The Crypto Big Short: How I Predicted the $50B Luna Collapse - Kevin Zhou, Galois Capital, Ep. 197 - Transcripts

May 17, 2022

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Last week, $60B in value was wiped from crypto in a few days. Not many saw the collapse of Luna coming - even fewer had the guts to bet on it. Since the start of the year, Galois Capital has been openly calling out for the impending fall of Luna and...



ladies and gentlemen

gentlemen, welcome to the block crunch podcast. They go to podcast for investors and builders in crypto before we get started with today's episode, I've got some great news for our listeners. For those of you looking for an extra edge in crypto. We created block crunch V. I. P. Just for you. Every week our team at block crunch prepares an in depth research memo with the sector analysis project explanation, competitor breakdown and our own in house investment outlook for every project brought onto the show delivered straight to your inbox. We'll do the work so you don't have to, will scour discord twitter forums and blocks and help you highlight potential catalysts and provide actionable insights for every project we interview. In addition, we also host exclusive ams with myself to answer any of your questions and all of that is only available to block punch V. I. P subscribers.

But the good news is that it costs less than a coffee a week. So head on over to the block crunch dot com slash V. I. P. Or click the link in the show notes below to sign up. Hey everybody, welcome back to another episode of the black french podcast. Now this week I'm very honored to interview kevin joe, the hedge fund manager who has made headlines recently by being one of the very, very few people in the world to vocally call out the impending collapse of terra luna during its peak at $40 billion and that was not at all a popular stance to take let alone publicly. The cabin stuck to his guns and just this past week, the short thesis finally played out as luna's entire market cap effectively evaporated over the course of a few days. So we're not going to do a play by play about exactly what happened with Carolina. We're gonna save that in written form for our V. I. P.

Subscribers, but instead we're gonna dive into, you know, kevin's process how we identify some of the unsustainable economics in the project and lessons we can learn from that as well as how we can move forward as a space. So first of all, I'm super excited to have you on the show for the first time kevin? Yeah, super excited to be here. Um and yeah, it's

been a really momentous

past week. Um you know, I think for me, I'm running on a little bit of low sleep right now. So you apologize to the viewers if I'm a little

bit groggy, but yeah, happy to chat

about what happened and uh, you know, yeah, and super appreciative of you. I know it's early morning or time as well and it's probably a pretty crazy past 78 days. Um so I guess like first, just how do you feel about things like, do you feel almost vindicated that the things you warned about finally came true or do you feel kind of shocked that they played out in such a massive magnitude. Um yeah, you know, definitely a bit vindicated, You know, I was pretty

vocal about this stuff

along with a few others on on crypto twitter um and you know for the most part initially were met with a lot of severe backlash, you know the lunatics, they were in all of our threads and

tweet threads and just

slamming us and calling us all manner of names. So you know I do feel a bit of indication there um now, you know since then I think uh you know in terms of how it exactly played out um you know, I think it's a little it's always a little bit hard to call the timing, I mean this could have happened um a little bit later I mean it could have taken months for this to play out um you know rather than immediately

where where

it did very recently, so you know I think that's always hard to call, but I think in terms of how it played out once it, once it started, I think it really was in line with a lot of what we're predicting and in many

ways it actually collapsed

faster, you know, I thought this whole thing was um you know there is always that kind of bank run risk but there's also like

just bank kind

of walk risk right? Even if it happened in slow mo um I also thought that that was a pretty uh you know possible um you know kind of situation, so you know it definitely happened quicker and more suddenly than expected

but otherwise

uh you know in line with our expectations. Yeah


internally we've been talking about some of our skepticism about kind of under collateralized or algorithmic stable coins for a while as well. But we just didn't have the conviction

to really put a directional bet on it.

So I guess

for for for those

who may not be aware of how you formulated

your thesis, what was it

about the mechanism

in luna's design

that made you I kind of realized

Hey this might collapse one day. Like

was there a specific

part of the design to make you think that way or? Um Yeah you know

I think a lot of it

is just that you know we've seen a lot of these different algo stable

coins before in the

past, you know ever since um you know there was like the basis of design. Uh

and then uh

you know there was like a whole bunch of others. There was like yams


you know basis cash

based um

you know ample

fourth um E. S. T. D. S. D. Uh time. Um You know all of these different


of basically a very similar

concept now. You know

on the surface you might look at the mechanisms and you might say they're all kind of different from each other but I think when you really dig deep I mean

at the end of the day these

feedback cycles all

try to govern this

idea that when you have a stable coin which is

above peg you want to

inflate supply and when you have a stable coin which is below peg you wanna contract supply, like it doesn't matter how many steps you go through through this giant contraption, this rube Goldberg machine

to get to that final result, but ultimately there is that kind of final piece of it that causes the quote unquote stability of the coin. So

in my opinion

after having seen a lot of these, I think pretty much they're all kind of equivalent.

Um So that's kind of

where we got this idea that you know this this um luna ust mechanism


basically the exact same

thing as all these other

coins in the past that have not

done super

well in terms of you know having solvency and maintaining

stability. Now I

think I want to maybe point out one particular

uh coin

which we analyzed very carefully and we actually did

make a

very uh you know fairly

profitable play um

on which was very instructive

in uh you know

teaching us about how to even trade these

kinds of things and

that was um fay and

tribe, you know and then

when when faye first came out

um you know

there was it was like a

you know it's just

like this coin which you know

tons of people invested

into is supposed to be stable


in effect it wasn't

actually a

stable coin, it was kind of like a


it was sort of like a structured

product on keith

right? Because you had

like all of this like

collateral which was backing this stable coin

and if keith

went up a lot

of the stable coin doesn't benefit to

the upside right, it's just kind of capped at one, all the excess value is just like excess value, but if it goes down and the bed the backing to this coin

is insufficient

um then the coin would depend on on the downside.


you know what what is this like? Well it's kind of like a put option on keith right, you get downside

but you don't get the upside um

you know maybe there's some kind of like

hidden premium in the middle,

but effectively you can kind

of map the payout

to basically put like kind of

payout um So when we

were trading this thing and this was during a time where you know they're severely gating the exit right as it trades below Peg, you get penalized more and more so it's very very hard to,

you know fully deviate from

the peg even though everybody wanted out of this thing and there was like tons of capital stuck in this all the investors were trying to get out and you know it's very severely gated so it couldn't

um so

you know in

trading this basically

We were some of the only buyers of uh this coin of fe below peg you know 85 cents of the dollar and below.

And the reason that we were able to buy it is because we we didn't

we realized

that we could always just

delta hedge

um and

put on the other side

right? So like in doing so even if they ended up trading

at zero we make

um everything

back on the east leg of it

and it would be fine to even hold this coin to zero and which is why we're very

comfortable buying

it um when when it started depending so

that kind of was

was instructive on

you know how to trade some

of these kinds of structured

products like at the end of the day

all these things are

basically you know

with some obfuscation structured products on on something or other, right

on some kind of underlying

or other. So I think um

you know all of that was

very instructive and then also examining sort of like the mechanisms

of previous

algo stable coins. That's really really interesting because um

when luna first went

when the US t stable converse defect, I did cite fe as a potential example of how maybe they could fix this. They could, there is potentially a way out of this but obviously it happened for fe but not for luna. Um So I guess going off of that vein do you think luna's failure

is a condemnation of all algo stable

coins or are there

models that could work because

even for fei fei right

now is technically a

collateralized stable coin already

they're no longer you know fully algorithmic.

You know in other words are

their designs

that maybe could

actually work. Um Yeah well

maybe I just I'll just say one last thing about

fay which is like the you know

the primary difference between

faye and luna

in my opinion when

you abstract away all of like the small little bells and whistles and contraptions

um is the

idea that like with fe it's ether that was backing um the stable coin while with U. S.

T. It was mostly

luna itself that was backing um it's stability. So

in in many ways

like luna and ustr just much more circular with the collateral being endogenous while

faye was more

um you know kind of direct and having external. Uh and exogenous collateral. But

basically the idea is

the same which is that you have some kind of volatile asset which is backing some kind of stable asset. Right? So so that I think concept still holds but in terms of like how much reflectivity each one has well you're gonna have a lot more reflectivity when you have something circularly kind of backing itself? Right? Um

So so that's um

that's sort of my first thought and then um the maybe maybe to return to your question, could you could you remind me again of what that was again?

Yeah so I guess

there's luna's failure imply that there's no algorithmic stable coin design

out there that could possibly

work. Um I'm pretty

pessimistic about

pure algo stable coins I think you know let's leave the class of over collateralized algo stable coins alone. But I think for the pure kind of like skyhook

type um

you know algo stable coins, I'm very pessimistic because I think at the end of the day you're really trying to Malcolm eyes something from nothing

and you're basically

like functioning like the central bank right? Like maybe you have some control over something that's

similar to interest

rates that you know help contract or expand the money supply, maybe have some control over something that looks like open market operations that has some control of supply and demand. So um you know that's that's sort of my thought, I think I think there's um just uh some

kind of analogy

to a

central bank function

but without the advantages that most central banks have. Right? So in the sense that you know if you look at the Fed for example the Fed

has the advantage

of you know the base

currency of the U. S.

Is what people must pay their taxes in. Um And you know for

for dollars

uh you know there's a deal with opec that they have to trade oil and uh you know in in in U. S.

Dollars. So I

feel like with these algo stable coins you're basically replicating that but you don't have those advantages.


and then you know on top of that

I would say that even

fiat money

itself under standard

essential banking

systems and

regimes um in the long run doesn't seem to work either. Right? Um

so that's sort of what my

thought is and that's kind of my analogy for pure algo stable points. Um ultimately I think they all

boil down to the same

idea. I would say that all of these mechanisms are basically isom or fake to each other when you really kind of dig deep into like what's going on with the supply and contraction

and on that

point about using a volatile asset to

offset the volatility of the stable

coin in this case using

luna to obstruct the

volatility. I think a lot of people

also had issues

with that design. But then

when they announced when

luna announced that they were going to use Bitcoin as part of

the collateral as well, I think some people's,


kind of, you know, begin to soften

after the idea of hey

USt might actually be pretty

stable. But obviously that didn't work out. So what exactly went wrong there because they did introduce a significant amount

of btc as

collateral which is supposed to be more stable but that didn't really

play out.

Um Yeah I think you know the idea was good adding more exogenous collateral was a good idea.


just, in my opinion that it wasn't enough, you know,

in the end they ended up with

About three billion worth of Bitcoin.

I think if they got

It up to around 10 or 11 billion, I think it would have been okay. It's just, it wasn't, it just wasn't enough. You know, and I think they were, they were just really running out of time. Their goal was to get to about, you

Know, 10 billion, but,

you know, there's just, there's just not enough time to actually get that done. And the collapse happened before that, um, you know, the other thing too is that like,

where did they get this money from

anyway? Right. Like a lot of it is basically coming from selling luna itself to

willing investors on some

kind of lock up schedule, uh, in return for, you know, hard assets, which they can then use to buy Bitcoin or other types of


collateral, right? So like at some point, there's always kind of this fear,

even within like

the investors that they're courting that maybe this thing doesn't

work. And maybe they don't

actually want this thing, uh, you know, that's locked for like, you know, a year with one year,

um, linear vesting

at some kind of discount because maybe this thing will just, that spiral, right? Like maybe even if they were to hedge it, we're using the perps, maybe the cost of doing that would just be too high uh in the later stages. Right? So even if they think that there's a reasonable chance or a small chance of hyperinflation happening, the funding during that period could be so astronomical that it's totally not worth whatever discount they're getting

right. So if if they

pull expectations forward, um there's going to be at least some investors that are not willing to take that deal. And what my guess is is that they were just not able to sell um you know,

enough right? Another

7-8 billion worth of luna to get this exogenous backing. Um And I

would also say

that, you know this um this kind of this

kind of exogenous

collateral, the choice of it um was also really important. Right? Like why was it Bitcoin rather than just like us dc. Right? Or why was it Bitcoin instead of like an inverse position in Bitcoin? Right. So like or like an inverse position in us equities for example, right? Like an inverse index. Um Because

if you think about it,

uh if you have Bitcoin then you have these kinds of like nasty compression effects um where it's sort of like as you know, luna is going down. So the endogenous collateral is evaporating um There's also all these correlated effects with the external collateral, this exogenous collateral Bitcoin uh in that, you know, it's highly correlated the bait is highly correlated uh to luna itself right under normal market situations. So you're getting contraction of both types of collateral at the same time rather than something that's anti cyclical where you know, like a short Bitcoin position as luna's tanking bitcoins. You know, the short position is going up. So then, you know, you maintain a lot more stability that way. Now I think they wouldn't do something like that because it kind of violates narrative. Um You know, even though it's more sound, you know, how do you even maintain, let's say a decentralized short like Bitcoin position, You're even short lunar position. I mean you can't really, right. So you know violates like this concept of like decentralization now how much of the decentralization was just like, you know, dog and pony show. I mean how much really was there in the first place? I mean that, I don't know, but it certainly violates narrative to to start moving in that

direction. I think that's

maybe why um they didn't, they didn't do it like

I know that

Um you know Harrison zero

X. Hammes.

Uh you know, he

suggested to them

to do some kind of like inverse Bitcoin position.

Um So

you know, they didn't, I mean this is an idea that they already had from way back when, I mean he's in the war room. He's already told him about this stuff, you know, a while ago and I think they

just never listened.

Um So you know, so that's that's sort of my thought I think the choice of the collateral was wrong and then the second I think um it just it just wasn't enough, you

Know three billion versus

10 or 11 billion. I mean there was just a really big shortfall there. That

makes a lot of sense.

And what when it comes to the technical elements of the actual short

itself was the play too short? Ust or short luna?

Was there like a preference between the

two or we're both

kind of on the table.

Yeah I think that's um I think that's a great question because it really depends on um the gating mechanism that

they have right? So

initially what they had is that you could mentor redeem uh luna to ust. Ust to luna at what was

It like $200 million dollars

worth per day um Something like that. Right? So if um the the demand for luna

because U. S. T. Is unwinding

exceeds that per day um Then

you're gonna see like

a deep event right? Because then people are just gonna dump it on the open market rather than go through this very uh

this nicer

path of you know just doing the arbitrage, going through luna, getting dollars worth close to a dollar's

worth of luna for all

U. S. T. Um That is burned. Um So it really depends on the capacity of that avenue

on whether or not

you think that it's you know luann

itself is going to go down

more or USt itself is going to depend on the opposite side.

Let's say there was no gating mechanism.

Well then it's just much more likely that USt

holds its peg for a lot longer but it's luna that itself start spiraling out of control much earlier. Right? So I

think you know tfl had

a very important decision to make all along the way

because I think near the end they

Were allowing the minting of like what maybe one million

luna units

Per minute or something like that. And then afterwards I think they just even remove that cap entirely and then just like you know at that point supply was like doubling every 18 minutes or something like that right? For luna. So you know I think they had

a very important decision

to make which is whether to favor at least temporarily the USt holders or to favor the luna holders right? And you know different times along the way. They

were different folks that

were favored. I would say generally

they tended to

favor the U. S. T. Holders given that they kept relaxing these constraints uh to try and hold the peg

together as

best as they could. I mean the peg was already gone by that time but I mean certainly

it could have broke down even

further uh if they were gating mechanisms in

place to prevent that

kind of uh redemption of US tv luna so um so I think I think you know there's definitely some considerations there

and then the other

consideration too is

that there's

some so there's something to be

said about the

risk that you want to take right if

you're short ust

you're basically making a one way bet because it's not like us t is just gonna pop and rip up to like

$2 right?

Like it's kind of cap there if you're shorting at it from like you know pretty much the top um you know you can only you can basically only win and then you know if you lose your break even so um in that way a lot safer but maybe you have to wait some time

uh you

know for the peg to

really fully break

down. Right? So it's maybe a little bit of a slower process and then the last consideration is um how do you actually go about shorting it and what are the costs? Um Generally throughout this

entire thing the cost

of shorting

us t

wasn't that expensive right there what you pay on the perp funding wasn't really that bad. Um

But when you shorted luna it

got to a point where the perp funding was so bad it was like what is it like five digits, four digits or five digits or maybe even beyond that at some point

right? Because it's

basically compensating people for


opportunity, cost of

getting there you

know, money hyper inflated away, you know with the price having every 18 minutes and supply doubling every 18

minutes. So that's all

reflected on on on on the perp funding rate.

So you know those are

some of the considerations

right? It's like what are the

costs of doing the short

um is it a one way bet or is it bidirectional? Right,

because with luna a few short learning can rip in

your face. Um

and then uh you know what what the gating mechanism is, I

would say that those are probably

The three most important considerations there.

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makes sense. And it's almost a perfect storm in. That may be a perfect storm is an insensitive way to put it,

but the speed with

which it played out I guess benefited the shorts because you're not

playing, you're not paying

funding for a very long time, right? That your your thesis basically pays out within a week. Um and I guess on that note, um you

actually you publicly

called the lunar project out I think earlier this year already,

but you also probably

said on multiple occasions that

you didn't really pull the trigger

on the short until much later. So

I guess that that's probably

part of the challenge of shorting in crypto

is that speculative

friends you can last for a very long time. It can be unpredictable. So

I'm curious about your process like

what were maybe a list

of things that you were looking out

for to make you decide to pull the trigger on executing the actual trade. Yeah, definitely. So, you know,

I think when it comes to shorting,

I think it's particularly difficult because being early is

sometimes as good as being

wrong. Right? So the timing component is really important and

then on top of that

there's other considerations

which is that because

you're short, even if you're one x short, you can still get blown up on margin, right? So if the path to get to you being right is very unfavorable to

you. You could still get

wiped out on your on your liquidity and on your margin.

So um so those

are all considerations and then on top of that there's borrow costs on the short side, right whether it be manifested as per funding or you actually take physical borrows to go short this stuff um you know overall it's just more difficult. So for all those reasons I would say that shorting is more difficult. And then lastly on the upside for shorting the upside of shorting is very capped to

write if you buy

an asset it can go up 100 X. If you short something the best you can do is double your money

right? Unless

it at least right unless it at least. So um so I think um with all these considerations I think getting the timing right was very

important. So um the way that we thought it through wasn't through any kind of like super complicated quant model

or anything like that

a lot of it was just kind of you know intuition and kind of finger in the air

um guesswork

and back in the

napkin kind of

math. And basically

what we figured is

that you know this thing is probably

going to implode for sure

right? But we just

don't know when and

we want to basically uh you know be able to farm

anchor until the very last

moment to get all the

free money and the juice

there. Uh

And then finally when it's time

to short get out before everybody else. So like is

that prudent, is that

safe? Well, you know, I figured that just even

reading through twitter and

you know, talking to these lunatics that are interacting

with me on my threads

that there is enough

true believers

in this project that in the moment of distress we will be being

the cynical people that

we are. We're going to be able

to get out of this. Um A

lot quicker than people who are kind of in denial still have hope. Um

you know, high on opium.

Uh these,

you know the true believers

and probably a lot

of their own, you know backers

and and them themselves. Uh So

you know, I I

didn't see that as particularly

worrying. We're basically monitoring very closely all the exit liquidity that was immediately available on curve for example. Um you know, in the order books and you know when you s. T started to dip peg, you know, just a little bit

and liquidy dried up a little

bit. We started to see the imbalance in those curved pools. Then we're like uh

you know, maybe it's

happening or but it's maybe fine too.

We don't know for

sure at this point it's not clear if it's really happening now, but why don't we just be safe? Why don't we just pull it all out and then see where things go?

So we started

pulling out and I figured that other people that were similar to us which are more like kind of on the fence about whether this is happening now generally who are a bit pessimistic about this whole system. They also pulled right and

that generally started to cause

maybe like a cascade. Um And I know there were people before us but I know there were also people after us and they started to


out the liquidity and liquids basically

dried up and all

on the curve pools and and overall in the markets. Uh And then finally when it was really dry and it's we started to see some serious peg deviations. Then we thought about,

okay so now that we're

out of this thing, maybe it is a good time to start putting on uh you know some kind of short place which which we did but I don't want to get too much into details yet because some of it is still ongoing

but we did

end up putting on some shorts around that time. And I think this was monday.

Yeah that makes a lot of sense. I distinctly

Remember there was a small deepak to maybe 98 cents and then

it's briefly returned

almost to peck. And then there was an $85 million dollar trade from

us t to U.

S. D. C. Or U. S. D. T. On the curve pool almost immediately afterwards. And then things just spiraled out of there.

So it does seem like

maybe there were large parties that were kind of thinking like you guys or maybe it was you guys, I don't know. Um that kind of saw the initial Deepak and then just exited. Um So I guess that did

any point, Did you kind of doubt that this

is at any point? Because I guess before the defect obviously um you know, ust

ust and luna

commanded a really high valuation and there's a lot of really smart people in the space back in

the projects as well.

Did you at any point kind of doubt that hey, maybe our thesis is wrong, maybe

this is a sustainable

way of building a stable coin. Um

I didn't have much

doubts about the thesis being wrong.

I did have some

doubts about the timing of it.

You know, just after the

first deep peg, after the peg closed back up. I thought,

okay, maybe this was

just a false alarm. Maybe this thing is not unwinding now. Right?

So we did have

some doubts about that in the intermediate, about like the tactical plays that we made in this particular event. But I think in the long term, um, I didn't really have much doubt about that. You know, I think if it didn't collapse that this week, this past week, you know, would have collapsed like a month later or two months later, maybe even six, you know, three quarters later, maybe even nine months later, you know, um, you

know, even, possibly

even longer. So, um, so I think on that timing, we weren't very sure, but we did think that for sure at some point this thing would unwind

because it's

just, it's kind of like gravity, right? It's just that we're just like doing back in the napkin math. And even if our assumptions were wrong by, by, you know, like two or three x or even greater than that, this thing was so insolvent. It was, it was insolvent by, you know, uh, you know, it was, I think like 78 billion, I mean, that was a healthy margin. I mean, these are, these are yards at stake,

right? And then, and you

know, in terms of their backers, one of the

particular reasons I actually

really liked shorting this, um, is because,

uh, you

know, there was a consensus trade on which literally it's a who's who of crypto investors and they're all backing this thing, right? So this is, I think exactly where, you know, being a contrarian can be really profitable. It's where everybody believes something to be true and they're wrong. And, and I think most of the time, uh, that's not the case, I think most of the time when there's consensus people are right. So I think to find something where that is the case, I think is is particularly nice and that that's also kind

of reflected in

our style of trading. You know, historically we've

only made a few

relatively big plays um I would say about once a year or a little bit like once every year and a quarter, um you know, in 2018, uh we were flat for the entire

year and then we went

along Bitcoin in december at a blended price of 37 50 and that was the anti consensus trade, right? It was everything was super bleak. Everybody thought that, you know, it was just like terrible,

there was despair,

there was apathy in the market, there was, there's no reason for Bitcoin to go up. And

basically the idea

is is that everybody is so maximally pessimistic, there are no new pessimists to sell

the point of the price

further down, Everybody currently holding Bitcoin will literally never sell it at any price, right? And then whoever sold has already sold, right? So it's just like, it's hard to see this thing going down even further. It's so bleak already. It's it's hard to get worse than this, right? Um the trade that we made in 2019 was um you know, buying FTT. Um and that was also not a consensus

trade, you know, people

forget, but there was a lot of hair on that deal on that 10 cent around in the very beginning, a lot of people passed on it. So there was a lot of things. It was, it was sort of like the stars aligned because there's a lot of data points that were particularly good about that deal first is that you didn't have all the big name vCS in it because Sam at the time in Alameda, they were still kind of like

outsiders, right,

coming into the space. They were not very well known. Um, we had done a lot of otc trading with them already and, you know, having, um, some background, uh, in, uh, you know, understanding where they come from, like, you know, having a lot of like jane street folks, having folks from like math camp and stuff like that, having met sam in person knowing the guy was very smart. Um, you know, I,

I knew that the space was

kind of undervaluing this guy. Uh,

and on top of that there

was hair on the deal, like

I think Sue called

Out, uh, you know, earlier, which is that they were offering, you know, 21, quote unquote guaranteed

loans which tarnished

their reputation and their name. They really shouldn't have done that. That was bad marketing, but you know, in some ways that kind of helped isolate the deal from other pools of capital that might be coming into it. Um, and uh, you know, I think lastly, I think, you

know, there was always,

um, the timing effect where they, they rushed the deal

so quickly for FT. X.

Um, that there wasn't enough time for people to really get on board and do the due diligence. So that also kind of constrains the amount of capital flowing into this stuff.

So all of

those put together makes this look like a highly undesirable deal. But that's what exactly what made it much more desirable. And then maybe, I don't mean to just continue, you know, Toot our own horn, but maybe just as a final example, um, there was the wifi trade that we did uh, in 2020. Um, and basically that also was not a consensus trade until maybe three days into it, but the whole thing was farmed out if I remember in a week. Right? So we were the first big whale, uh, that was farming wifi. And the only reason that we were able to do that is because um, when everybody was farming compound in june and july right? And we were to write, um, we actually started studying curve because we're thinking about like what other pools exist, what other things are are farmable. And we started studying curve very heavily and this is before curve was very popular. And then on top of that, uh, there was a very unique pool

which had all these

like y assets and we're like, what the hell are these y assets. So we started studying this and you know, we go into a website where the documentation is really sparse. Everything looks very shoddy that there was a certificate error on the, on the website. I mean everything looked terrible. Like I thought this thing could have been a scam, right? But after studying it very carefully, what we could, we realized, oh, that's not a bad idea at all. You know, it's like an interest bearing version of these underlying coins, but that they bounced around between these different pools to maximize the yield, like a robo advisor. Like this has never been done before. This is actually pretty cool idea. So then we're like, okay, by the time, you know, the wifi token got announced and we're already familiar with that protocol, right? So it's like a lot of, it was just the preparation of being in the right place at the right time because we had studied curve and wifi uh, and the y the wiring protocol before um you know, before these, uh, these tokens were

launched, the wifi token was launched, right?

So you know, that's

sort of the idea, right? Because

like, right afterwards, like

two or three days into it, then like all these big

wheels started coming in and farming

this stuff. Right? But in

the beginning, like we

just got like a, like

A 1-2 day head start and that accounted

for like more than any anybody else

got basically because it was just so

it was just so juicy

and so isolated. So

that's kind of what we look for. We

particularly really like these kind of contrarian plays, we have tons of big money and very smart people on the other side. Um, and every once in awhile, very rarely, but every once in a while they're just completely off base and it makes it particularly

juicy there.

Yeah, thank you for that very clear breakdown of the process and

that's a philosophy that

I abide by as well as you kind of do the preparation because by the time that the play comes um, it's,

it's too late to start doing your

DD and in crypto,

You know, one or 2 days

difference can, can really be all, all that matters. And of those players you mentioned, I think the only one

got right was

Wifi because I

was very publicly about

missing out on FTT

Precisely because of those three

reasons you mentioned, which is one of the biggest

regrets in my career so

far, but a lesson learned there

and I guess going

back to luna, would

you characterize the way that this played

out as a black swan event because it did require

a lot of things

aligning luna

was transitioning to the four

pool at that time and you know, there were some massive sellers um,

didn't require this like specific mixture of events to

be happening at the same time

or would have whatever happened

under any other circumstances eventually anyway. Yeah. You know, it was funny

because I was in the chat

with Eagle capital, right? And they were like, yeah, what kind of sigma event you guys think this is and everybody's giving their opinion and I almost facetiously said, oh, this is a zero sigma event, like it was bound to happen. Um,

I think, I think

over a long enough time horizon, this is basically zero sigma movement, I think it was fated to be this

way, but I think

in the short term, tactically, I would

say probably like

something like two sigma and then, you know, I don't think too outlandish, but I think fairly rare, right? There was at least tactically in the short term, a lot of things that had to happen at the same time, right? Like this three pull 24 pull migration and you know what's funny is that, um, that definitely exacerbated

the problem, but it is

possible that even

Without the three pool 4

pull migration, that this thing would have collapsed, you know, maybe would have taken a half a day longer or a couple of hours longer, but it could have still just collapsed, I mean that there wasn't that much liquidity in three

pools, uh

you know, that that TfL pulled when they were migrating over the four pool and what I would say is that what, what would be really ironic is that, um it was the let's say that, you know that

85 mil sell

into that curve pool right into three pool after the liquidity got pulled. That could have just been somebody doing it by accident

right? Because maybe

there was just some large whale that was also thinking the same thing that we were thinking, which is that we're gonna wait to see like once it's liquidy starts to come down and then we're gonna take the last clip of it to exit our our anchor position. And they just didn't know that the migration was happening, right? Maybe communication wires got crossed there just one day they just see oh shit somebody pulled up, pulled out tons of liquidity out of three pool. Okay guys, it's time we got to pull out, right? So it could have like it could've just been an accident of not knowing that the migration was happening that caused this guy to panic, which caused further guys to panic and then the stampede happens and everybody trampled each other to death through the small door. Right? So that that would be the most ironic thing is that maybe it was just them, you know, tfl not having broadly communicated that the migration was happening or maybe it wasn't even their fault, maybe they

did and it was just some

random guy who just had no idea, it wasn't following things that closely, they were not

like super into

luna and ust not following the news on that very closely. They were just some casual, you know whale farmer of anchor and then they just monitored liquidity and they got scared and then they caused the stampede. So all of that is possible. I, I never want to chalk up to um, you know, malicious intent, what can be easily explained by human stupidity. So, um, and I think, I think it's also the funniest story if that was the case too.

So you're not

off the, you're

not to believe that maybe

citadel or I think that rumor

was Blackstone or

Blackrock was behind this. You know, there's just that, I don't think it's even possible. It's more likely that that citadel could have than black rock. I think Blackrock's absolutely impossible. I think for citadel very, very unlikely. I think these large stratified

institutions for them to even get

compliance approval to make some kind of weird play like this. I mean, you know, it had to have been brewing for like six months, right? And even then I think compliance would say no. So

I think

overall it's just not, uh, it's just not really in the wheelhouse. I mean,

what was this? I mean, this is like a

four Chan Post and then literally,

you know, some

Rando makes a post on four chan and the Blackrock incident will actually have to respond. I mean, what world do we live in? You know, this is kind of wild that they literally have to deny a rumor started by some Rando on fortune. You know what I think is that the market was really just entering the phase of finger pointing

now that

finally all the hope is gone and we realized that this doesn't work well

whose fault is it? Right? And

you know, Tfl is very happy to say, oh, you know, probably not our fault. You know somebody who caused this. It was the attacker, it's the shorts problems,

right? They're, they're the

ones that caused this for all of you guys. Don't,

don't bring your

torches and pitchforks to us. Really, you should take it to these nebulous, abstract Attackers. You know, whoever they may be, you know, diffuse your anger through

them. So I think that's

really a lot of it what was going on? But, but honestly a lot of it too, is that the mob themselves want somebody to blame, right? Like nobody's going to just do the self reflection necessary in the heat of the moment, maybe later on. And I am hopeful,

but in the heat of the moment

to say, oh it was my fault,

right? It was like,

oh I, I was greedy and that's why this has happened, right? They're gonna say, oh no, it's Cfl's fault, oh no, it's like Blackrock's fault. Oh no, it's got was fault. It's this, this and that they're gonna point the finger everywhere before, you know, they pointed at the mirror. Um, and I think maybe after the cool down, I think maybe it's a lot more sobering um,

and you know, there

could be some time for self reflection, but I think, um,

I think that's

basically what was going on and that's why, you know, people come up with these wild conspiracy theories. Um, it could have just been an accident, like nobody likes to talk about it, it could literally have just been an accident, you know? Yeah, I think over time the

public will put the blame

on the right people. Um, and I think especially for, for a lot of

retails out there, I feel

bad for them because they're kind of promised this safe savings product and I know I've heard a lot of anecdotes about people putting in a lot of their savings into it and they kind of

trust that whatever they saw

online. Um, and maybe there were endorsements from influencers

as well. So

over time I do think there will be, you know, hopefully some, some vindication and

hopefully some of these people

will, some of the details, especially the smaller guys would get, um, you know, bailed out in some way, I know there are a few plans that are in motion right now and I'd

love to get your thoughts on some

of these plans as well. So if you look

back at the past few

days, there have been a few proposals, the first proposal to save

us, t was, you know

that the deploy capital back in the curve pool and it did

restore the pack for a little

bit. And you mentioned that for a brief moment you thought, hey, maybe maybe that would fix

it. But obviously

that didn't, you know, fix the pack.

And then the second proposal they put

forth was, you know,

they're just gonna let luna

inflate away all the bed

that. So I'm curious, you

know, what was your thought on that when you saw that they were going to just let luna inflate like infinitely.

Mhm Yeah. So what my

thought on that is that I

don't have a particular

problem with any of the choices that were made. I think really the issue is,

is that you need to communicate this

stuff properly and you need to make sure

that there's no insider

trading of this information. Right? So like for

example, if in the war room where you have all

these investors and

all these like uh, you know, high, high up

people uh, in the

terror ecosystem. If they decide, okay, now we're going to raise the

limit of how much can be

minted and redeemed

from, you know, x amount

250 mil per day down now

to a million

units of luna per

minute. Right? Like

you can imagine that even in the moments that that is being discussed. If there's a big enough


in that group, some people are gonna start

front running that news.

Right because they're gonna know that luna is going to be hyper

inflating. Like I

wouldn't be surprised

if people

in that war room and their own

investors at some point

with the privilege

of information started

shorting luna themselves, right? The

exam that exacerbates the problem,

right? And in a way it's kind of like double dipping.

I mean these guys already got such

good deals on seed round and huge

discounts, you know, and

already such huge appreciation and now get to double dip and you know, dipping and

dump on retail with

access to privileged

information. So I

think that's really what the issue is regardless of the

decisions that they made as

long as it was not

publicly broadcast and telegraph.

And you know, people, you know, there were insiders who had to come to these

decisions in the first place. There

was, there's always gonna be leaks

and there's always going to be, um, some flows in the

market that are at first to retail. So that's really what the issue is, right?

Um, now in

terms of this idea of like

defending the peg versus letting the peg break and

then hyper inflating luna.

I mean


they should have already had a

prescription in a play

by play in place that they follow down

to the T. Right. Now

there is some argument

to be said that they need

some flexibility,

right? It's like you can't fully

advertise exactly what

you're going to do because in the market's gonna adapt, right? But overall

to avoid these kinds

of conflicts of interest problems.

Um you know, which

which I think are very huge, right? Like why? Why is it like there's definitely gonna be investors um here

where they

should have blown up, but

they didn't and one can only wonder

why, right?

And how, you know, how

did they make certain profits

during this

collapse that most other people could not have

made right? Especially on their side.


So I think um

you know, there needs to be something uh

something of an investigation, we

really need to clean out

this kind of corruption within the

space. Um I think they need

a change of leadership


even even

symbolically they need

that um you know, just

to placate um all the people and all the lunatics in order

for any chance of a recovery plan

for not being immediately dumped. Right? Um So, you know, those are, those

are some of my thoughts and

you know, I think in the

end it does look like the

reserves were used to

defend the peg. But

if people just knew when

those clips were uh,

you know, pushed into the market, that's huge. Um

information. I mean that's a huge

information. Asymmetry.

Uh and that's not particularly fair to the

average retail holder. Yeah. In hindsight, I guess they could

have been a bit clearer and a bit prompter

with the communication

because there was a stretch of

time when they were pretty quiet. but I do

think that these conflicts of

interest will be very hard to avoid just in times of crisis like this you could open it up for a

vote for everybody but

that would probably you

know make it an even slower.

So I do empathize with how difficult it is for them to kind of pull this off but also kind

of understand the point about the

transparency. Um and I guess speaking of their responses their latest response so far is they announced I think earlier today that they have about $84.85 million dollars in reserves left

if you don't count us

tea or luna so significantly lower than a lot of people were

thinking they thought maybe they have

a billion dollars left. So based on just you know rough back back of the envelope math it means

that um you

know if they do bail out all of the circulating U. S. T. That's you know 90% less value than where it is

trading at right now. So you know I'm

Curious about if you were in their shoes right with this $80 million dollars in reserves what can they

possibly do to