human toll is unimaginable.
Peter McCormack: I mean, you must have read some of it as well.
Jonathan Wu: Oh my God, yeah, awful.
Peter McCormack: I also think the behaviour of Do Kwon was particularly overconfident, and I don't like the idea of there being a LUNA 2.0. But we can get into all of that. Do the whole, explain like I'm five, let's talk about -- I want to get into what Terra and LUNA are and were and why they were fundamentally broken.
Jonathan Wu: Yeah. It might be helpful to just walk through the day I wrote the thread. So, that was Monday. Boy, now I'm forgetting the actual day date, but that was Monday.
Peter McCormack: Two weeks ago, right?
Jonathan Wu: Two weeks ago. And I have a day job, and I was watching the depeg happen in real time, and I was like, "Wow, nobody is covering why this happened". I had done a bunch of research on LUNA around the Abracadabra crash that we can get into, back in February, and I had covered IRON, TITAN and FEY and some other stablecoin failures, or stablecoin issues. So, I was kind of well-positioned to cover it. I started digging in and I realised this was an algo failure like any other.
So, it's worth talking about what Terra is. Terra purported to be a network to support an ecosystem of stable currencies. They actually had a bunch of real-world use and adoption. There's this Korean payments application, called CHAI, that's like Venmo for Korea; they had adopted UST. The point of the network was to facilitate transactions in stablecoins, specifically their flagship stablecoin, UST, which is a dollar-pegged, undercollateralised, algorithmic stable. It's worth just breaking out a couple of those things.
Peter McCormack: Undercollateralised already concerns me.
Jonathan Wu: So, let's start with "undercollateralised", which means there's no "hard collateral" for every dollar of UST in circulation. So, a hard collateralised protocol would be something like MakerDAO, which you might have heard of, where one Dai is collateralised by more than a dollar of volatile cryptocurrency. And it's more than a dollar, because the underlying collateral is volatile. So, if you just had a dollar, well you could quickly become undercollateralised if the volatile collateral slipped. So, UST was undercollateralised. For a long time, it had zero "hard collateral", so it was only collateralised by LUNA and we'll get to that dynamic in a little bit.
The second word is "algorithmic". So, algorithmic just means smart contracts govern the pegging mechanism to make it stable. The third word is "stable currency", which means that it should be low volatility. There are higher volatility stable currencies out there, but in general you want it to be pegged as closely as possible to the reference currency; and in this case, the reference currency is the US dollar. So, that is what UST was purported to be.
Now, the way I analogise UST, the relationship between UST, which is the dollar-pegged stable, and LUNA, which is the governance token and security token of the network, is to use a TradFi analogy. And the traditional finance analogy I would make is something like a Visa network which has two predominant securities. One is Visa equity, which we're all familiar with, and Visa equity gives you ownership in the network and gives you a claim on a share of the network revenue. That is fundamentally what equity is. Then, imagine a Visa also had VisaCoin, which was essentially a coin pegged to the US dollar, and Visa's promise to you is the way that VisaCoin has value is, any time you want to exchange VisaCoin, we'll give you $1 worth of Visa's equity.
Peter McCormack: Okay.
Jonathan Wu: So, if Visa's stock were at $10, for instance, and I wanted to exchange 1 VisaCoin, I would get one-tenth of a share of Visa back. So, it's just like UST/LUNA, it's not hard collateralised, it's this kind of circular thing where the currency on the network is backed by an ownership share of the network.
Peter McCormack: Okay, I'm following you.
Jonathan Wu: So, that's roughly the way that it worked. So the question is, why would anyone want to use VisaCoin, or to go back to the LUNA case, why would anyone want to use UST? You need it to gain wide adoption. The reason why people were incentivised to use UST was they paid you 20% per year through something called Anchor protocol to hold it.
Peter McCormack: This was my first red flag. It's quite a high interest rate.
Jonathan Wu: Right. Now, Anchor protocol launched at a time when there were three-figure yield farms, 100%, 200%. So, 20%, it's hard to believe now that we're in kind of a bear market, seemed like a very reasonable rate at the time.
Peter McCormack: Can we go back a step here? How can any yield farm generate 100% in returns; how are they doing this? Again, I know little about yield farms, but the little I do know is that some of them, they work until the rug pull happens and then they collapse.
Jonathan Wu: I don't think that's a horrible mental model! I would think of it like, yield farms are created -- the high APRs are created by inflationary rewards. And inflationary rewards, again to analogise the traditional finance, means I'm handing out equity. Now, imagine if you invested in a business that said, "If you do something that benefits the business, we'll issue you a bunch of share-based compensation; we'll give you more shares in the underlying company. So, if you do something that helps Visa Network, we'll just give you more Visa equity".
Now, at today's dollar rate, at today's dollar valuation of Visa equity, that seems like I'm making a lot of money. Now, is that sustainable? You have to ask yourself whether the inflation rate of the equity is sustainable.
Peter McCormack: Probably not.
Jonathan Wu: So, it's not clear, but we haven't seen very sustainable yield farming strategies, because extremely high inflation is not sustainable. You can't prop up the value of the underlying, and emit a large quantity of it into the circulating supply for ever; it's probably not going to happen.
Peter McCormack: So, when these happen and these yield farms collapse, who are the losers? Is it a game of chicken?
Jonathan Wu: Yeah, I would say it is a game of chicken, but no different from any other marketplace. When Saas multiples collapsed over the last couple of months and the likes of Pelaton and Zoom and Snap all went down 80%, 90%, who were the bag-holders? The people who didn't quite realise that multiples would contract. Now, this is maybe a slightly different case. You could say that high emissions are destined to bring prices down; I wouldn't necessarily argue against that.
Peter McCormack: I mean, I would say the difference with something like Pelaton is that it was a company that produced a product, has a revenue model, that hopefully would deliver dividends at some point; and sadly, what happened is the business couldn't keep up with the growth trajectory, and therefore it eventually collapsed and collapsed quickly. They obviously had some other internal issues. I see the comparisons, but what I find with these crypto products is they don't tend to have an actual product itself.
Jonathan Wu: So, it's worth talking about the circularity in the context of LUNA UST. The dream with Terra LUNA was, the more UST is adopted, the more transactions happen on the network. And just like Visa, the more transactions happen on the network, the more the network processors, in this case the network validators, the ones that are actually executing the transactions, get in terms of fees. And the more they get in terms of fees, the more fundamental value LUNA should have.
Peter McCormack: Hold on, would it be actually fair, in some ways, to compare this to almost the bootstrapping of Bitcoin, because Bitcoin had an inflation rate in some ways?
Jonathan Wu: Yeah.
Peter McCormack: But Bitcoin has managed to sustain its price with new people adopting Bitcoin at a rate that has generally outperformed the inflation rate of Bitcoin. But Bitcoin had a decreasing inflation rate.
Jonathan Wu: Yes, I think that's a very reasonable way to think about it. Anchor protocol, which is essentially the high-yield savings account of LUNA UST, was meant to be an initial bootstrapping phase. Now it didn't, if you really think about it, last all that long. And so, yeah, the 20% sounds like a lot. Let's say at the peak, I believe, the circulation of UST was 15 billion, and something like 70%, so let's call it 10 billion, was staked, and they were giving away 20% a year, so they were giving away $2 billion a year to get people to adopt this thing.
Now, that sounds nominally like a really high number, but LUNA's market cap was something like $60 billion. So, one of the things they were doing was liquidating the LUNA token to put into the Anchor protocol reserve to pay out this high APR rate. And, one mechanism we actually haven't touched on yet is the redemption between LUNA and UST. You can always redeem 1 UST for $1 of LUNA, and that would be burning a UST and then minting $1 worth of LUNA. And so, the supplies of UST and LUNA are inversely related, so the more UST there is, the less LUNA there is. So, LUNA must be burned to create UST and when UST is redeemed, it goes back into LUNA. So, that's the relationship between those two tokens.
The idea with Anchor protocol was, if everyone believes in LUNA, then the price of LUNA goes up. Then, if 1 LUNA is worth a lot, it can be burned to mint a ton of UST. It can also be sold into the open market and fill up the Anchor protocol reserve to pay out UST holders. So, there's this really great reflexive upcycle where, when the number goes up, the supply of UST goes up, LUNA gets sold to fill up the Anchor protocol reserve, all the UST holders get a sustainable 20% on their income; the LUNA supply goes down, which further compresses the price upward, because you're burning supply, and for the same level of demand the price of LUNA should go up.
So, there's this really amazing reflexive upcycle that you can imagine might get you to extremely wide UST adoption. And if UST is adopted very widely and used commonly between people; let's say we went to Five Leaves today and you got a burger and I paid for it and you Venmo'd me in UST and we were used to using UST in our day-to-day, then there's really no reason to exit. At some point, UST becomes as good as money to you; that was really the goal.
Peter McCormack: Right, okay. But…!
Jonathan Wu: But now, in this specific failure case, it's worth rewinding back to February. Back in February, there was this entire ecosystem headed up by this guy, Daniele Sesta, who's an Ethereum developer; not Ethereum, Core developer, but a developer on the Ethereum ecosystem and others, who created a lending protocol called Abracadabra. Now, off the bat it's called Abracadabra and their stable currency was called Magic Internet Money, so I'll leave you and the listeners to make whatever assumptions about that as you will, but it was a very legitimate protocol in terms of the mechanism.
Without getting too deep in the weeds, it was a lending protocol. It allowed you to commit collateral and then mint a stablecoin. So, that's not very different if you're familiar with MakerDAO, where you get to put down volatile underlying and then mint a stable loan against it. And if the underlying goes below a certain level, then your position gets liquidated and your collateral gets taken; so a kind of standard lending protocol. But what Abracadabra allowed you to do was recursively borrow MIM, swap it for UST, stake it in Anchor protocol, turn it into a staking token called AUST, and then put it back into Abracadabra as collateral, and then mint more MIM and repeat the cycle.
Peter McCormack: Okay.
Jonathan Wu: Now, the most important takeaway of this recursive lending thing is that allows you to access extremely high leverage, so you run the recursive loop a couple of times, and your 20% APR in Anchor, as long as you can borrow money at less than 20%, becomes much bigger than 20%. So, in this degen box strategy, people were able to yield 100% APRs.
The problem is, there's a lot of leverage in that system now, and that increases the sensitivity of your lending position to the underlying collateral. And, because the collateral was UST-denominated, people were lulled into a false sense of security. They were like, "The underlying collateral is stable collateral, so as long as UST holds peg, we're good". The problem is, in that case, UST didn't hold peg, because there was a bit of a panic and people sold a bunch of UST and it pushed the price of UST down, and it started liquidating lending positions.
Peter McCormack: How much did it lose its peg by that time?
Jonathan Wu: At that time, I believe it lost its peg by 8%, so it got down to like 92 cents. I'll have to double-check my facts on that, but I believe it got down to 92 cents.
Peter McCormack: So, not good, but not catastrophic?
Jonathan Wu: Not catastrophic, unless you have something like a 92% levered UST position that's really sensitive to the price of the underlying. The problem with these recursive lending things is, once collateral starts getting liquidated, the collateral I'll remind you in this case is UST-denominated, so more UST gets dumped on the open market and drops the price of UST further, which then liquidates more; and that creates this liquidation --
Peter McCormack: Like a contagion effect.
Jonathan Wu: Exactly. Now, because of the way UST works, when UST is below peg, you can always get $1 worth of LUNA for it. So, if UST is at 92 cents, you can always redeem this thing that's only worth 92 cents, and get something that's worth $1; $1 of LUNA.
Peter McCormack: Hold on, so there's another cycle you can perform there to arbitrage?
Jonathan Wu: There's always that redemption mechanism between UST and LUNA. You can always redeem 1 UST, regardless of what its market value is, for $1 of LUNA.
Peter McCormack: But could you then buy $100 of UST at an 8% discount, redeem that for $100 of LUNA, sell LUNA on the open market?
Jonathan Wu: Yes, that's exactly what they're hoping you will do. And the reason why that's part of the peg stability mechanism is because you purchasing UST on the open market increases the demand, and it should bring it back up to $1.
Peter McCormack: Oh, okay, I see. So, the arb itself closes itself.
Jonathan Wu: It should close itself. The hard part about it closing itself, let's talk about the second part. You buy a bunch of UST, which supports the UST price, and you redeem it for LUNA; but then, what do you do with that LUNA? You dump it immediately, because you want to make sure you get your 8 cent arb, you don't want to hold LUNA while it's falling. But the more people do that, the lower the price of LUNA goes. And the lower the price of LUNA, the more LUNA has to be created in order to support UST redemptions.
Peter McCormack: Which creates the inflation.
Jonathan Wu: And that creates this runaway, what people call the death spiral effect, which is what we saw a couple of Mondays again and sent LUNA essentially to zero. I think it's hovering around 13-millionths of a cent, or something like that. There are many zeros in front of the first significant figure in its value. So, yeah, that is the death cycle.
So, this happened in February and sent LUNA prices crashing down, and I think the LUNA Foundation Guard, now it's important to introduce this other entity; the LUNA Foundation Guard is essentially the central treasury entity of the LUNA Network. So, this is Do Kwon and a bunch of network insiders who have LUNA in the treasury for creating the protocol.
Peter McCormack: A premine?
Jonathan Wu: Like a premine.
Peter McCormack: Like a premine. But do they own it, or does the treasury own it; as in, does an entity own it, or do they individually own it?
Jonathan Wu: It's an entity that has a number of -- it's essentially a board that governs this gigantic pot of LUNA.
Peter McCormack: But do they hold it for the benefit of LUNA?
Jonathan Wu: Yes, so they hold it for the benefit of the LUNA Network. But they ultimately had discretion over the way the funds were spent.
Peter McCormack: Do we know how many people were on this board?
Jonathan Wu: At the time, I believe it was seven, about seven folks, but really it was gathered at Do Kwon's discretion; it was really under Do Kwon's control. So, you've got this central entity and they saw what happened to LUNA price, because of this death spiral effect in Abracadabra in February, and they said, "It's not so great that UST gets redeemed for LUNA and it can initiate a death spiral at any time". A large UST sell event, or a recursive leverage unwinding can really just de-peg UST and then send LUNA crashing down.
Once the train leaves the station, it's really hard to stop. The momentum of this death spiral is, buy UST, redeem it for LUNA, dump LUNA; LUNA's price starts crashing down and every incremental UST that gets redeemed sends LUNA price even further down. So, it's really scary, and recall that you need LUNA price to be high for a lot of different reasons. But one of the reasons you really need it to be high is because you need to sell it to fund the Anchor protocol reserve.
Peter McCormack: Do you need it to be high, or do you need it to be growing in value?
Jonathan Wu: You need it to be high and growing in value. So, the directionality is also really important. In an ideal world, it kind of increases in value slowly over time, and the system strengthens step by step. What you don't necessarily want is what happened over the course of the last few months, where the LUNA price spiked super-super-high, a bunch of UST was redeemed, or LUNA was burned for UST at a very high value; the supply of UST grows and then what is UST? UST is essentially a claim on LUNA.
So, you've printed a bunch of claims on LUNA while LUNA is at a very high price; then when LUNA starts coming down, you have all these outstanding claims, but not enough LUNA to pay it back.
Peter McCormack: Okay.
Jonathan Wu: So, very complex, lots of complexity. But let's talk about Bitcoin.
Peter McCormack: But that's an issue in itself, because like I say, interestingly, I've never used a stablecoin, funnily enough. Never used one, never had a need for one. I use the pound and I buy Bitcoin, but I fully understand why people would, like I say, use a stablecoin in certain jurisdictions and if somebody asked me, I would say, "Yeah, you should use them". If they asked me which one, well, I know about Tether. Dai seems to have, up until recently, remained fairly stable. UST was growing in popularity, I didn't know anything about it, but now I'm scared to recommend anything without knowing everything about it, but I don't have the time to learn this. And it's not even just the case of learning, it's very complex and there are unknown unknowns.
Jonathan Wu: It is incredibly complex. I think this is where I'll maybe say something unpopular that I've been beating the drum on. The industry needs disclosure. The industry needs norms of disclosure. We need to all look around the table and say, "We need to disclose risks to investors in a really upfront way".
Peter McCormack: I mean, that's what the SEC prefers people to do, and I know it's not popular, certainly in Bitcoin, in crypto world, to have centralised entities providing any form of protection. But that's the role of the SEC, to protect people in scenarios like this.
Jonathan Wu: Now, why do we hate the SEC? I think that's worth talking about, right.
Peter McCormack: Yeah.
Jonathan Wu: "Well, John, if not disclosure, why not SEC?" The SEC enforces disclosure; why not give it to them? Because I think there's a very reasonable pushback that the SEC doesn't know what they're talking about.
Peter McCormack: I think that's very reasonable!
Jonathan Wu: And they're not educated, and they could require disclosures that are immaterial or onerous, and that's why I'm a proponent for proactive disclosure.
Peter McCormack: Self-regulation.
Jonathan Wu: Yeah. I'm not saying that's the silver bullet, I'm not saying, "We're going to get to a place where nobody gets rugged", but everyone should be able to at least see something like a 10-K when they explore a protocol.
Peter McCormack: What's a 10-K?
Jonathan Wu: A 10-K is the SEC's mandated public, annual disclosure, shareholder disclosure, for publicly-listed equities.
Peter McCormack: Well, one of the big fears that bitcoiners have is an exchange doing what happened with Mt. Gox again, all losing their Bitcoin.
Jonathan Wu: Sure.
Peter McCormack: And, Kraken has a proof of reserve; I'm pretty sure they did the whole proof of reserves and you can check their reserve status. That is, I guess, their version of a 10-K, in some ways?
Jonathan Wu: Yes, it's something like that, but there's more to a 10-K. There's discussion of risk, there are public financials, like the financial health of the organisation; there's what's called MD&A, which is Management Discussion and Analysis, which is, "Here are the insiders' takes on how the business is doing and where it's going".
Peter McCormack: MDMA?!
Jonathan Wu: Something like that! It's just a way to create a norm of transparency, and everyone of course is bound by this centrally, legally-structured incentive, where everyone has to be a fiduciary. The management has to be a fiduciary to shareholders, which means that they have a legal obligation, and in fact a criminally enforced legal obligation, to disclose things. I'm not calling for that, but I don't think it's beyond the pale to say, "Legitimate protocols should be really upfront about the failure case, and people should not have to spend many, many hours on a weekend figuring out what the tail risk is of putting $1 in a savings account".
Peter McCormack: And to be honest, in fairness, some of them wouldn't be able to figure it out. These things are complicated. I mean, I've had you sat here opposite me explaining it on a one-on-one, and there are still bits I'm going, "I still don't understand that, what the fuck are you on about?" So, it's a lot for people to expect. And I guess also, these risks change. Was this a known risk prior to Abracadabra; or is it after Abracadabra it was like, "Oh, shit, we have this new risk that we weren't aware of"?
Jonathan Wu: That introduced a new risk, and that's the thing about permissionless markets, is human creativity is unbounded and where there's money, people are going to want more of it. So, the Abracadabra event was a kind of unforeseen event, and then what happened with the Bitcoin Treasury was an unforeseen event. So, yeah, it's almost impossible to know, because we're on the frontier of financial innovation here. But that's why, in my opinion, it's ever more important to disclose the risks, and people shouldn't see a stablecoin as being as trusted as the US dollar.
That being said, I don't necessarily think the US dollar is a great comparison for these monetary experiments, because let's think about the US dollar. The US dollar was on the gold standard for hundreds of years before it was lifted in the early 20th century. That's not really a long time for a thing to make its way into culture and adoption. Imagine, for generations, people have been using a currency. Your mother and your mother's mother and your mother's mother's mother all used US dollars. There are many other monetary experiments that have failed: Zimbabwe and the Weimar Republic and Venezuela.
So, I'm not saying that we shouldn't be really careful here, and deliberate about how we experiment with finance, but there are many other failed monetary experiments in human history. DeFi is not the first domain for trying to figure out how to create currency and money.
Peter McCormack: I mean, it's not even just money; it's tech. There are many failed experiments at a VC level. I mean the traditional, what is it? They make ten investments; one will break even and one should make back everything. They get one Facebook or Instagram or Snapchat. In all of those, I think what's happening is, with these projects and with these crypto protocols, it was Jill Carlson who said -- she's changed her name, she's got married; but she said this to me a long time ago, "These protocols are essentially IPO'ing at seed stage".
Jonathan Wu: Yeah, that's right.
Peter McCormack: That's essentially what's happening, and where venture capitalists have a long history of analysing risk and studying founders and monitoring them, perhaps having somebody on the board and keeping a close eye on their investments and having follow-up rounds if they're successful, etc; that risk has now, in some ways, the VC's are taking a very, very early bet, and that's almost like a pre-seed stage really. And the seed and the IPOs happen at the same time, and all the risk is now being put onto the millions of crypto investors around the world.
What I've noticed is that a lot of these VCs are actually getting to exit prior to the collapse of some of these ideas that are just unworkable. I mean, Pantera, I don't hold it against them, but what was it, $1.7 million they put in and they walked away with $170 million?
Jonathan Wu: Yeah, I saw that excerpt in The New York Times, yeah.
Peter McCormack: I mean, congratulations to them, but who are the losers for that to happen, who are these inexperienced investors who aren't ready for this?
Jonathan Wu: I don't think we talk enough about -- you're touching on a couple of themes here. One is, markets are adversarial. Don't think for a second someone's not trying to make a buck off of you. And so, when we say -- that's why stablecoins have this special type of danger, where you think that there's no failure mode, but actually it belongs in the extremely adversarial, permissionless, global tech and financial ecosystem that we call DeFi. People are trying to make it fail, people are trying to make a buck.
I think the other thing that you're touching on here is that, as systems get a lot more complex, there is inherently more trust. There is inherently going to be more of a need for intermediaries. The beauty of Bitcoin is the trustlessness is kind of okay, because it's so simple, it's really easy to audit. As you build more and more complex, interconnected ecosystems, you begin to introduce trust, you being to introduce trusting the smart contract dev, the auditor, the person who holds the keys to the multi-signature wallet. You begin to trust me, you begin to trust some random guy on Twitter to have done the correct analysis and help you understand that, "Hey, there is this failure mode. It may happen, it may not happen", and who's to say I don't have financial incentives?
Peter McCormack: Yeah, look, that's a really fair point, and even bitcoiners aren't completely trustless. I had a conversation recently with Adam Back related to the CTV BIP 119 -- is that the correct name -- upgrade recently. And I said, "I base my decision, Adam, on trusting people like you and your opinions. I'm not a techy, I'm not a cryptographer. When people are discussing a BIP, I can read the BIP. Do I understand if it's technically a good idea? Probably not. Do I understand whether there's good social consensus around this? Probably a little bit, I can do a little bit more there. But in the end if you, Adam Back, say this is a bad idea, I'm like, 'It's probably a bad idea', because over the last five years, you have become somebody I trust, because I can't make these decisions myself".
What does Greg Maxwell say? What does Andrew Poelstra say? I trust Jeremy Rubin a certain amount, I think he's a great guy, but I trust him a bit less because he hasn't built that trust model. So, trust exists, so nothing is fully trustless.
Jonathan Wu: Yeah, I think that's right. And I was just thinking the other day, do we really want to have an unintermediated relationship with all the products that we use? I was just out in Brooklyn yesterday at Elsewhere leaning against a railing, and I was like, "How many people do I have to trust going back in the supply chain to know this isn't going to collapse under me and I'll fall to my death?" Some guy in China extruding a metal pipe, some iron ore worker, some regulator, some guy who's underpaid on the New York Metropolitan staff inspecting this railing.
Our whole world view is built on trust. The question is, where do we grant it and where do we not grant it, and one of the things, again I'll beat this drum, that we can do as an industry, is start to build that trust by proactively disclosing, by saying, "Here are the risks", by engaging in that discussion publicly. Now Do Kwon is a pretty flagrant example of not doing that, because undercollateralised stablecoins are, on some level, faith-based, just like the US dollar is faith-based.
There are really strong reasons the US dollar keeps its value, not least of which is the threat of violence by the US Military, but some of these things that can fail in tail cases, they are faith-based. That's why Do Kwon was very, I don't know what the right word is; really outspoken about the fact that it would never fail.
Peter McCormack: I think you make a fair point that these things are different products from the dollar. Whilst they're dollar-pegged, they're different products. I mean, the dollar can fail, currencies have failed, and it can fail for the same reason; the reason there's high inflation -- not the only reason, we have to be clear about this, because some people think the high inflation rate is just because the US has printed a whole bunch of money. It's not just because of that; there are other reasons why you get inflation, prices go up. But generally speaking, if you print more dollars, you're going to have inflation and your dollars are going to be worth less.
What happened with Terra and LUNA is an extreme version of that, but they're almost like dollar derivatives in some way.
Jonathan Wu: Yeah, for sure. I think in all of this, the dollar has kept its primacy. One of the things we forget is that stablecoins are also pegged to dollars and they are experiencing price inflation, if you live in the United States.
Peter McCormack: Yeah. Is there any part of that Terra LUNA bit we've not covered yet?
Jonathan Wu: We didn't talk about the role of Bitcoin.
Peter McCormack: Yes, please, talk about that, because that was one of the things that I thought was -- I never jumped on that train of supporting this when I heard they were buying. Normally as a bitcoiner, when you hear about Tesla buying Bitcoin, that's a super-cool thing, "I love this, Elon Musk is getting behind Bitcoin, Tesla is holding Bitcoin, that's a super-cool thing".
When I heard about this, I think Do Kwon came out and said he's going to buy $10 billion of Bitcoin, or something, and I couldn't jump on it and I didn't understand it. But at the same time, everything I read about it and what Pomp explained to me, I was like, "This sounds extremely risky". When I see MicroStrategy buying Bitcoin I'm like, "They're probably not going to sell that for a very long time, if they ever will". With this, I was like, "Is this going to add even more volatility in?"
Jonathan Wu: Sure.
Peter McCormack: I wasn't predicting the extremity of what happened, but…
Jonathan Wu: A lot of people were bullish on it, because they were converting LUNA into hard collateral. So before, it's UST on one side and you've got LUNA, which is remember kind of equity in the network on the other. And there's this immediately accessible death spiral and they were like, "Man, that didn't go well in February. We need some hard collateral, so let's swap some LUNA for Bitcoin, and it's not going to be fully collateralised, because there's not enough liquidity in the world to support selling all of LUNA's market cap back in UST, but let's sell $3 billion of it, let's make UST 20% collateralised by Bitcoin".
There are a couple of things that seem a little fishy about this. One is, it kind of reeks of an exit. You're selling your equity, you're selling the equity in the network for hard collateral.
Peter McCormack: Well, that's why I compared it with Block.one.
Jonathan Wu: I'm actually not familiar with Block.one.
Peter McCormack: That was EOS, where they ran the year-long ICO and ended up accumulating 120,000 Bitcoin, or something or other. It just kind of smelt a bit similar. They found a way of printing Bitcoin.
Jonathan Wu: Take a thing whose value is uncertain and trade it for a thing whose value is more certain.
Peter McCormack: Yeah.
Jonathan Wu: Okay, but there's also good stability reason to hold hard collateral, which is it helps give a different escape path from UST. Before the Bitcoin thing, the only way to escape from UST was to redeem it for LUNA, which initiates the death spiral, like we talked about. But once you have Bitcoin in the system, then you can redeem UST for Bitcoin, and that doesn't initiate the death spiral, so it gives you this 20% cushion, where if 20% of people are redeeming, they'll get Bitcoin instead of LUNA, and LUNA's price can remain high.
Peter McCormack: Was that an optional thing; or, if you redeemed $1 of UST, you got 20 cents of Bitcoin and 80 cents of LUNA? Is that actually what happened?
Jonathan Wu: It's not actually what happened. In reality, it was the LUNA Foundation Guard's discretion to convert Bitcoin, to use their Bitcoin reserves to prop up the UST price.
Peter McCormack: Right, okay.
Jonathan Wu: So, rather than the UST price being propped up by LUNA, they could dump a bunch of Bitcoin onto the open market and keep the price of UST high and close to the peg. Now, maybe the outcome here is obvious, but once UST de-pegged, they had to sell all their Bitcoin, to your point.
Peter McCormack: And it still failed.
Jonathan Wu: And it still failed. Well, a couple of things happened. Number one, it tanked the price of Bitcoin, so it wasn't good for Bitcoin holders.
Peter McCormack: And also, their average sell price was way below -- I mean, weren't they buying over $40,000 at one point?
Jonathan Wu: Yes. So, the market actually had anticipated, once UST de-pegged, this failure mode, and the Bitcoin markets were already plummeting in advance of LUNA's sell pressure, because they saw that LUNA had all this Bitcoin reserve that they had to use to prop up the UST price. So ultimately, they burned through all their Bitcoin reserves; the amount of demand wanting to get out of the system was too great even for the amount of Bitcoin reserve; and the problem with having a volatile collateral is kind of obvious. When you sell the volatile collateral to cover your outstanding debts, the value of the collateral is dropping as you're selling it.
Peter McCormack: You see, one of the things I thought, it was so obvious it was failing, why didn't they just hold onto their Bitcoin and let it fail? At least there would be a pot of a valuable asset that they could either redistribute to investors, I mean maybe they didn't expect it to fail so badly, but maybe people would have got 20% back, rather than close to zero.
Jonathan Wu: I think it's very hard to know. They had this last-minute Hail Mary, where there's a universe in which they could have saved themselves. They distributed the Bitcoin to some of their investors, who are market makers, as a loan and so they didn't technically sell it, they just collateralised their own Bitcoin again to their market makers. So, they lent the money back out to market makers, and there was a universe in which if the peg had held, they could have repaid their Bitcoin loans at a lower basis, and they could have made out okay.
But I also think there was just faith. UST had survived crazy amounts of attacks like this historically, and I think everyone in the system had faith that it was robust and that it was going to hold, and here's a thing with these kinds of long-tail failure modes: it's not over until it's over; it doesn't fail until it fails. So, they had survived eight de-pegging events, or something like that previously, and they just thought this time wasn't any different.
Peter McCormack: Yeah. One of the other things that really stands out for me with this is that, they're essentially trying to find product market fit, but with a product or a network that's worth tens of billions. Really, usually when you're building tech products, the product market fits. It's usually done, you test with an audience of, depending on the product, maybe hundreds, maybe thousands and then you scale up. But with these products, you're essentially, just because it's a free and open market and anyone can get involved, these can scale up to tens of billions in value.
Jonathan Wu: I think you're pointing out something pretty interesting here, which is the larger these stablecoins are, the more adoption there is, the more stable they're likely to be; but then, the worse and more contagious the effect is if it fails. It's almost like you have to be really big in order for it to be stable; but once you get that big, the cost of failure is immense.
Peter McCormack: There's also this industrywide reputational issue that comes from it. We've seen attacks on crypto broadly, therefore that's an attack on Bitcoin because of this. The amount of calls or emails I've fielded from people saying, "I heard Bitcoin's crashing because of some stablecoin". I was fielding questions for about a week from people saying, "It's all over", etc. People had conflated LUNA with Bitcoin and said, "Bitcoin has crashed. I heard loads of people…" I had to field all these things, which is just fucking annoying; it's just annoying.
Jonathan Wu: Well, you see the headline, "LUNA $60 billion market cap goes to zero", and the lay person says, "I knew it, crypto's a scam". It reinforces that notion in their head. Is that good for us? There's this idea of the lemon problem, where if you're unregulated or you don't self-police, you let these things happen, legitimate investors are going to be like, "There's a really high probability of me landing on a lemon. I'm going to invest in something and it's just going to be another LUNA".
We don't want that. We want people to be able to distinguish good investments from bad, and we want legitimate, highly-capitalised investors to look at the space with legitimacy. We don't want them to walk away or write off the entire space as this ecosystem of scams. So, just to beat the drum again, I think we need to disclose risks, we need to be proactive about saying, "Hey, anyone who doesn't follow the standard disclosure maybe is hiding something", I don't know.
Peter McCormack: Yeah, but this is where it comes back to that thing where I think some of the large capital investors are benefiting from this kind of crypto product structure. Like I say, with most VCs traditionally, they invest in a bunch of ideas and they get one or two winners out of whatever number of investments, and that pays for itself. Now, they've completely put the risk of their investments onto retail. Some would argue they do that anyway, because most of the things like Snap or whatever tend to drop in price, or Uber, one they've hit market; Coinbase is similar.
But anyway, the point being is that they get into IPO at seed stage, I mean Multicoin made a huge amount of money on Solana, and arguably a lot of these things still don't have product market fit.
Jonathan Wu: Sure.
Peter McCormack: So, they get to get the early-stage investment, they get to get the expansion as it gets put out to retail, their whatever you want to call it, their premine, what do you call it, their early investor tokens? Whatever it is. But the risk is put onto everyone else and the impact is catastrophic on some people's lives. I mean, the LUNA Reddit page that day after was like, I think about five of the top eight posts were discussing suicide. It's like, "What the fuck?"
Jonathan Wu: Again, the human toll is totally incalculable to me. In addition to the lack of standard disclosure, there's also a lack of standard valuation. The reason why a 10-K is so effective is because we have this really standard way of describing traditional businesses. There's revenue, there's cost of goods, there's operating expenses, there's net income, there are taxes. We can read a standard income statement and roughly assess the quality of the business.
Crypto tokens are incredibly idiosyncratic. Every single one is explained and designed with different incentives, so even if you do do risk disclosure, I can't really apples-to-apples compare these different investments; it's actually extremely hard. And oftentimes, they're traded on really illiquid marketplaces, so that's what a standard rug pull is, right. It's pulling the liquidity from the market and making it so there's no exit path. Standard markets are just too deep in terms of liquidity to allow for these types of schemes to happen.
I'm not really sure how to fix that. In some ways, it's one of the best opportunities ever for someone who's self-motivated and believes in autonomy and self-sovereignty; because, if you do your research and you put in the work, there really is so much alpha to be gleaned by the differences between the different tokens. But to your point, if we're trying to get to mass adoption, is investing in liquid tokens the right move for the lay person; someone who can't invest 40 hours trying to understand the LUNA failure mode? I'm not so sure about that. Maybe the tokens themselves are utilised and invested in by a subset of people and the users get to use the underlying technology.
This is this kind of segregation of concerns; and again, I'm not calling for the SEC to come regulate the space, but it's something that we should really think about, is how to protect investors and how to make us look like we're doing right by the people who support the networks.
Peter McCormack: They probably are going to come and regulate the space though, because these things look like securities.
Jonathan Wu: I mean, they're already on top of it. They're already on top of stuff like Uniswap. The problem is, the SEC is totally outmanned. We can't even keep up with the space; insiders can't even keep up with the space. I'm not sure how they can understand all the idiosyncrasies of every single token, but we can help. I'm not saying help regulators, but we can help retail investors.
Peter McCormack: I would also question, how many success stories have we actually had here? Bear in mind, just to be clear, this is a Bitcoin show and I'm a bitcoiner. I see Bitcoin now as a success story. I think it's here to stay. Unless there is some coordinated, global regulatory attempt to destroy it, Bitcoin's here to stay. I think despite what some listeners might get angry about me saying this, I think Ethereum is arguably a success story on certain metrics, in that it has survived multiple cycles. You might not think it can scale, you might not like what people use it for, but it has survived.
I think there's still something a little bit interesting in Monero. I've got Seth for Privacy coming on the show this week to talk about that, because I want to learn a bit more.
Jonathan Wu: Okay, yeah, I love him.
Peter McCormack: I'm not opposed to Monero, I've always been very clear about that. But outside of that, I don't think there's been that many things, if anything else, I could say that has been a success story. There are a lot of failures, there are a lot of things that maybe have achieved some things technically that are interesting, so your measure of success is obviously subjective. But I would say, if we use things that have survived in terms of time or price appreciation, I think we've got very, very -- I think we've got a handful of success stories, in my world.
Jonathan Wu: I think we need to think about the segregation between token value and network success.
Peter McCormack: Yeah, fair.
Jonathan Wu: Sometimes we conflate them. I think Ether is a successful token and Ethereum is a successful network, but there is something like Uniswap where it is not clear what the long-term value accrual mechanism of the Uniswap token is, right. There's maybe this fee switch that's going to get turned on and do revenue share, but Uniswap protocol is undeniably successful. It's the dominant liquidity venue for ETH 2.0 stablecoins.
Peter McCormack: That's fair.
Jonathan Wu: It's just done, I think at this point, trillions of dollars of volume, fully decentralised and permissionless.
Peter McCormack: But the volume of failure that we've had is huge.
Jonathan Wu: For sure, and this is where Matt Levine, the Bloomberg writer, would say, "DeFi is learning in a couple of years what it took traditional finance thousands of years to learn". And these are all experiments, and we kind of have to learn by failure.
Peter McCormack: But that's where this disclosure becomes important, because I know everybody has their own choice to make an investment, whatever, but some people are stupid, some are degens, and some people are just caught in the crossfire, or they've been recommended by somebody. I mean, how many people probably turned round and said, "You should really take a look at LUNA, it's this great investment", because their friends did it, and they've not been exposed to the crypto scene, they don't know anything about it? They've lost a bunch of money.
Jonathan Wu: Right. I mean, what's the first question you get from somebody who's outside crypto about crypto? For me, it's always, "Should I buy Bitcoin right now?" It's not, "Tell me about consensus mechanisms".
Peter McCormack: "Am I late?"
Jonathan Wu: Yeah, "Am I late? Am I going to make money doing this?" It's never, "Help me understand how Dai works".
Peter McCormack: Yeah!
Jonathan Wu: "Hey, tell me about the newest BIP or EIP". So, I think it's our job as educators to get people smart about this stuff. And if you're not, maybe take the Warren Buffet approach, don't invest in something you don't understand.
Peter McCormack: There appeared to be a little bit of a contagion effect at other stablecoins. So, Dai's not something I hugely understand, but I know a little bit about it, but Dai seems to have survived, what, like four years; is about four years or five years even?
Jonathan Wu: Yeah.
Peter McCormack: Yeah, and hasn't had any real catastrophic de-pegging events?
Jonathan Wu: There was Black Thursday, or Black Tuesday, one of the days, in 2020. This was the March crypto crash of 2020, where Dai had --
Peter McCormack: Yeah, but everything died.
Jonathan Wu: Maker had to issue a bunch of Maker to back undercollateralised Dai positions. So, they've suffered an extreme event, but they made it; it's still alive.
Peter McCormack: Yeah, okay. But outside of that, it's been fairly stable. But there has been a contagion effect from this on Dai, right?
Jonathan Wu: Yeah, and on all stables. During any period of panic, people want to pull out of everything unilaterally; people just get afraid. People think, "Well, if there's contagion here to Bitcoin, why isn't there contagion to other stablecoins?" USDT, Tether, is completely unrelated, and USDT de-pegged very, very briefly for a little bit. I think that's just us, as human animals. There's a little bit of when panic and fear sets in, people start thinking irrationally.
I got so many DMs and messages saying, "Does this mean Tether's over too?" It's like, "That's a completely different mechanism.
Peter McCormack: Completely different product.
Jonathan Wu: Works completely differently. There's many reasons to be careful around USDT 2.0; that's just completely different. So, I think people, when panic sets in, they just kind of lose their minds a little.
Peter McCormack: There were some large redemptions against Tether, and I do wonder, was that people having a little bit of a fear and thinking, "Hold on, I'm holding a bunch of Tether here. Maybe we should redeem a little bit.
Jonathan Wu: In times like this, there's a flight to safety. And almost every investor I talk to right now is stacking cash, because they see deals coming on the horizon. I want cash to deploy when all assets come down in value, whether it's equities or it's crypto or it's real estate. People are scared of a global macro recession and they're thinking back, for those who have long enough memory, to the last recession and they're saying, "What did I wish I had at the bottom of the cycle in 2010, 2011? I wish I had cash, I wish I had boatloads of cash. I would have bought everything at the bottom".
Peter McCormack: Yeah, I think you're right. Quite interestingly, just a completely separate point, I do wonder, because you read a lot of stuff, whether it's -- I know he's not popular at the moment, but Raoul Pal or Lyn Alden or any of the macro analysts, Luke Gromen, it's a very negative sentiment with regards to especially within equities or even within crypto, I would say; but there's this very negative sentiment. But somehow, Bitcoin seems to be holding this price position at the moment, where it can't seem to get under $28,500, and there's been multiple attempts to take it below it, and I do wonder if Bitcoin's going to be our safe asset.
Jonathan Wu: Yeah, we'll see. It does seem to have a lot of strength right now, yeah. It seems very resilient.
Peter McCormack: Yeah. ETH's taken a little bit of a hit this week, right?
Jonathan Wu: Yeah, that's right. I think ETH is going to be okay though. But again, there's a big difference between token valuation and network strength, and if you think about Ethereum's broader impact, it doesn't all accrue to Ether. Think about all of these networks that are aping Ethereum's virtual machine. Avalanche and Solana has an implementation that they've called Neon and NEAR Aurora and Phantom. There's 1,000 other chains who recognise Ethereum's network effect and the network effect of Solidity developers, and none of that accrues back to Ethereum.
Peter McCormack: Right, okay. There are two other things I want to ask you about, and don't know if you know about it. Some concerns have been raised recently about STEPN, which is not something I've really looked at.
Jonathan Wu: Sure.
Peter McCormack: The only thing I want to know about STEPN is, can I get my dog to run around the yard and earn me tokens?!
Jonathan Wu: Well, that goes back to what we talked about, right; are insane emissions sustainable? I think one of my favourite tweets ever was, "I'm inventing SHITN. Can't believe I've been SHITN for free this whole time"! And then there's another one called SEXN, which is kind of a joke. Really the question is, if you're not providing value, do you deserve to get paid?
Peter McCormack: Yeah, but is STEPN a good idea, is it a shit idea? Should the STEPN token's actual value be zero?
Jonathan Wu: I'm not going to judge it, because they have a dual token model, where they're going to have a governance token and they have the thing that you earn from walking around. So, I'm not hyper-familiar with STEPN, but I would just say that, to go to first principles, what are you getting compensated for? If you're getting compensated for providing capital, then you have to ask yourself, "Why do I deserve that much compensation for capital?" And if you're getting compensated for walking, you have to ask yourself, "What economic value am I creating from walking?"
This is where play-to-earn gets me a little. You can't really do nothing and get paid, at least in a capitalist society. You can't really just contribute zero, create nothing of value and get compensated for it. So, from first principles, I get a little worried about any protocol that says, "We're going to pay you for functionally doing nothing".
Peter McCormack: Does that mean you are not somebody who supports Ethereum moving to proof of stake from proof of work?
Jonathan Wu: No, I'm not one of those people, although I am concerned that it's one of the biggest steps that the Ethereum Network is going to take.
Peter McCormack: There is contradiction there though, right?
Jonathan Wu: There is a contradiction a little bit. I mean, I would argue that staking contributes to the economic security of the network.
Peter McCormack: But if your tokens were premined and you can stake, you are essentially getting paid to do nothing?
Jonathan Wu: I think that is right. I think there's a very subtle distinction between again, contributing something as capital or as security or even, for the Ether token, locking up a bunch of the circulating supply and just making sure that there's less Ether in circulation; and literally just living your life and being alive. STEPN is basically just, "I'm alive".
Peter McCormack: "I'm walking!"
Jonathan Wu: Yeah, "I'm walking". But it can be reduced to something even simpler than that. And again, not to say anything bad about the project, I truly am not familiar enough; and from my understanding, they're looking to create more sustainable methods of token inflation; but yeah, I really struggle with those concepts.
Peter McCormack: I can't let you leave without answering that point. You said you've got different concerns about this transition.
Jonathan Wu: I think there's just a certain narrative that's been pushed around the proof-of-stake transition, like emissions going down 90% and miners being adversarial to the network; and currently, proof-of-work miners dumping Ether. I know some Ethereum miners, and they're friendly to the network, they're not adversarial, and they're not dumping Ether right now to cover their electricity costs and the costs of the hardware, they're stacking Ether because they're friendlies in the network. Why would you validate for a network you don't believe in? That doesn't make a ton of sense to me.
They validate for the network, they mine on the network, and they're stacking Ether like the rest of us, ready for the merge. So, there is this narrative that once the merge happens, it's going to be this huge boom for the Ether token, and who knows, maybe it will be. But a lot of that is premised on, I think, this totally unempirical claim that miners are going to stop dumping tokens. That might be true; I haven't seen a shred of data supporting it.
So, a lot of crypto lives on these narratives and I just want to question sometimes, is this based on data? Has someone called up all the miners in the world and said, "Hey, how much Ether are you actually selling into the open market and how much are you stacking? How much are you trying to recover the cost of this commodity hardware that you're proof-of-work mining on; and how much is already fully depreciated and you're just printing Ether tokens that you're just going to hold on to?"
If miners are already friendly and they're already holding onto their Ether, then we're not going to reduce the sell pressure. In fact, all of those folks are going to stake their Ether, and the proof-of-stake staking reward should go down.
Peter McCormack: What's going to happen to their mining equipment?
Jonathan Wu: That's a great question. I think a lot of people are using it for the protocol that I work for, Aztec Network. It's a ZK protocol and so a lot of people are thinking about how to use GPUs to accelerate zero-knowledge proofs. It's also commodity GPU hardware. It can just go back into -- gamers have been suffering with rising GPU costs for years. Maybe PC gaming gets really cheap over the next few years.
Peter McCormack: With the merge itself, with regards to we mentioned earlier about risks and 10-K disclosures, do you think there are some -- well almost certainly there are some unknown unknowns; but do you think people have fully looked into the risks of the merge and what will happen?
Jonathan Wu: I think a lot of people are paying attention to the risks.
Peter McCormack: Are you expecting pain?
Jonathan Wu: No, I'm not expecting pain. I can't say I'm a total pro on the merge risks. I think there is this universe where there's this proof-of-work network that might just exist somewhere. Some miners might just say, "We're just going to keep supporting the proof-of-work fork", and I frankly don't know the implications of that. We had Ether Classic after the DAO hack, now there's Ether Classic Classic. There could be a fork of the network that just continues on with proof-of-work mining, and there could be some small consortium of protocols or individuals who say, "We just believe more in proof of work, for some reason, so we're going to stay on this fork".
I think every other reasonable person is going to proof of stake. I think it would be a tiny minority of actors.
Peter McCormack: You would have to choose, right, because it's not like you get your tokens both, you have to swap out?
Jonathan Wu: Right.
Peter McCormack: Yeah. Whereas, when we've had Bitcoin forks, you get to keep both tokens. With this you don't, it will be interesting. Anything else we've not covered that you would like to have covered?
Jonathan Wu: Not really. This was a great conversation.
Peter McCormack: Well, we should end things before I get accused of being too shitcoiny, "Why the fuck are you talking about ETH?" but while you're here… No, I really wanted to understand a bit more about what happened with Terra and LUNA. I think a lot of people wanted to hear it. The thread was great, but hearing you explain it's even better.
Jonathan Wu: Appreciate it.
Peter McCormack: We will put that in the show notes. I will make sure people follow you, but just tell people, if they want to find out more about you or get in touch, how can they get hold of you?
Jonathan Wu: Yeah, Twitter @jonwu_.
Peter McCormack: Awesome, man. Well look, appreciate you coming and doing this, man.
Jonathan Wu: Thanks, Peter.
