June 4, 2022
Ross Stevens, Nic Carter, and Allen Farrington

On Impossible Things Before Breakfast

Over a period of five incendiary days last month, the catastrophic failure of the Terra blockchain (LUNA) and its associated stablecoin TerraUSD (UST) evaporated $60B of crypto wealth, a loss on par with the Lehman Brothers bankruptcy. This failure was not caused by buggy smart contracts or the theft of private keys, but rather alchemist monetary policy, with fatal design flaws known well ahead of time.

The downfall of LUNA and UST represents a cautionary tale of investor avarice and the insecurity of currency pegs. It is a stark reminder that what is too good to be true always is, and that uneconomic, unsustainable yields — even if glossed over in a thin veneer of familiar financial terminology — represent risk, not safety. UST was just the latest in a long line of failed algorithmic stablecoins, but the fragility of currency pegs has a long history in the fiat world, predating the advent of cryptocurrencies.

This paper explores the fundamental insecurity of LUNA/UST and exposes DeFi risks more generally, but offers a fundamentally optimistic glimpse, grounded in first principles, of the road ahead.


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