The Terra-Luna Syndrome in DeFi

Case example and recommended treatment

Def. Syndrome: A collection of symptoms or conditions that occur together and suggest the presence of a certain disease problem or an increased risk of developing the disease problem.

Since the Terra-Luna crash, many DeFi users have developed a special crypto syndrome related to their newly acquired knowledge of the events that occurred with these two tokens a few months ago. If you just woke up from a comma or just arrived from an island with no internet, you just need to know for now that Luna peaked at $119 and crashed to near zero in early May this year. , wiping out a few billion dollars generating a cascading effect across the entire crypto ecosystem.

Due to this newly developed crypto syndrome, many users or investors, in the process of deciding to buy a token, tend to make a permanent comparison between the wanted token and Terra-Luna tokens.

Here are some typical findings:

• If the price has fallen exponentially, then it will probably be like Luna
• If the supply is elastic uses the same dynamics as Luna
• If there is a stable that is hollow and elastic, it is like Luna.

This type of reasoning ignores any objective comparison. Blockchains are complex systems of people, code, ideas and values, vision, symbolic design, governance, technology and use cases. Drawing this kind of conclusion is no different from saying: “I live in a democracy because I can vote for a third party who will decide for me every 4 years”…

But don’t worry, treatment for this syndrome is free, good for the soul, and no vaccinations are required, so here are my personal recommendations:

1.- Learn what is cognitive bias, know yourself and be curious. There is a good example in this recently published article also in Hackernoon.

2.- Lily on the blockchain/token you are interested in and check the facts (block explorers, governance votes, systems in force, development status, risk assessments, others…)

3.- To research the underlying facts that led to the consequences in Terra-Luna

4.- ask politely in the token’s official channels, search for questions that include the similarities you find to be informed.

With this easy treatment, you will be able to draw conclusions rationally and in Dauntless mode. You will be able to move around the DeFi world with your own opinion and knowledge, and you will have arguments to back up your conclusions. It will also allow you to make productive decisions in your DYOR process, without rejecting projects with incredible growth potential.

Case example: Terra-Luna versus XOR or XSTUSD

Since the last May events regarding LUNA, I have noticed an increasing number of users asking in the official SORA channels I participate in, whether XOR or XSTUSD tokens are the same as Luna. Interestingly, in the previous 12 months, no one at any time suggested any similarity between the two networks. It is quite clear that many users have come to an “ex-post” assumption due to a simplistic comparison of price behavior. So let’s look at the underlying facts, as part of the recommended treatment for the syndrome.

Vision and goals

While Terra-Luna (by the way, Earth-Moon translates from Spanish to English) is a proposal for a stablecoin with a dual token system, based on the white paper Segnoriage Shares by Roger Sams with the dynamics of dual token system explained in the document, SORA is both a New Supranational World Economic System (NEWO) that decentralizes the concept of central banking as well as a network in the Polkadot ecosystem that will connect to the Polkadot relay chain and to parachains with built-in DeFi-focused tools designed for the greater good.

In other words, Terra offers an algorithmic stablecoin use case where you can benefit from both the volatility absorbed by the Luna token and the stability of USDT. In SORA, the value proposition is a new crypto-economic system that can take countries’ GDP to the next level, with XSTUSD being just one of the many use cases available.

Governance differences

With the majority of users and investors focusing on the design of tokenomics to forecast a price chart, little attention is usually given to network governance.

The SORA community actually uses the on-chain Polkadot governance interface for key decisions regarding the allocation of money for productive purposes, while an optimal democratic system is being developed: the SORA Parliament.

At Terra-Luna, many times marketed as a decentralized finance service, founder Do Kwon managed (through the LFG shadow foundation where the community does not participate) to mint millions of USDT dollars and donate them to the protocol Anchor, in order to provide a very attractive 20% yield that will appeal to all DeFi users looking for a safe haven, with one of the highest and most persistent yields of any option available in both the worlds crypto and fiat. This situation favored an attack vector which was then exploited.

The concept of elasticity

Interestingly, the dynamics of Terra-Luna’s elasticity to supply has been repeatedly described as a decentralized bank with algorithmic monetary policy. Without considering that the allocation of the money created is as important as the same act of monetary creation.

Compared to XOR, the elasticity of supply is the consequence of 2 facts:

• Algorithmic token binding curve is designed for futures price direction once reserves are depleted
• Decisions are made by the community regarding the allocation of the new fund

But when it comes to XSTUSD vs Luna comparisons, the syndrome appears stronger: they must be the same because you hit one token to mine the other… Funny journalists have confirmed that LUNA has a dynamic supply of 1 billion rooms.

Ankle

In Terra-Luna, minting and busting takes place when arbitrageurs buy or sell tokens for profit, with an incentive system designed to balance demand and supply against a target price of $1. If the incentive disappears, the peg is lost. If the arbitrageurs conclude that there is no potential profit, confidence in the future of the team disappears.

Surprisingly, the XOR currency provides no economic incentive to mint or mine XOR for XSTUSD. This is simply driven by the actual demand or supply of the synthetic XSTUSD by applying the exchange rate for the XOR-$ pair (DAI price feed) at any time.

Since XSTUSD is protected by a community-governed floor price and will also be protected by a token bond curve with reserves, it is not possible to perform a Soros-like attack.

Lordship versus the common good

Seigniorage is the profit made by the issuing authority of a currency, in particular the difference between the face value of the coins and their production costs. In the case of XOR, the cost to mint or break XSTUSD is the same as trading any other token (disregarding slippage). SORA tokenomics are designed to return the value generated by the use of the network to all users, thus being a global economic system designed for the common good of humanity.

In a sense, Terra-Luna acts like any central bank, as a commission (segnoriage) is charged just for the right to mint a coin. This type of profit is not much different from paying miners for the coin they mint.

Post-treatment considerations

The idea is that often our decisions (including myself here) are usually based on concepts and ideas raised by mainstream crypto media. Right after the Terra Luna attack, hundreds of articles appeared advocating for fiat-backed stablecoins, claiming their “safety” and robustness.

Elastic supplies are not new to crypto but are difficult to understand when users are skewed by BTC fixed supply versus Fiat quantitative easing policies.

In the end, by following the suggested recommendations: read, learn, research and ask, you will at least be sure that you are making your decisions based on your own ideas.