The Collapse of Terra
Hartmann Capital Newsletter, Friday May 13 2022
Note: All Hartmann Capital funds had 0 exposure to Terra and UST already months before, during, and after the crash.
The Rise of Terra was a sight to behold. A new era of decentralized stablecoins was ushered in that could not be censored like its centralized cousins USDC and USDT. However it was its rapid rise that ultimately led to its downfall.
This week, I sat down for a one hour solo-episode on the podcast to discuss the rise and fall of Terra. I highlight what first drew me to back Terra/Luna at $0.20 and what ultimately made me walk away from Terra completely at $85, going as far as warning of a potential black swan on last week's podcast episode (here and here) when UST had still been trading at peg.
In the episode I discuss:
What Terra did right in its early days
How the Luna/UST mechanism works
What ultimately went wrong and where we spotted the smoke
Understanding how the collapse unfolded
Potential implications for both Terra, contagion, and the space at large
Where to next for the digital asset space
For those short on time, a brief summary of events:
Terra is both a stablecoin protocol and a layer 1 blockchain. Its stablecoin feature saw early successes with KRT (a decentralized version of the South Korean Won). What made Terra stand out from the pack was that while most stablecoin protocols merely offered supply (the currency), Terraform Labs (the company behind Terra) was the only protocol to also ensure demand. Terraform labs began spinning out countless products from Anchor (a credit protocol) to Mirror (a synthetic asset protocol), and others that would lend real world use cases to the decentralized stablecoin. It had some of the best UI/UX in crypto. So far so good.
The summary of where things went wrong can be attributed to three core aspects:
Unsustainable 20% yields offered on Anchor that were funded by Luna sales
High yields created a bubble of inorganic demand for UST
Do Kwon’s leadership went from being a visionary underdog to a pompous narcissist
The full post mortem in the podcast highlights the fine nuances, but even as a fund with 0 exposure at the time of the collapse, we believe that it was not the tech or bad intentions that caused the collapse, but rather a mix of ambition and pride. It was the rapid growth of UST that enabled a potential bank run in the first place.
While this is certainly a shock to the space, and very likely a reason for regulators to crack down on stablecoins, we also see the silver lining in the collapse to drive the space away from its hyperfocus on incentives and back to organic demand and use cases. Whether it's the collapse of Olympus, Terra, or Axie, the theme is the same - value must come from somewhere and inflationary incentives are not a business model. This has been our belief for years and while value focused investing can seem old school in raging bull markets, it’s what wins in the long term.
Whether it's the collapse of Terra or the rise of interest rates, tough founders will keep building and innovating no matter the backdrop. And those are the founders that will create the technologies that will define our future. Think I am too optimistic? Check the dates when Uber, Airbnb, Whatsapp, Instagram, and Disney were founded. We’re just getting started.
This is not an offering. This is not financial advice. Always do your own research.
Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.