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TerraUSD crash led to vanished savings, shattered dreams

wsj.com

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Re: TerraUSD crash led to vanished savings, shattered dreams

#131

Post by propter_hoc »

MBCook wrote: post #116
wmf wrote: post #69

Earlier quoted context omitted.

The reporting is skipping some steps. You'd buy UST then deposit it into a "separate" bankish thing called Anchor which would pay you 20% APR. The interest was supposed to come from Anchor loaning out your UST at a higher rate. This would be sustainable in theory, but they were actually paying interest out of their marketing budget to bootstrap the Terra/Luna/Anchor "ecosystem".

So I take my coin, pegged to the dollar, and lend it Anchor for a 20% return. Anchor lends it out to someone else at >20% APR because that other person is… brain dead? Who would accept that? But again, where do the new Terra coins come from? If Anchor pays me in more stable coins, they had to buy USD to be allowed to mint them right? Does that mean I bought Terra with USD to allow Anchor (which is Terra?) to sell my…

My understanding (probably incomplete) is that a lot of the loans were short-term "flash loans". Being that the term was quite short, they're more akin to payday loans. If you were to compute the loan on an APY basis it would be usurious, but since it's only for a short period the total amount paid is small.

Collect many of those short-term high-interest loans into a single bucket, and you have a longer-term high interest facility. Like being an LP in a credit fund. So there is a fairly high fundamental yield. Not 20%, but maybe 6%.

Second, as the GP mentions, they were also using their marketing budget to pay an unsustainably high yield to excite and entice investors. So on to the 6%, add another 4% of VC money.

Finally, they were underestimating the risk of the underlying loans defaulting, thereby causing them to overestimate the APY on the pool. That brought them to a place where they thought they could pay 20% instead of 10%.

There might be more to it than that but that's what I understand.

Re: TerraUSD crash led to vanished savings, shattered dreams

#132

Post by KMag »

sumy23 wrote: post #120
rurp wrote: post #79

Earlier quoted context omitted.

Heh, I think that idea has a lot of promise. Casinos might offer some guidance here given how good they are at making games with fairly straightforward negative odds seem enticing. We need some sort of responsible investing vehicle that includes gamification, intermittent reinforcement, and a tiny chance for a huge payoff.

> We need some sort of responsible investing vehicle that includes gamification, intermittent reinforcement, and a tiny chance for a huge payoff. You’re basically describing options.

> You’re basically describing options.

Well, with vanilla options, you'd need a basket of options to both reasonably closely replicate performance of a broad index (the "responsible vehicle" part) and also a small percentage of the time hitting a big pay-out. Presumably, you'd want mostly short-duration at-the-money calls on a low-fee broad-index ETF (so they often end up owning the ETF), and a small number of deep out-of-the money puts and calls on volatile micro-cap single names to get that sweet sweet irregular reinforcement dopamine hit.

This is not investment advice.

Re: TerraUSD crash led to vanished savings, shattered dreams

#133

Post by quickthrowman »

KMag wrote: post #114
dustyharddrive wrote: post #37

Earlier quoted context omitted.

It’s worth mentioning USDC (Circle) reserves have never been audited, and they don’t even claim to hold dollars anymore ( https://archive.today/2021.07.12-223553/https://www.ft.com/c... ): > Until March 2020, the attestations said USDC was backed by dollars, held in government-backed US depository institutions. After that, they said the reserves were held at institutions and in “approved investments”, but did not giv…

The thing I never understood was why they didn't just invest in treasuries. Yield on the US 10-year is currently north of 3.3%, closer to 2% for a while. That's under inflation, but if you're a small start-up holding 100s of millions or billions of other people's money, that's enough to hit screw-it money in a few years without the constant fear of things going terribly wrong.

You wouldn’t want to hold 10 year bonds, way too much duration risk. 30 day T-Bills is what they’d want to hold to minimize risk.

Re: TerraUSD crash led to vanished savings, shattered dreams

#134

Post by ngold »

jmyeet wrote: post #31

I occasionally get asked by relatives and friends of what to invest in. Now I'm no expert but I guess in the valley of the blind the one-eyed man is king. Thing is what I tell them seems to bore them because, well, it's boring. My advice is basically this: Put your money in a broad index fund and don't look at it for 10 years. In giving this advice you start to realize it's not what people want to hear. It's not that…

Just remind them of Warren buffets 10 year bet on index funds, and he made that right before the 2008 collapse. Still won.

Re: TerraUSD crash led to vanished savings, shattered dreams

#135

Post by troon-lover »

cowtools wrote: post #60
MBCook wrote: post #55

Ok I’ve never tried to look into TerraUSD or other stablecoins before. So I have $100. I use that to buy $100 worth of Terra because it’s pegged to USD. Then I can.. sell it for $100? What’s the point? If they promise returns where are they supposed to come from? If my coins are pegged to USD how do they appreciate? Or is the idea they just give me more for holding? But if the coins are pegged where do they get the m…

>If my coins are pegged to USD how do they appreciate? Staking rewards. It's marketed as a necessary feature of PoS cryptocurrencies, but it isn't really necessary if the cryptocurrency is actually centralized anyways. Centralized cryptocurrencies like USDT just use it to entice buyers with rewards for just holding it, creating inflation at the cost of everyone else. This is a major reason against Proof-of-Stake: if…

No post body was provided.

Re: TerraUSD crash led to vanished savings, shattered dreams

#137

Post by sumy23 »

KMag wrote: post #132
sumy23 wrote: post #120

Earlier quoted context omitted.

> We need some sort of responsible investing vehicle that includes gamification, intermittent reinforcement, and a tiny chance for a huge payoff. You’re basically describing options.

> You’re basically describing options. Well, with vanilla options, you'd need a basket of options to both reasonably closely replicate performance of a broad index (the "responsible vehicle" part) and also a small percentage of the time hitting a big pay-out. Presumably, you'd want mostly short-duration at-the-money calls on a low-fee broad-index ETF (so they often end up owning the ETF), and a small number of deep o…

I don't think investing in short-term at-the-money options would be a good strategy because you'd lose a lot to premiums. It'd be better package long positions on the low-fee ETFs mixed with some deep otm options as an investment vehicle. Love the concept!

Re: TerraUSD crash led to vanished savings, shattered dreams

#138

Post by Nick87633 »

adrr wrote: post #91
dustyharddrive wrote: post #37

Earlier quoted context omitted.

It’s worth mentioning USDC (Circle) reserves have never been audited, and they don’t even claim to hold dollars anymore ( https://archive.today/2021.07.12-223553/https://www.ft.com/c... ): > Until March 2020, the attestations said USDC was backed by dollars, held in government-backed US depository institutions. After that, they said the reserves were held at institutions and in “approved investments”, but did not giv…

I always wondered if the USD based stablecoins just hold each other's coins in lieu of cash. It's like an infinite money glitch if it's circular.

Or like governments issuing bonds in foreign denominations.

Re: TerraUSD crash led to vanished savings, shattered dreams

#139

Post by chii »

makeitdouble wrote: post #51
jmyeet wrote: post #31

I occasionally get asked by relatives and friends of what to invest in. Now I'm no expert but I guess in the valley of the blind the one-eyed man is king. Thing is what I tell them seems to bore them because, well, it's boring. My advice is basically this: Put your money in a broad index fund and don't look at it for 10 years. In giving this advice you start to realize it's not what people want to hear. It's not that…

I think index funds are better seen as "savings" than "investments" in most people's mind.

"savings" implies that you can withdraw it at any time without loss, which definitely isn't the case with index fund investments. You should only "withdraw" in times of high market prices.

people see investments as something that returns 10x - so i say rather than calling index investing "savings", we should call the 10x type investments "speculation" or gambling.

Re: TerraUSD crash led to vanished savings, shattered dreams

#140

Post by chii »

charlie0 wrote: post #121

Coming from relative poverty, I can say that, counterintuitively, a lot of people way down on the socioeconomic ladder would rather gamble on a moonshot to riches rather than invest in an index fund. One large part of this is simply lack of education. The other part is the realization that if making close to minimum wage, investing in an index fund would still take quite a very long time to go up significantly. Give…

> gambling your 5K-10K of savings for a potential 10x return in a year or two, it's easy to rationalize the latter.

which is why it's overwhelmingly large number of lottery buyers are poorer folks.

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