March 6, 2023 • 48 mins
The Ponzi scheme is a classic high-stakes con game that can net a scammer a lot of money, but at considerable risk. We take a look at the Terraform Labs collapse of 2022 and learn what factors led to its downfall and why its co-founder is on the run.
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:04):
Welcome to tech Stuff, a production from iHeartRadio. Hey there,
and welcome to tech Stuff. I'm your host, Jovin Strickland.
I'm an executive producer with iHeartRadio and how the tech
are you? So? Back on January twenty fifth, twenty twenty one,
I published an episode titled It's a open Bracket Crypto,
(00:29):
closed bracket Ponzi Scheme. So it's a crypto Ponzi scheme.
That's where I was paying homage to stuff you should
know as Chuck Bryant, who I have heard say it's
a Ponzi scheme way back in the house stuff works days.
And in that episode, I talked about numerous issues within
the crypto community that relate to Ponzi schemes, and today
(00:53):
I thought we would do an update to talk about
one specific one that really had an enormous impact last year,
and then a little additional details because even since twenty
twenty one, there's been more examples of either outright Ponzi
schemes in the crypto space or closely related issues that
(01:15):
had enormous impact. So I'm not talking about every single one,
but I'm talking about the really big ones. Now, first,
we need to remind ourselves about what a Ponzi scheme
actually is. Now. It takes its name from a guy
named Charles Ponzi, who in the nineteen twenties used a
method to steal a whole lot of money, reportedly around
(01:38):
fifteen million dollars in less than a year. Now that's
a lot of money right now, fifteen million. I would
not sneeze at fifteen million. I would be shuffed to
receive that. But holy cats, think about that in nineteen
twenties money a ridiculous amount of cash. Well, what was
(01:59):
he doing? Well? Schtick was centered around International Reply coupons,
or IRCs, and essentially an IRC is a voucher for
postage stamps in another country. So you would go to
the post office and you would buy IRCs if you
wanted to write back to your family in the old
(02:20):
country and then have them be able to respond without
them having to buy stamps themselves. So instead they would
go to their post office, they would use the IRC coupon,
and the coupon would cover the cost of stamps to
send international mail back to you. You don't have to
do this within the same country, because then you could
(02:40):
just use a self addressed stamped envelope, but obviously a
US stamp doesn't mean anything in a different country. Well,
Ponzi's idea was to use IRCs and leverage the differences
in postage costs in different countries. See, when you bought
an IRC, you did so at whatever the local postage
(03:02):
rate for a stamp was in your area, and even
if the postage rate was higher in another country, the
IRC would still cover the stamp. So this example doesn't
really hold because the rates would be flip flocked. But
here we go. If a stamp at the US cost
a nickel at the time, so five cents, but a
(03:24):
stamp in Germany cost a dime or ten cents in
equivalent US cash, what you could do is you could
go to the US post office. You would use a
five cent nickel to buy an IRC. You'd send that
over to your papaw in Germany, and your papa could
use that same IRC to get a ten cent stamp
(03:45):
at the post office, even though you only had to
pay five cents back in the United States. So Ponzi's
idea was to try and leverage this. He wanted to
buy IRCs in cheap countries and then redeem them and
innsive ones and then sell the stamps out a profit.
So it was like creating money out of nothing. He
(04:06):
tried to convince a bank to back this idea, of
the banks weren't convinced that the strategy would work, or
if it did work, it wouldn't really be scalable. You
wouldn't be able to do this in a volume that
would actually make you any significant amount of money. It
turns out those banks were right. So instead Ponzi goes
and starts talking to friends and acquaintances, and he starts
(04:29):
making promises that within three months he could double an
initial investment, and he secures a round of investment cash,
and sure enough, some of these investors see impressive payouts
from Ponzi later down the road. Except it turned out
those payouts were not the result of this IRC scam
(04:50):
he had in mind, or not even scam his scheme.
This IRC scheme wasn't the reason why Ponzi was paying
out the dividends on those investments. Instead, Ponzi actually found
the logistics of getting this scheme to work were way
more complex than he anticipated it. Like I said, the
(05:11):
banks were right, So I think, at least in the beginning,
he probably was determined to try and make it work.
But in the meantime, what he did was he needed
to find a way to give a return on investment
to these initial investors. So he took out a second
round of investing, and with some of the money that
(05:32):
folks were pouring into the scheme at this round of investment,
he took that money and paid out some of his
earlier investors. Well, the earlier investors are incredibly excited to
see that they got such a rapid and considerable return,
so a lot of them reinvested back into Ponzi's scheme,
(05:53):
and before long Ponzi shifts away from trying to make
the IRC thing work. He just gives up on that
and he steady just runs a scam where he takes
the most recent round of investments to pay out returns
to earlier investors and himself. Now, to be clear, Ponzi
did not invent this idea. This was not a brand
(06:16):
new concept. He was not the first to come up
with a Ponzi scheme, but we call them Ponzi schemes
because he went big time with this, mostly out of Boston, Massachusetts.
While previous examples of these schemes followed essentially the same
thing that what Ponzi was doing. Ponzi's version propelled him
to such wealth that before the whole thing came crashing down,
(06:39):
he was pretty famous in the New England area. Newspapers
would cover his business favorably, and that of course led
to even more investments. So when a newspaper would say, hey,
these investors are super happy because they got so much
money back on their investment, more people were begging to
give Ponzi their money. Was able to perpetuate the scheme
(07:01):
and make him even richer. But here's the thing. Even
the best run Ponzi scheme will not last forever. Eventually,
the incoming investments are not enough to cover all the
previous investors, and you either have to pay out smaller
and smaller dividends, which is going to upset your investors,
or you got to take the money and run while
(07:22):
you can. But while the scheme is booming, you can
have yourself a swell time. Just you know, you've got
to remember that at some point the piper will demand
to be paid, and you'll likely also have some government
agencies with some scary initials, and they'll be really, really
interested in talking to you. Another way to describe the
(07:42):
Ponzi scheme is the old saying robbing Peter to pay Paul,
or sometimes it's borrowing from Peter to pay Paul. But
you get the idea. You're not creating wealth, you're really
just redistributing it. And it only works as long as
you can keep finding more Peters so that you can
keep paying all those Palls and keep them at bay.
(08:05):
As for Ponzi himself, well, several months after he rocketed
to wealth, the investigators began to close in on him.
The US Postal Office denounced the underlying principle of his
supposed business, which, remember, was not actually what he was doing.
It was just what he said he was doing. But
the US post Office said, there's just no way he
(08:27):
could be making that much money through IRCs because the
volume he would have to trade in was greater than
what the supply was, so literally, there was no possible
way for him to make his money through the way
he was claiming, because there weren't enough IRCs out there
to make it happen. And local newspapers began to suspect
that perhaps they had been hoodwinked, and so chagrined, they
(08:52):
began to launch their own investigative efforts and a way
to try and save face, because if you talk someone
up and then it turns out that they're a flim
flam artist, that does not go well for your reputation. Right,
So these newspapers are like, we need to if something
is hinky here, we need to really look into it.
(09:13):
There were a couple of points where it seemed like
the mob was about to turn on Ponzi, that everyone
was gonna pull their money out, which would have sent
the whole thing into a collapse. But a couple of
times he was actually able to dissuade them, and some
folks who were determined to withdraw their money once the
investigations began would later reconsider because Ponzi seemed to be
(09:33):
on the up and up, like he was returning money
to investors who were requesting it, like millions of dollars
early on, and so folks began to say, well, if
he was actually a crook, he wouldn't be returning money,
so he must be honest. That means I might actually
stand to make a whole bunch of money from this guy.
(09:54):
And so people who had initially thought I'm out, ended
up not just staying in, but some of them put
even more money into the scheme. Now, ultimately, an audit
by the US government found that Ponzi's business was thoroughly
corrupt and totally baseless. The investigation ultimately found there was
around sixty one dollars worth of IRC's in the whole
(10:16):
dang business. You are not going to be making millions
of dollars in profit off of sixty one dollars of
these coupons, And it proved that what Ponzi really was
doing was just convincing more and more people to hand
him money to pay off the earlier investors and to
make himself rich. Ponzi ultimately would go to jail, though
(10:38):
not before having a few more adventures through skipping bond
and running off to different states before he was ultimately
apprehended and sentenced, and after serving his sentence, he was
deported to Italy. He was an immigrant from Italy to
the United States. He did not return to the US,
but he did immigrate to Brazil and set up a
(10:59):
business there until in nineteen forty nine he passed away. Now,
there are a couple of scams that closely relate to
a Ponzi scheme, but are slightly different. For example, a
pyramid scheme. This is where you've got one person or
a group of people at the very tip top of
the pyramid, and then they recruit a layer of investors
(11:21):
who pay money into the scheme. In return, these initial
investors have to go out and recruit another layer of investors,
and they keep a little bit of the money that
those folks are contributing to the organization, and they pass
the rest of the money up the pyramid and then
this new layer, so now we're two layers down from
(11:44):
the top. They have to go on and recruit yet
another layer of investors, and so on. So each group
of investors needs to get more investors. And if you
want to think of a simple one, let's say that
each investor needs to get two other investors to pay
into the system. And it expands rapidly as you would imagine.
(12:05):
And that's just if you only had to get two.
And so meanwhile, the people at the top, they're getting
payouts with every successive layer that's added to this pyramid.
Each person along the top is getting a small amount
per investment till you get to the tippy top where
they're really making bank. But the people at the bottom
are not making anything at all unless they are recruiting
(12:28):
new people into the organization, so they're feeding into the pyramid.
And like a Ponzi scheme, a pyramid scheme will ultimately
fall apart because at some level the base of the
pyramid is so large that there's no way to recruit
more people to pay into the system, and the whole
thing starts to fall apart. And really the only people
(12:50):
who make any serious money are the ones near the
top layers, like maybe the first couple of layers, and
the tippy top being the ones who make the most
money out of the whole thing. Now relate into that
are multi level marketing schemes. These aren't necessarily outright scams,
they are not necessarily illegal, but they also rely heavily
(13:10):
on recruiting new members, and sometimes they rely more on
the recruitment side than they do with whatever they're actually
supposedly selling or marketing. And there are tons of these,
and they're known for selling all sorts of stuff. The
classic example is cosmetics, where you have people who get
(13:30):
pay into the system in order to get access to
cosmetics supplies to sell to people, but very quickly they
see that the real money isn't in selling the cosmetics,
but recruiting other people to join in to sell these cosmetics.
And once you really start stripping things away, it starts
to look like the cosmetics are just an excuse for
(13:52):
the organization to exist. The real money comes in looping
in more and more people into the scheme until you've saturation,
and then if the cosmetics can support that, if selling
the cosmetics can keep the organization going, it's technically a
legitimate organization. It's just that it's probably not making the
(14:13):
same amount of money it was when it was in
the recruitment phase, and it's still kind of questionable. And
then we've got the crypto version, and these can take
a lot of forms, but the basic sequence tends to
be someone creates a new cryptocurrency, either on an existing
blockchain or possibly through a new one, and they hold
an initial offering of coins ioc Man. There's a lot
(14:36):
of initialisms in this episode, and sometimes I stands for initial,
and sometimes it stands for international. It's initial in this case,
so in return for an investment, the investor gets an
initial offering of coins or digital tokens that are awarded
to them, and they are newly minted, fresh, crispy crypto coins.
(14:57):
We'll talk about where this can go wrong after we
take this quick break. Okay, an initial offering of coins
where you jump in on a brand new blockchain offering,
(15:22):
whether it's on a brand new blockchain itself or on
an existing one. You want to be an initial investor,
so you put some of your real money into the system,
and you are awarded some digital tokens, some crypto coins
that have been mented specifically for this purpose to attract investors,
and so your investment now is represented by these digital tokens.
(15:44):
There's nothing inherently wrong with that, right. There are legit cryptocurrencies,
or as legit as you believe cryptocurrencies to be. That's
kind of a sliding scale in public perception. But there
are also schemers who would follow this exact same chain
of events in order to rake in that investor money.
(16:04):
They'd meant out cryptocurrencies that ultimately would end up being worthless.
Once the whole scheme comes down and the ringleader runs
off with the investment cash, and everyone else's left with
digital tokens that don't hold any value, and due to
the fact that crypto allows for a certain amount of anonymity,
it can be possible for the same scam artist to
(16:25):
pull the scheme again at a later date with a new,
equally worthless crypto coin. It's also possible for a well
intentioned person or group to fall into this trap of
a Ponzi scheme because they found themselves in a tough
spot that they hoped was just a temporary situation, and
they start practicing the whole Rob Peter to pay Paul
(16:47):
approach just as a way to stay afloat while still
hoping to make a legitimate recovery and not have to
continue that practice. And maybe sometimes that works. Some folks
might be able to use creative accounting to stay above
water long enough to regain stability, But it definitely doesn't
(17:07):
always work right, because there are lots of examples where
this kind of thing will ultimately lead to a total collapse.
And I want to add that one of the factors
that I believe really helps fuel this is the combination
of high enthusiasm and low knowledge or experience that the
(17:31):
promise of a huge return, which is a typical red
flag of any Ponzi scheme can really excite someone who
has some money that they would like to invest and
see that money increase. And the fact that cryptocurrency itself
is a difficult thing to describe and explain. It's hard
to teach someone how it works in a way that
(17:53):
doesn't make them go cross eyed because it is very complicated. Ultimately, well,
lack of information can end up helping if you're pulling
a scam because people just know, oh, cryptocurrency, that's something
that can in some cases at least lead to massive
(18:15):
increase in value. So I could get rich overnight by
investing in this, And because they don't have a full
understanding of it, they aren't aware of the potential risks,
and that's what creates this perfect environment for running scams.
I frequently say, if there's a lack of information and
an overabundance of enthusiasm, that is an enormous warning sign
(18:39):
and you should take a moment to really think things
through before you jump in and participate. Doesn't mean that
it's necessarily going to go bad, but it's just that
conditions are perfect for that thing to kind of happen,
So you need to take that step back and start
asking questions and make sure that you understand can you
(19:01):
evaluate the answers before you start making decisions? All right?
This finally brings us to talk about Terraform and UST
and Luna. So Terraform Labs would be the company we'll
be talking about. And the co founders were Quan Do Jung,
although in the crypto community he's known as Do Quan
(19:22):
and his business partner Daniel Shin. Quan had previously worked
for some big tech companies in the US before he
moved from the United States back to his home country
of South Korea. He went into business for himself, and
then in twenty eighteen, he moved to Singapore and co
founded Terraform Labs in January of that year. So he
(19:46):
located in Singapore, and you might wonder why, and a
lot of these crypto companies they will locate in places
that have lax regulatory bodies in an effort to be
able to do business without having two much interference from
government agencies. So Terraform Labs then introduces the terra blockchain
(20:07):
and ultimately would begin to mint two different cryptocurrencies, although
not right out of the gate. These were actually unveiled
in different times. But one I want to talk about
is terra USD, which we usually just refer to as UST.
That does get confusing because UST stands for terra us D,
(20:30):
and then the other cryptocurrency is Luna. All right, even
though it came out second, we're going to take Ust
first to explain what it is. Terraform introduced Ust as
an algorithmic stable coin. Now we need to break that down.
A stable coin is a type of cryptocurrency that has
(20:51):
its value connected or pegged, as they say, in crypto,
to some other asset. This is why ideally would keep
this particular type of cryptocurrency stable. The value of the
stable coin, at least theoretically, would only change if the
value of the pegged asset also changed. So if you
(21:15):
were to peg your cryptocurrency stable coin to the US dollar,
which is a pretty common thing, then in theory, as
the US dollars value rises, so would your stable coin
that's pegged to it. Or if the US dollar value decreased,
then the value of your stable coin would decrease in kind.
(21:35):
Typically we're looking at a one to one relationship when
we're talking about fiat currency, So one US dollar and
one Ust would be equivalent in value, assuming that everything
is going correctly. Stable coins try to address an issue
that non backed cryptocurrencies often encounter, which is volatility. Now
(21:58):
you've probably heard me say way too many times that
one of my big problems with cryptocurrencies like bitcoin is
that their value can fluctuate so much that you are
discouraged from using it as actual currency unless you're willing
to encounter some potentially significant problems. For example, the value
(22:20):
of some cryptocurrencies like bitcoin can change by significant amounts
so quickly that when you start a transaction, you're exchanging
a certain amount of value or purchasing power, but by
the time the transaction is complete, that amount could have
changed dramatically. So let me give you a very oversimplified example.
(22:42):
This is one I've used before. So let's say you
walk into a convenience store and you want to buy
a candy bar, and the candy bar is priced at
one US dollar. So you pick up the candy bar,
you go to the cash register, you hand over your
hard earned US dollar, and in return, you get to
take the candy bar and leave the store. But right
(23:05):
at the moment that you're doing this exchange, let's say
that the value of the dollar changes wildly, and now
that one dollar bill has five dollars worth of purchasing power,
because now the value of the dollar has changed, So
what you could have bought with one dollar before has
(23:25):
increased by five times. Now like technically that one dollar
is equivalent to the value of five candy bars, not
just one. But now that means the candy bar you
bought is way overpriced, right, because it should now cost
twenty cents, because the presumably the candy bar's value is
(23:46):
independent of how much a dollar is worth. It's not
like a candy bar is magically one dollar. No matter
how much a dollar is valued, a candy bar has
its own intrinsic value, and that value the price should,
in theory, fluctuate with the value of the dollar, at
least at some point. It's probably gonna trail because these
(24:06):
things are not instantaneous, but it will change. So it
would mean that perhaps in the future you would come
to that same store and now you'd see all the
candy bars are valued at twenty cents, not a dollar,
because the value of the dollar itself has changed. On
the flip side, let's say that at the moment of
purchase the value of the dollar decreases by half, which
(24:29):
means you've got yourself a one dollar candy bar, but
at the purchasing equivalent of fifty cents before this change.
Now the candy bar company or the convenience store is
hurting because the dollar they collected isn't worth as much
as it would have been pre purchase. Now that's a
very silly example, right, But that sort of stuff actually
happens with cryptocurrencies because the transaction times can be long.
(24:52):
With bitcoin, you're talking about potentially ten minutes, and the
fees that you pay with transactions are fairly high, and
then you pair that with the currency's volatility. People end
up being discouraged from actually using cryptocurrencies as currency because
you could end up losing a huge amount of money
(25:13):
just in the process as you're completing a transaction. However,
stable coins, because theoretically they lack volatility, they can be
more useful as digital currency. You could actually buy into
a stable coin and be relatively sure that your money
will be good wherever you spend it, and you don't
have to worry about massive fluctuations and value. You can
(25:35):
use it as a currency. Now, a lot of people
use stable coins to move money into and out of
non backed cryptocurrencies. Right, so instead of just immediately withdrawing
bitcoin into US dollars, you might convert bitcoin into a
stable coin first, then go through the conversion of the
(25:57):
stable coin into US dollars. If you want to liquefy
or liquid date, I should say your assets. Liquidity is
very important for there to be confidence in the crypto market.
But Ust is not a backed stable coin. It's an
algorithmic stable coin. That means UST relies on a set
(26:17):
of rules that's one algorithm is Ultimately, it's just a
set of rules in order to keep the coins value stable.
And this involves stuff like keeping very careful control of
the supply of stable coins and by extension, the supply
of the related but non stable cryptocurrencies. And that brings
us to Luna. So unlike Ust, which is on the
(26:40):
again the Terra blockchain and also traded on other blockchains,
Luna was not a stable coin, and Ust, rather than
being backed by a fiat currency or other commodity, was
instead backed by Luna. And you might say, huh, so
you've got one digital token and it's being used to
(27:00):
help stabilize a different digital token, neither of which are
connected to any real world commodity, and we could get
into a discussion about how money in general is also
a step away from real world, but then I'm just
going to descend into madness, so we'll leave that for now.
So terraform Labs, the company was using Luna to not
(27:25):
just peg ust to another currency, but also to act
as a proof of steak for the Terra blockchain. Proof
of steak is how blockchains like Terra and now Ethereum
allow for transaction verification. Members who want to participate put
up a portion of their crypto holdings their steak in
(27:46):
an effort to win the right to validate a block
of transactions, and if they win that, they get a
reward then the form of more digital tokens. So really
the more you have, the more you can earn on
these proof of steak models. Luna was also used to
pay transaction fees on the Tara blockchain, because while proof
of state doesn't require the massive compute power of the
(28:09):
proof of work cryptocurrencies like Bitcoin, there's still are bills
that have to be paid and also holding onto Luna
gave Tara blockchain members the right to vote on proposals
that would shape the network. So let's say you held
some Luna and you wanted to trade that Luna out
and withdraw your money from the Tara blockchain. First, you
(28:32):
would trade the Luna for UST, and this would burn
the Luna tokens, essentially destroying the specific tokens you held,
and you would be paid an equivalent value in UST,
with one UST being equated to one dollars worth of Luna.
That's important, we'll come back to that. And since Ust
(28:55):
was meant to be more or less the same value
as a US dollar, this was like being paid out
in US dollars, but it required another step, so it
wasn't exactly the same because you would still have to
convert your UST to US dollars at a crypto exchange
and also pay some transaction fees along the way. This
would set up the scenario that would allow for absolute
(29:19):
disaster once things began to unravel. I'll explain more when
we come back after this quick break. Okay, let's say
that you had Luna. You had let's say eighty five
(29:42):
dollars worth of Luna. Well, because the UST was supposed
to be equivalent to a US dollar, even though it
wasn't pegged to the US dollar. You do this transaction
and Luna ends up converting over into eighty five US
t right, and then they would burn Luna. That Luna
(30:06):
token would get burned, and then you would liquefy your
UST holdings. Let's say you want to pull that out,
you want to make them into dollars. Well, in order
to preserve the value of stable coins and keep them stable,
the Tarra blockchain would then meant more Luna, and this
was meant to keep the UST stable. Right, So even
(30:28):
though we're talking about two different digital tokens that are
not backed by anything other than each other, and as
you are pulling out one, you have to ment more
of the other to keep things stable. And then as
you end up purchasing more Ust, you might end up
(30:49):
having some different issues with the Luna supply as well.
We'll get to that. So you could use your Ust
to buy Luma. And you know, as I said, one,
Ust was established as being worth one dollar of Luna. However,
because Ust was not actually pegged to the US dollar,
(31:10):
that meant that if UST was to slip and value
and dip below a dollar, well, it gave you an opportunity.
You could purchase UST with US dollars and remember, at
this point the UST is worth less. Let's say it's
worth ninety cents instead of a dollar. You could use
US dollars to buy more Ust, because the US dollars
(31:35):
worth more than the UST is at this point. Then
you could exchange the ust each UST for one dollar
worth of Luna. So if UST dropped to ninety cents,
but you could still buy a whole bunch of UST
and then use that to secure Luna, you could buy
Luna at a ten percent discount because that one Ust
(31:56):
equals one dollar of Luna. That wouldn't change. So UST's
drop in value would give you the chance to buy
Luna at a discount and potentially make a whole lot
of money. Now let's get to the Ponzi scheme side
of this. The Tara blockchain launched in twenty eighteen, and
for the first three years things were pretty quiet, but
(32:17):
in twenty twenty one things would change. So one of
the things that helped this was an initiative that do
Quan had previously introduced as an incentive to attract new
investors to the Tara network, and that was promising a
twenty percent annual return on investment if you posted your
ust holdings the stable coin holdings against a lending platform
(32:42):
called Anchor, which Doquan had also established Anchor. This lending
platform was built also on top of the Tara blockchain,
So you've got your stake right however much you decide
to put on Anchor, and then on top of that,
you make twenty percent every year, and you still have
the original steak, So if you decide that you're done,
(33:05):
you could just withdraw your steak, plus you have all
those returns you've made over the years. Side note, in
my experience, people never get tired of making money. So
the thought was people will put up their steak and
they'll just leave it there because it'll just continue to
generate a twenty percent return year over year. So in
five years, you've doubled your investment, right, because you could
(33:28):
always pull your steak and then you'd have twice as
much money as when you put it in. But these
kind of promises are exactly the red flags for stuff
like Ponzi schemes, and typically those promise an incredible return
on a relatively short time frame, and the Anchor platform
itself was a decentralized money market that again was built
on top of the Tara blockchain, and its purpose was
(33:48):
to loan out money to investors so that they could
pour that money into, you know, another investment, perhaps right
back into the system. So, in other words, they were
encouraging UST holders to post money to Anchor. Doquon would
then apparently take that steak and loan it out to
(34:08):
investors who would then pour the money into investments, potentially
right back into the tarra form blockchain. And meanwhile Doquan
was promising the initial Anchor backers a twenty percent return
on their investment. And people said, you know, this is
sounding more and more like a Ponzi scheme. You're taking
investor money to pay out other people. Things started to
(34:30):
go south in the spring of twenty twenty two. On
May seventh, twenty twenty two, some investors who had staked
Ust on the Anchor platform began pulling their stakes to
the tune of about two billion dollars worth of UST,
and a lot of folks began to liquidate their assets entirely,
meaning they were pulling it off the Tara blockchain. They
(34:54):
weren't just converting to Ust, they were converting it to
something else, whether it was another stable coin or a
fiat currency. And there were questions initially about whether this
started as a purposeful attack on the Tarra blockchain, that
someone was specifically doing this to orchestrate the events that followed,
because these were things that people had been warning about
(35:17):
ever since the launch of UST, and it's pegging to
the Luna cryptocurrency. People were saying, this sets things up
for disaster, and that's exactly what was happening. So it
led people to say, oh, did someone look at the
warnings and take that as an instruction booklet on how
to do an attack? But further investigations suggested that perhaps
(35:39):
this wasn't so much an attack. It may have just
been that investors were getting concerned because interest rates were
on the rise around the globe and they wanted to
start pulling their money. But whatever the cause, it all
started a massive domino effect. So people started to cash
out and the value of UST began to slip. And again,
(36:01):
like when the value of UST goes down, it means
technically you have the opportunity to purchase more Luna at
a lower price. You're getting it for a discount, so
the ust slipped to almost ninety cents, and cryptotraders pounced
on it. They started to buy up Ust in order
(36:22):
to convert it into Luna, and Luna was trading at
a very high value up to that point, like in
April of twenty twenty two, it was almost one hundred
twenty dollars per Luna token. So if you could suddenly
buy a ten thousand dollars stake of Luna for nine
thousand dollars, and then because Luna's value had exploded since
(36:46):
early twenty twenty one, like in early twenty twenty one,
it was trading at around a dollar, well now is
at one hundred twenty dollars or close to it. So
you started to think, Wow, if it continues on that
trajectory and I'm able to essentially buy a thousand dollars
of it for free, I'm if I'm already sinking ten
(37:06):
grand into it, man, I'm going to get stinking rich
and it's just going to take a year, right if
we're on the same trajectory. So you had all these
these crypto traders jumping on that opportunity. Well, it turns
out the assumption that the value of the lunatoken would
hold was a really bad one because UST continued to
(37:29):
slip and it became completely unpegged to the US dollar,
and that led to a panic. Folks began to liquidate
their UST holdings in an effort to save as much
of their investment as they could. They were pulling out,
you know, maybe they had made some money in the
past and they're hoping like, all right, let's cut and run.
This is about to go south. I want to get
(37:50):
my money out before I take a bath on this.
And some people got out with a considerable amount of money,
but they were acting super early. And in the process,
as people were liquidating their UST, it meant, because of
the nature of this UST to Luna relationship, that the
Terra blockchain had to mint more Luna to cover UST
(38:14):
and stabilize it. Well. By minting more Luna, it meant
that you were increasing the supply of the Luna cryptocurrency token,
and opportunists meanwhile had been grabbing up more and more
Luna due to UST's value taking a hit. But now
all the Luna they had scooped up was worth less
than it had been because you had this new rush
(38:36):
of supply right, Supply and demand are the two things
that determine stuff like value, and when the supply dramatically increases,
the demand decreases and then you start to see the
value drop. So at this point, crypto exchanges began to
jump in because the value of Ust was plummeting and
(38:56):
Luna was following suit, and so the crypto exchang just
in order to reduce their liability, began to delist Ust
and Luna because both currencies were seen as being extremely unstable.
But obviously by delisting the cryptocurrency, that added to that instability.
And you know, it's really hard to keep value with
(39:18):
a cryptocurrency if it turns out there's nowhere you can
go to exchange it for something else, because then it
just exists on its own, isolated little blockchain. It's trapped
there and its utility is greatly reduced, and that again
impacts value. So perfect storm situation. The crash of Luna's
value sent a massive shockwave through the entire cryptocurrency community.
(39:41):
So it's one of those big events that precipitated the
collapse of several companies that were connected to the crypto world.
Like there were crypto exchanges there were crypto loaners. All
sorts of companies that were related to the cryptospace began
to take a massive hit due to this collapse. Some
estimates put the amount of wealth lost in the wake
of the crash at hundreds of billions of dollars. Now
(40:06):
this has prompted several massive government agencies in countries like
South Korea and the United States to look into what happened.
They are very very interested in speaking with Doquan. Quan
so far has evaded them. But the SEC, for example,
believes that Doquan failed to inform investors of risks, that
he made promises on returns that were unrealistic and unsustainable,
(40:29):
and that he had outright lied about how Terraform worked.
In fact, the SEC alleges the Doquan was engaged in
securities fraud and that quote the Terraform ecosystem was neither
decentralized nor finance. That's a sick burn, the quote continues.
It was simply a fraud propped up by a so
(40:52):
called algorithmic stable coin, the price of which was controlled
by the defendants, not any code. Quote. The SEC is
saying there wasn't any algorithmic nature to the stable coin
at all, it was maintaining its value based upon just
Terraform Labs saying it dead. Now do Quan's last known
(41:14):
location with Serbia. He apparently fled there after he left
Singapore because Singapore police are now investigating Terraform Labs as well,
and do Quan had already picked up stakes and left.
He fled to Dubai first and now is in Serbia,
or at least his last known location with Serbia. My
guess is he'll continue to try and keep a low
profile and move around because he is a very much
(41:36):
wanted man at this point in several countries. Now, before
I wrap up, I should also mention the FTX debacle.
I did an entire episode on FTX and Sam Bankman freed,
the co founder, and arguably FTX isn't quite the same
thing as a Ponzi scheme, but it does come down
to a robbing Peter to pay Paul situation all the same.
(41:58):
So the cliffs Notes version of the FTX debacle goes
something like this. Sam Bankman Freed, or SBF as the
folks who used to be his friends and believers called him,
co founded a crypto investment company called Alimator, Research. So
this company essentially what it did was it would take
investor money and it would put it into different crypto
(42:20):
investments in an attempt to create a profit. So far,
so good. It's not a guaranteed moneymaker, right because the
crypto markets can be pretty fickle, but it's fairly straightforward.
And he located the business off shore because that helps
and avoid those imperial entanglements. As obi Wan would say,
that's important to remember. One of the big anchor points
(42:41):
for the crypto philosophy tends to be that crypto could
be free from regulations as opposed to the big established
financial systems in various countries. However, this is something that's
rapidly changing because governments around the world find themselves saying, wait,
you lost how much investor money? So the regulatory agencies
(43:06):
around the world have definitely been closing in on crypto anyway.
A little later after founding Alimator Research, spf CO founds
another company called FTX, and this is a crypto exchange.
So this is a business that exchanges currencies for other
currencies and it takes a little bit off the top
to pay for its own operations. So an exchange is
(43:26):
somewhere where you might swap your UST for Luna, for example,
or vice versa, or UST for US dollars. You get
the idea. These are the entities that make it possible
to jump into different cryptocurrencies and participate in the crypto world. Now,
FTX would actually grow to become the second largest crypto
(43:47):
exchange in the world, and folks could keep their money
in the exchange itself. They could treat it kind of
like a bank, and when the dust would settle a
FDx collapsed, it would appear as though SPF and his
crew were a bit lucy goosey with the money stored
in customer FTX accounts. So, just ahead of the collapse
came this expose that included screenshots of spreadsheets that appeared
(44:11):
to show that the FTX folks had been funneling money
from customer accounts to Alimta Research to help cover investor
returns there so again it looked like they were robbing
Peter in the form of FTX customers to pay Paul
the Alimator Research investors. This expose set off a chain
(44:32):
of events that would lead to the collapse of FTX,
and FTX had its own native token the FTT, and
folks started to cash out their FTT investments because that
expose showed that FTX probably didn't have enough FTT to
cover all the money that customers had actually put into
the exchange. So you're thinking, ha, they don't have as
(44:53):
much money as people had invested into it, so I
should pull my money out because I don't want to
be left holding the bag. So people started to cash out,
and not included Binance, the largest cryptocurrency exchange in the world,
which coincidentally had also at one point offered to bail
out FTX, and then TOTS changed their mind. They ended
(45:15):
up cashing out their considerable amount of FTT tokens in FTX,
and this accelerated the collapse, so FTX didn't have all
the money they needed to pay this out. The reveal
about the elimated research problem got published and everything came
crashing down. So it wasn't exactly a Ponzi scheme, but
(45:36):
there's a lot of overlap in the Venn diagram here,
and it's stuff like Ponzi schemes that have really hurt
the cryptocurrency industry in general. Like not every cryptocurrency is
an outright scam or at least it wasn't initially created
to be a scam, but there are enough examples that
have really damaged the whole industry, including banks that didn't
(45:56):
start in the crypto world but ended up getting tangled
up in it. If you are interested in learning more
about that, you should look up the bank silver Gate.
This was a real estate bank or is a real
estate bank in southern California that about a decade ago,
a little less than a decade ago, got involved into
the cryptocurrency world and now is in real crisis mode
(46:18):
because of things like the FTX collapse and the collapse
of several other cryptocurrency companies that had been customers. It
has even gotten the attention of the US government to
look into silver Gate, which may or may not have
done anything wrong. Silver Gate might not have done a
single thing wrong, but once you start getting the attention
(46:38):
of the authorities, then customers start to get really nervous,
and a lot of cryptocurrency companies have pulled their accounts
with silver Gate. So this kind of activity, these ponzi
schemes and stuff, can end up having a very large
ripple effect beyond just the initial investors who lose their money.
(46:59):
It could end up poisoning the well for everyone. There's
the saying one bad apple can spoil the bunch. In
this case those Ponzi schemes and related scams. That's the
bad apple, and it could poison the entire blockchain community.
Even though blockchain on its own is not necessarily a
bad thing, it's just that it's prone to this, largely
(47:23):
due to the lack of regulation, which again means that
potentially to solve this, the crypto world needs to change
its stance and its thoughts about regulation and its role
in finance. It goes flies in the face of the original,
like crypto anarchists who thought that deregulation was the way
(47:46):
of the future. As it turns out, it does create
the perfect opportunity for scam artists to steal lots of money,
which hurts everyone. Okay, that's the update on It's a
crypto Ponzi scheme. Hope you enjoyed this. If you have
questions or maybe you've got an idea for a show
I should do in the future, a couple of different
(48:07):
ways you can reach out to me. One is you
can send me a message on Twitter. The handle for
the show is tech Stuff HSW or you can download
the iHeartRadio apps free to downloads free to use. You
can navigate over to tech stuff a little search bar.
You'll see a little microphone icon on there. If you
click on that, you can leave me a voice message
up to thirty seconds in length. Let me know what
you would like to hear, and I'll talk to you
(48:28):
again really soon. Tech Stuff is an iHeartRadio production. For
more podcasts from iHeartRadio, visit the iHeartRadio app, Apple Podcasts,
or wherever you listen to your favorite shows.
Welcome to tech Stuff, a production from iHeartRadio. Hey there,
and welcome to tech Stuff. I'm your host, Jovin Strickland.
I'm an executive producer with iHeartRadio and how the tech
are you? So? Back on January twenty fifth, twenty twenty one,
I published an episode titled It's a open Bracket Crypto,
(00:29):
closed bracket Ponzi Scheme. So it's a crypto Ponzi scheme.
That's where I was paying homage to stuff you should
know as Chuck Bryant, who I have heard say it's
a Ponzi scheme way back in the house stuff works days.
And in that episode, I talked about numerous issues within
the crypto community that relate to Ponzi schemes, and today
(00:53):
I thought we would do an update to talk about
one specific one that really had an enormous impact last year,
and then a little additional details because even since twenty
twenty one, there's been more examples of either outright Ponzi
schemes in the crypto space or closely related issues that
(01:15):
had enormous impact. So I'm not talking about every single one,
but I'm talking about the really big ones. Now, first,
we need to remind ourselves about what a Ponzi scheme
actually is. Now. It takes its name from a guy
named Charles Ponzi, who in the nineteen twenties used a
method to steal a whole lot of money, reportedly around
(01:38):
fifteen million dollars in less than a year. Now that's
a lot of money right now, fifteen million. I would
not sneeze at fifteen million. I would be shuffed to
receive that. But holy cats, think about that in nineteen
twenties money a ridiculous amount of cash. Well, what was
(01:59):
he doing? Well? Schtick was centered around International Reply coupons,
or IRCs, and essentially an IRC is a voucher for
postage stamps in another country. So you would go to
the post office and you would buy IRCs if you
wanted to write back to your family in the old
(02:20):
country and then have them be able to respond without
them having to buy stamps themselves. So instead they would
go to their post office, they would use the IRC coupon,
and the coupon would cover the cost of stamps to
send international mail back to you. You don't have to
do this within the same country, because then you could
(02:40):
just use a self addressed stamped envelope, but obviously a
US stamp doesn't mean anything in a different country. Well,
Ponzi's idea was to use IRCs and leverage the differences
in postage costs in different countries. See, when you bought
an IRC, you did so at whatever the local postage
(03:02):
rate for a stamp was in your area, and even
if the postage rate was higher in another country, the
IRC would still cover the stamp. So this example doesn't
really hold because the rates would be flip flocked. But
here we go. If a stamp at the US cost
a nickel at the time, so five cents, but a
(03:24):
stamp in Germany cost a dime or ten cents in
equivalent US cash, what you could do is you could
go to the US post office. You would use a
five cent nickel to buy an IRC. You'd send that
over to your papaw in Germany, and your papa could
use that same IRC to get a ten cent stamp
(03:45):
at the post office, even though you only had to
pay five cents back in the United States. So Ponzi's
idea was to try and leverage this. He wanted to
buy IRCs in cheap countries and then redeem them and
innsive ones and then sell the stamps out a profit.
So it was like creating money out of nothing. He
(04:06):
tried to convince a bank to back this idea, of
the banks weren't convinced that the strategy would work, or
if it did work, it wouldn't really be scalable. You
wouldn't be able to do this in a volume that
would actually make you any significant amount of money. It
turns out those banks were right. So instead Ponzi goes
and starts talking to friends and acquaintances, and he starts
(04:29):
making promises that within three months he could double an
initial investment, and he secures a round of investment cash,
and sure enough, some of these investors see impressive payouts
from Ponzi later down the road. Except it turned out
those payouts were not the result of this IRC scam
(04:50):
he had in mind, or not even scam his scheme.
This IRC scheme wasn't the reason why Ponzi was paying
out the dividends on those investments. Instead, Ponzi actually found
the logistics of getting this scheme to work were way
more complex than he anticipated it. Like I said, the
(05:11):
banks were right, So I think, at least in the beginning,
he probably was determined to try and make it work.
But in the meantime, what he did was he needed
to find a way to give a return on investment
to these initial investors. So he took out a second
round of investing, and with some of the money that
(05:32):
folks were pouring into the scheme at this round of investment,
he took that money and paid out some of his
earlier investors. Well, the earlier investors are incredibly excited to
see that they got such a rapid and considerable return,
so a lot of them reinvested back into Ponzi's scheme,
(05:53):
and before long Ponzi shifts away from trying to make
the IRC thing work. He just gives up on that
and he steady just runs a scam where he takes
the most recent round of investments to pay out returns
to earlier investors and himself. Now, to be clear, Ponzi
did not invent this idea. This was not a brand
(06:16):
new concept. He was not the first to come up
with a Ponzi scheme, but we call them Ponzi schemes
because he went big time with this, mostly out of Boston, Massachusetts.
While previous examples of these schemes followed essentially the same
thing that what Ponzi was doing. Ponzi's version propelled him
to such wealth that before the whole thing came crashing down,
(06:39):
he was pretty famous in the New England area. Newspapers
would cover his business favorably, and that of course led
to even more investments. So when a newspaper would say, hey,
these investors are super happy because they got so much
money back on their investment, more people were begging to
give Ponzi their money. Was able to perpetuate the scheme
(07:01):
and make him even richer. But here's the thing. Even
the best run Ponzi scheme will not last forever. Eventually,
the incoming investments are not enough to cover all the
previous investors, and you either have to pay out smaller
and smaller dividends, which is going to upset your investors,
or you got to take the money and run while
(07:22):
you can. But while the scheme is booming, you can
have yourself a swell time. Just you know, you've got
to remember that at some point the piper will demand
to be paid, and you'll likely also have some government
agencies with some scary initials, and they'll be really, really
interested in talking to you. Another way to describe the
(07:42):
Ponzi scheme is the old saying robbing Peter to pay Paul,
or sometimes it's borrowing from Peter to pay Paul. But
you get the idea. You're not creating wealth, you're really
just redistributing it. And it only works as long as
you can keep finding more Peters so that you can
keep paying all those Palls and keep them at bay.
(08:05):
As for Ponzi himself, well, several months after he rocketed
to wealth, the investigators began to close in on him.
The US Postal Office denounced the underlying principle of his
supposed business, which, remember, was not actually what he was doing.
It was just what he said he was doing. But
the US post Office said, there's just no way he
(08:27):
could be making that much money through IRCs because the
volume he would have to trade in was greater than
what the supply was, so literally, there was no possible
way for him to make his money through the way
he was claiming, because there weren't enough IRCs out there
to make it happen. And local newspapers began to suspect
that perhaps they had been hoodwinked, and so chagrined, they
(08:52):
began to launch their own investigative efforts and a way
to try and save face, because if you talk someone
up and then it turns out that they're a flim
flam artist, that does not go well for your reputation. Right,
So these newspapers are like, we need to if something
is hinky here, we need to really look into it.
(09:13):
There were a couple of points where it seemed like
the mob was about to turn on Ponzi, that everyone
was gonna pull their money out, which would have sent
the whole thing into a collapse. But a couple of
times he was actually able to dissuade them, and some
folks who were determined to withdraw their money once the
investigations began would later reconsider because Ponzi seemed to be
(09:33):
on the up and up, like he was returning money
to investors who were requesting it, like millions of dollars
early on, and so folks began to say, well, if
he was actually a crook, he wouldn't be returning money,
so he must be honest. That means I might actually
stand to make a whole bunch of money from this guy.
(09:54):
And so people who had initially thought I'm out, ended
up not just staying in, but some of them put
even more money into the scheme. Now, ultimately, an audit
by the US government found that Ponzi's business was thoroughly
corrupt and totally baseless. The investigation ultimately found there was
around sixty one dollars worth of IRC's in the whole
(10:16):
dang business. You are not going to be making millions
of dollars in profit off of sixty one dollars of
these coupons, And it proved that what Ponzi really was
doing was just convincing more and more people to hand
him money to pay off the earlier investors and to
make himself rich. Ponzi ultimately would go to jail, though
(10:38):
not before having a few more adventures through skipping bond
and running off to different states before he was ultimately
apprehended and sentenced, and after serving his sentence, he was
deported to Italy. He was an immigrant from Italy to
the United States. He did not return to the US,
but he did immigrate to Brazil and set up a
(10:59):
business there until in nineteen forty nine he passed away. Now,
there are a couple of scams that closely relate to
a Ponzi scheme, but are slightly different. For example, a
pyramid scheme. This is where you've got one person or
a group of people at the very tip top of
the pyramid, and then they recruit a layer of investors
(11:21):
who pay money into the scheme. In return, these initial
investors have to go out and recruit another layer of investors,
and they keep a little bit of the money that
those folks are contributing to the organization, and they pass
the rest of the money up the pyramid and then
this new layer, so now we're two layers down from
(11:44):
the top. They have to go on and recruit yet
another layer of investors, and so on. So each group
of investors needs to get more investors. And if you
want to think of a simple one, let's say that
each investor needs to get two other investors to pay
into the system. And it expands rapidly as you would imagine.
(12:05):
And that's just if you only had to get two.
And so meanwhile, the people at the top, they're getting
payouts with every successive layer that's added to this pyramid.
Each person along the top is getting a small amount
per investment till you get to the tippy top where
they're really making bank. But the people at the bottom
are not making anything at all unless they are recruiting
(12:28):
new people into the organization, so they're feeding into the pyramid.
And like a Ponzi scheme, a pyramid scheme will ultimately
fall apart because at some level the base of the
pyramid is so large that there's no way to recruit
more people to pay into the system, and the whole
thing starts to fall apart. And really the only people
(12:50):
who make any serious money are the ones near the
top layers, like maybe the first couple of layers, and
the tippy top being the ones who make the most
money out of the whole thing. Now relate into that
are multi level marketing schemes. These aren't necessarily outright scams,
they are not necessarily illegal, but they also rely heavily
(13:10):
on recruiting new members, and sometimes they rely more on
the recruitment side than they do with whatever they're actually
supposedly selling or marketing. And there are tons of these,
and they're known for selling all sorts of stuff. The
classic example is cosmetics, where you have people who get
(13:30):
pay into the system in order to get access to
cosmetics supplies to sell to people, but very quickly they
see that the real money isn't in selling the cosmetics,
but recruiting other people to join in to sell these cosmetics.
And once you really start stripping things away, it starts
to look like the cosmetics are just an excuse for
(13:52):
the organization to exist. The real money comes in looping
in more and more people into the scheme until you've saturation,
and then if the cosmetics can support that, if selling
the cosmetics can keep the organization going, it's technically a
legitimate organization. It's just that it's probably not making the
(14:13):
same amount of money it was when it was in
the recruitment phase, and it's still kind of questionable. And
then we've got the crypto version, and these can take
a lot of forms, but the basic sequence tends to
be someone creates a new cryptocurrency, either on an existing
blockchain or possibly through a new one, and they hold
an initial offering of coins ioc Man. There's a lot
(14:36):
of initialisms in this episode, and sometimes I stands for initial,
and sometimes it stands for international. It's initial in this case,
so in return for an investment, the investor gets an
initial offering of coins or digital tokens that are awarded
to them, and they are newly minted, fresh, crispy crypto coins.
(14:57):
We'll talk about where this can go wrong after we
take this quick break. Okay, an initial offering of coins
where you jump in on a brand new blockchain offering,
(15:22):
whether it's on a brand new blockchain itself or on
an existing one. You want to be an initial investor,
so you put some of your real money into the system,
and you are awarded some digital tokens, some crypto coins
that have been mented specifically for this purpose to attract investors,
and so your investment now is represented by these digital tokens.
(15:44):
There's nothing inherently wrong with that, right. There are legit cryptocurrencies,
or as legit as you believe cryptocurrencies to be. That's
kind of a sliding scale in public perception. But there
are also schemers who would follow this exact same chain
of events in order to rake in that investor money.
(16:04):
They'd meant out cryptocurrencies that ultimately would end up being worthless.
Once the whole scheme comes down and the ringleader runs
off with the investment cash, and everyone else's left with
digital tokens that don't hold any value, and due to
the fact that crypto allows for a certain amount of anonymity,
it can be possible for the same scam artist to
(16:25):
pull the scheme again at a later date with a new,
equally worthless crypto coin. It's also possible for a well
intentioned person or group to fall into this trap of
a Ponzi scheme because they found themselves in a tough
spot that they hoped was just a temporary situation, and
they start practicing the whole Rob Peter to pay Paul
(16:47):
approach just as a way to stay afloat while still
hoping to make a legitimate recovery and not have to
continue that practice. And maybe sometimes that works. Some folks
might be able to use creative accounting to stay above
water long enough to regain stability, But it definitely doesn't
(17:07):
always work right, because there are lots of examples where
this kind of thing will ultimately lead to a total collapse.
And I want to add that one of the factors
that I believe really helps fuel this is the combination
of high enthusiasm and low knowledge or experience that the
(17:31):
promise of a huge return, which is a typical red
flag of any Ponzi scheme can really excite someone who
has some money that they would like to invest and
see that money increase. And the fact that cryptocurrency itself
is a difficult thing to describe and explain. It's hard
to teach someone how it works in a way that
(17:53):
doesn't make them go cross eyed because it is very complicated. Ultimately, well,
lack of information can end up helping if you're pulling
a scam because people just know, oh, cryptocurrency, that's something
that can in some cases at least lead to massive
(18:15):
increase in value. So I could get rich overnight by
investing in this, And because they don't have a full
understanding of it, they aren't aware of the potential risks,
and that's what creates this perfect environment for running scams.
I frequently say, if there's a lack of information and
an overabundance of enthusiasm, that is an enormous warning sign
(18:39):
and you should take a moment to really think things
through before you jump in and participate. Doesn't mean that
it's necessarily going to go bad, but it's just that
conditions are perfect for that thing to kind of happen,
So you need to take that step back and start
asking questions and make sure that you understand can you
(19:01):
evaluate the answers before you start making decisions? All right?
This finally brings us to talk about Terraform and UST
and Luna. So Terraform Labs would be the company we'll
be talking about. And the co founders were Quan Do Jung,
although in the crypto community he's known as Do Quan
(19:22):
and his business partner Daniel Shin. Quan had previously worked
for some big tech companies in the US before he
moved from the United States back to his home country
of South Korea. He went into business for himself, and
then in twenty eighteen, he moved to Singapore and co
founded Terraform Labs in January of that year. So he
(19:46):
located in Singapore, and you might wonder why, and a
lot of these crypto companies they will locate in places
that have lax regulatory bodies in an effort to be
able to do business without having two much interference from
government agencies. So Terraform Labs then introduces the terra blockchain
(20:07):
and ultimately would begin to mint two different cryptocurrencies, although
not right out of the gate. These were actually unveiled
in different times. But one I want to talk about
is terra USD, which we usually just refer to as UST.
That does get confusing because UST stands for terra us D,
(20:30):
and then the other cryptocurrency is Luna. All right, even
though it came out second, we're going to take Ust
first to explain what it is. Terraform introduced Ust as
an algorithmic stable coin. Now we need to break that down.
A stable coin is a type of cryptocurrency that has
(20:51):
its value connected or pegged, as they say, in crypto,
to some other asset. This is why ideally would keep
this particular type of cryptocurrency stable. The value of the
stable coin, at least theoretically, would only change if the
value of the pegged asset also changed. So if you
(21:15):
were to peg your cryptocurrency stable coin to the US dollar,
which is a pretty common thing, then in theory, as
the US dollars value rises, so would your stable coin
that's pegged to it. Or if the US dollar value decreased,
then the value of your stable coin would decrease in kind.
(21:35):
Typically we're looking at a one to one relationship when
we're talking about fiat currency, So one US dollar and
one Ust would be equivalent in value, assuming that everything
is going correctly. Stable coins try to address an issue
that non backed cryptocurrencies often encounter, which is volatility. Now
(21:58):
you've probably heard me say way too many times that
one of my big problems with cryptocurrencies like bitcoin is
that their value can fluctuate so much that you are
discouraged from using it as actual currency unless you're willing
to encounter some potentially significant problems. For example, the value
(22:20):
of some cryptocurrencies like bitcoin can change by significant amounts
so quickly that when you start a transaction, you're exchanging
a certain amount of value or purchasing power, but by
the time the transaction is complete, that amount could have
changed dramatically. So let me give you a very oversimplified example.
(22:42):
This is one I've used before. So let's say you
walk into a convenience store and you want to buy
a candy bar, and the candy bar is priced at
one US dollar. So you pick up the candy bar,
you go to the cash register, you hand over your
hard earned US dollar, and in return, you get to
take the candy bar and leave the store. But right
(23:05):
at the moment that you're doing this exchange, let's say
that the value of the dollar changes wildly, and now
that one dollar bill has five dollars worth of purchasing power,
because now the value of the dollar has changed, So
what you could have bought with one dollar before has
(23:25):
increased by five times. Now like technically that one dollar
is equivalent to the value of five candy bars, not
just one. But now that means the candy bar you
bought is way overpriced, right, because it should now cost
twenty cents, because the presumably the candy bar's value is
(23:46):
independent of how much a dollar is worth. It's not
like a candy bar is magically one dollar. No matter
how much a dollar is valued, a candy bar has
its own intrinsic value, and that value the price should,
in theory, fluctuate with the value of the dollar, at
least at some point. It's probably gonna trail because these
(24:06):
things are not instantaneous, but it will change. So it
would mean that perhaps in the future you would come
to that same store and now you'd see all the
candy bars are valued at twenty cents, not a dollar,
because the value of the dollar itself has changed. On
the flip side, let's say that at the moment of
purchase the value of the dollar decreases by half, which
(24:29):
means you've got yourself a one dollar candy bar, but
at the purchasing equivalent of fifty cents before this change.
Now the candy bar company or the convenience store is
hurting because the dollar they collected isn't worth as much
as it would have been pre purchase. Now that's a
very silly example, right, But that sort of stuff actually
happens with cryptocurrencies because the transaction times can be long.
(24:52):
With bitcoin, you're talking about potentially ten minutes, and the
fees that you pay with transactions are fairly high, and
then you pair that with the currency's volatility. People end
up being discouraged from actually using cryptocurrencies as currency because
you could end up losing a huge amount of money
(25:13):
just in the process as you're completing a transaction. However,
stable coins, because theoretically they lack volatility, they can be
more useful as digital currency. You could actually buy into
a stable coin and be relatively sure that your money
will be good wherever you spend it, and you don't
have to worry about massive fluctuations and value. You can
(25:35):
use it as a currency. Now, a lot of people
use stable coins to move money into and out of
non backed cryptocurrencies. Right, so instead of just immediately withdrawing
bitcoin into US dollars, you might convert bitcoin into a
stable coin first, then go through the conversion of the
(25:57):
stable coin into US dollars. If you want to liquefy
or liquid date, I should say your assets. Liquidity is
very important for there to be confidence in the crypto market.
But Ust is not a backed stable coin. It's an
algorithmic stable coin. That means UST relies on a set
(26:17):
of rules that's one algorithm is Ultimately, it's just a
set of rules in order to keep the coins value stable.
And this involves stuff like keeping very careful control of
the supply of stable coins and by extension, the supply
of the related but non stable cryptocurrencies. And that brings
us to Luna. So unlike Ust, which is on the
(26:40):
again the Terra blockchain and also traded on other blockchains,
Luna was not a stable coin, and Ust, rather than
being backed by a fiat currency or other commodity, was
instead backed by Luna. And you might say, huh, so
you've got one digital token and it's being used to
(27:00):
help stabilize a different digital token, neither of which are
connected to any real world commodity, and we could get
into a discussion about how money in general is also
a step away from real world, but then I'm just
going to descend into madness, so we'll leave that for now.
So terraform Labs, the company was using Luna to not
(27:25):
just peg ust to another currency, but also to act
as a proof of steak for the Terra blockchain. Proof
of steak is how blockchains like Terra and now Ethereum
allow for transaction verification. Members who want to participate put
up a portion of their crypto holdings their steak in
(27:46):
an effort to win the right to validate a block
of transactions, and if they win that, they get a
reward then the form of more digital tokens. So really
the more you have, the more you can earn on
these proof of steak models. Luna was also used to
pay transaction fees on the Tara blockchain, because while proof
of state doesn't require the massive compute power of the
(28:09):
proof of work cryptocurrencies like Bitcoin, there's still are bills
that have to be paid and also holding onto Luna
gave Tara blockchain members the right to vote on proposals
that would shape the network. So let's say you held
some Luna and you wanted to trade that Luna out
and withdraw your money from the Tara blockchain. First, you
(28:32):
would trade the Luna for UST, and this would burn
the Luna tokens, essentially destroying the specific tokens you held,
and you would be paid an equivalent value in UST,
with one UST being equated to one dollars worth of Luna.
That's important, we'll come back to that. And since Ust
(28:55):
was meant to be more or less the same value
as a US dollar, this was like being paid out
in US dollars, but it required another step, so it
wasn't exactly the same because you would still have to
convert your UST to US dollars at a crypto exchange
and also pay some transaction fees along the way. This
would set up the scenario that would allow for absolute
(29:19):
disaster once things began to unravel. I'll explain more when
we come back after this quick break. Okay, let's say
that you had Luna. You had let's say eighty five
(29:42):
dollars worth of Luna. Well, because the UST was supposed
to be equivalent to a US dollar, even though it
wasn't pegged to the US dollar. You do this transaction
and Luna ends up converting over into eighty five US
t right, and then they would burn Luna. That Luna
(30:06):
token would get burned, and then you would liquefy your
UST holdings. Let's say you want to pull that out,
you want to make them into dollars. Well, in order
to preserve the value of stable coins and keep them stable,
the Tarra blockchain would then meant more Luna, and this
was meant to keep the UST stable. Right, So even
(30:28):
though we're talking about two different digital tokens that are
not backed by anything other than each other, and as
you are pulling out one, you have to ment more
of the other to keep things stable. And then as
you end up purchasing more Ust, you might end up
(30:49):
having some different issues with the Luna supply as well.
We'll get to that. So you could use your Ust
to buy Luma. And you know, as I said, one,
Ust was established as being worth one dollar of Luna. However,
because Ust was not actually pegged to the US dollar,
(31:10):
that meant that if UST was to slip and value
and dip below a dollar, well, it gave you an opportunity.
You could purchase UST with US dollars and remember, at
this point the UST is worth less. Let's say it's
worth ninety cents instead of a dollar. You could use
US dollars to buy more Ust, because the US dollars
(31:35):
worth more than the UST is at this point. Then
you could exchange the ust each UST for one dollar
worth of Luna. So if UST dropped to ninety cents,
but you could still buy a whole bunch of UST
and then use that to secure Luna, you could buy
Luna at a ten percent discount because that one Ust
(31:56):
equals one dollar of Luna. That wouldn't change. So UST's
drop in value would give you the chance to buy
Luna at a discount and potentially make a whole lot
of money. Now let's get to the Ponzi scheme side
of this. The Tara blockchain launched in twenty eighteen, and
for the first three years things were pretty quiet, but
(32:17):
in twenty twenty one things would change. So one of
the things that helped this was an initiative that do
Quan had previously introduced as an incentive to attract new
investors to the Tara network, and that was promising a
twenty percent annual return on investment if you posted your
ust holdings the stable coin holdings against a lending platform
(32:42):
called Anchor, which Doquan had also established Anchor. This lending
platform was built also on top of the Tara blockchain,
So you've got your stake right however much you decide
to put on Anchor, and then on top of that,
you make twenty percent every year, and you still have
the original steak, So if you decide that you're done,
(33:05):
you could just withdraw your steak, plus you have all
those returns you've made over the years. Side note, in
my experience, people never get tired of making money. So
the thought was people will put up their steak and
they'll just leave it there because it'll just continue to
generate a twenty percent return year over year. So in
five years, you've doubled your investment, right, because you could
(33:28):
always pull your steak and then you'd have twice as
much money as when you put it in. But these
kind of promises are exactly the red flags for stuff
like Ponzi schemes, and typically those promise an incredible return
on a relatively short time frame, and the Anchor platform
itself was a decentralized money market that again was built
on top of the Tara blockchain, and its purpose was
(33:48):
to loan out money to investors so that they could
pour that money into, you know, another investment, perhaps right
back into the system. So, in other words, they were
encouraging UST holders to post money to Anchor. Doquon would
then apparently take that steak and loan it out to
(34:08):
investors who would then pour the money into investments, potentially
right back into the tarra form blockchain. And meanwhile Doquan
was promising the initial Anchor backers a twenty percent return
on their investment. And people said, you know, this is
sounding more and more like a Ponzi scheme. You're taking
investor money to pay out other people. Things started to
(34:30):
go south in the spring of twenty twenty two. On
May seventh, twenty twenty two, some investors who had staked
Ust on the Anchor platform began pulling their stakes to
the tune of about two billion dollars worth of UST,
and a lot of folks began to liquidate their assets entirely,
meaning they were pulling it off the Tara blockchain. They
(34:54):
weren't just converting to Ust, they were converting it to
something else, whether it was another stable coin or a
fiat currency. And there were questions initially about whether this
started as a purposeful attack on the Tarra blockchain, that
someone was specifically doing this to orchestrate the events that followed,
because these were things that people had been warning about
(35:17):
ever since the launch of UST, and it's pegging to
the Luna cryptocurrency. People were saying, this sets things up
for disaster, and that's exactly what was happening. So it
led people to say, oh, did someone look at the
warnings and take that as an instruction booklet on how
to do an attack? But further investigations suggested that perhaps
(35:39):
this wasn't so much an attack. It may have just
been that investors were getting concerned because interest rates were
on the rise around the globe and they wanted to
start pulling their money. But whatever the cause, it all
started a massive domino effect. So people started to cash
out and the value of UST began to slip. And again,
(36:01):
like when the value of UST goes down, it means
technically you have the opportunity to purchase more Luna at
a lower price. You're getting it for a discount, so
the ust slipped to almost ninety cents, and cryptotraders pounced
on it. They started to buy up Ust in order
(36:22):
to convert it into Luna, and Luna was trading at
a very high value up to that point, like in
April of twenty twenty two, it was almost one hundred
twenty dollars per Luna token. So if you could suddenly
buy a ten thousand dollars stake of Luna for nine
thousand dollars, and then because Luna's value had exploded since
(36:46):
early twenty twenty one, like in early twenty twenty one,
it was trading at around a dollar, well now is
at one hundred twenty dollars or close to it. So
you started to think, Wow, if it continues on that
trajectory and I'm able to essentially buy a thousand dollars
of it for free, I'm if I'm already sinking ten
(37:06):
grand into it, man, I'm going to get stinking rich
and it's just going to take a year, right if
we're on the same trajectory. So you had all these
these crypto traders jumping on that opportunity. Well, it turns
out the assumption that the value of the lunatoken would
hold was a really bad one because UST continued to
(37:29):
slip and it became completely unpegged to the US dollar,
and that led to a panic. Folks began to liquidate
their UST holdings in an effort to save as much
of their investment as they could. They were pulling out,
you know, maybe they had made some money in the
past and they're hoping like, all right, let's cut and run.
This is about to go south. I want to get
(37:50):
my money out before I take a bath on this.
And some people got out with a considerable amount of money,
but they were acting super early. And in the process,
as people were liquidating their UST, it meant, because of
the nature of this UST to Luna relationship, that the
Terra blockchain had to mint more Luna to cover UST
(38:14):
and stabilize it. Well. By minting more Luna, it meant
that you were increasing the supply of the Luna cryptocurrency token,
and opportunists meanwhile had been grabbing up more and more
Luna due to UST's value taking a hit. But now
all the Luna they had scooped up was worth less
than it had been because you had this new rush
(38:36):
of supply right, Supply and demand are the two things
that determine stuff like value, and when the supply dramatically increases,
the demand decreases and then you start to see the
value drop. So at this point, crypto exchanges began to
jump in because the value of Ust was plummeting and
(38:56):
Luna was following suit, and so the crypto exchang just
in order to reduce their liability, began to delist Ust
and Luna because both currencies were seen as being extremely unstable.
But obviously by delisting the cryptocurrency, that added to that instability.
And you know, it's really hard to keep value with
(39:18):
a cryptocurrency if it turns out there's nowhere you can
go to exchange it for something else, because then it
just exists on its own, isolated little blockchain. It's trapped
there and its utility is greatly reduced, and that again
impacts value. So perfect storm situation. The crash of Luna's
value sent a massive shockwave through the entire cryptocurrency community.
(39:41):
So it's one of those big events that precipitated the
collapse of several companies that were connected to the crypto world.
Like there were crypto exchanges there were crypto loaners. All
sorts of companies that were related to the cryptospace began
to take a massive hit due to this collapse. Some
estimates put the amount of wealth lost in the wake
of the crash at hundreds of billions of dollars. Now
(40:06):
this has prompted several massive government agencies in countries like
South Korea and the United States to look into what happened.
They are very very interested in speaking with Doquan. Quan
so far has evaded them. But the SEC, for example,
believes that Doquan failed to inform investors of risks, that
he made promises on returns that were unrealistic and unsustainable,
(40:29):
and that he had outright lied about how Terraform worked.
In fact, the SEC alleges the Doquan was engaged in
securities fraud and that quote the Terraform ecosystem was neither
decentralized nor finance. That's a sick burn, the quote continues.
It was simply a fraud propped up by a so
(40:52):
called algorithmic stable coin, the price of which was controlled
by the defendants, not any code. Quote. The SEC is
saying there wasn't any algorithmic nature to the stable coin
at all, it was maintaining its value based upon just
Terraform Labs saying it dead. Now do Quan's last known
(41:14):
location with Serbia. He apparently fled there after he left
Singapore because Singapore police are now investigating Terraform Labs as well,
and do Quan had already picked up stakes and left.
He fled to Dubai first and now is in Serbia,
or at least his last known location with Serbia. My
guess is he'll continue to try and keep a low
profile and move around because he is a very much
(41:36):
wanted man at this point in several countries. Now, before
I wrap up, I should also mention the FTX debacle.
I did an entire episode on FTX and Sam Bankman freed,
the co founder, and arguably FTX isn't quite the same
thing as a Ponzi scheme, but it does come down
to a robbing Peter to pay Paul situation all the same.
(41:58):
So the cliffs Notes version of the FTX debacle goes
something like this. Sam Bankman Freed, or SBF as the
folks who used to be his friends and believers called him,
co founded a crypto investment company called Alimator, Research. So
this company essentially what it did was it would take
investor money and it would put it into different crypto
(42:20):
investments in an attempt to create a profit. So far,
so good. It's not a guaranteed moneymaker, right because the
crypto markets can be pretty fickle, but it's fairly straightforward.
And he located the business off shore because that helps
and avoid those imperial entanglements. As obi Wan would say,
that's important to remember. One of the big anchor points
(42:41):
for the crypto philosophy tends to be that crypto could
be free from regulations as opposed to the big established
financial systems in various countries. However, this is something that's
rapidly changing because governments around the world find themselves saying, wait,
you lost how much investor money? So the regulatory agencies
(43:06):
around the world have definitely been closing in on crypto anyway.
A little later after founding Alimator Research, spf CO founds
another company called FTX, and this is a crypto exchange.
So this is a business that exchanges currencies for other
currencies and it takes a little bit off the top
to pay for its own operations. So an exchange is
(43:26):
somewhere where you might swap your UST for Luna, for example,
or vice versa, or UST for US dollars. You get
the idea. These are the entities that make it possible
to jump into different cryptocurrencies and participate in the crypto world. Now,
FTX would actually grow to become the second largest crypto
(43:47):
exchange in the world, and folks could keep their money
in the exchange itself. They could treat it kind of
like a bank, and when the dust would settle a
FDx collapsed, it would appear as though SPF and his
crew were a bit lucy goosey with the money stored
in customer FTX accounts. So, just ahead of the collapse
came this expose that included screenshots of spreadsheets that appeared
(44:11):
to show that the FTX folks had been funneling money
from customer accounts to Alimta Research to help cover investor
returns there so again it looked like they were robbing
Peter in the form of FTX customers to pay Paul
the Alimator Research investors. This expose set off a chain
(44:32):
of events that would lead to the collapse of FTX,
and FTX had its own native token the FTT, and
folks started to cash out their FTT investments because that
expose showed that FTX probably didn't have enough FTT to
cover all the money that customers had actually put into
the exchange. So you're thinking, ha, they don't have as
(44:53):
much money as people had invested into it, so I
should pull my money out because I don't want to
be left holding the bag. So people started to cash out,
and not included Binance, the largest cryptocurrency exchange in the world,
which coincidentally had also at one point offered to bail
out FTX, and then TOTS changed their mind. They ended
(45:15):
up cashing out their considerable amount of FTT tokens in FTX,
and this accelerated the collapse, so FTX didn't have all
the money they needed to pay this out. The reveal
about the elimated research problem got published and everything came
crashing down. So it wasn't exactly a Ponzi scheme, but
(45:36):
there's a lot of overlap in the Venn diagram here,
and it's stuff like Ponzi schemes that have really hurt
the cryptocurrency industry in general. Like not every cryptocurrency is
an outright scam or at least it wasn't initially created
to be a scam, but there are enough examples that
have really damaged the whole industry, including banks that didn't
(45:56):
start in the crypto world but ended up getting tangled
up in it. If you are interested in learning more
about that, you should look up the bank silver Gate.
This was a real estate bank or is a real
estate bank in southern California that about a decade ago,
a little less than a decade ago, got involved into
the cryptocurrency world and now is in real crisis mode
(46:18):
because of things like the FTX collapse and the collapse
of several other cryptocurrency companies that had been customers. It
has even gotten the attention of the US government to
look into silver Gate, which may or may not have
done anything wrong. Silver Gate might not have done a
single thing wrong, but once you start getting the attention
(46:38):
of the authorities, then customers start to get really nervous,
and a lot of cryptocurrency companies have pulled their accounts
with silver Gate. So this kind of activity, these ponzi
schemes and stuff, can end up having a very large
ripple effect beyond just the initial investors who lose their money.
(46:59):
It could end up poisoning the well for everyone. There's
the saying one bad apple can spoil the bunch. In
this case those Ponzi schemes and related scams. That's the
bad apple, and it could poison the entire blockchain community.
Even though blockchain on its own is not necessarily a
bad thing, it's just that it's prone to this, largely
(47:23):
due to the lack of regulation, which again means that
potentially to solve this, the crypto world needs to change
its stance and its thoughts about regulation and its role
in finance. It goes flies in the face of the original,
like crypto anarchists who thought that deregulation was the way
(47:46):
of the future. As it turns out, it does create
the perfect opportunity for scam artists to steal lots of money,
which hurts everyone. Okay, that's the update on It's a
crypto Ponzi scheme. Hope you enjoyed this. If you have
questions or maybe you've got an idea for a show
I should do in the future, a couple of different
(48:07):
ways you can reach out to me. One is you
can send me a message on Twitter. The handle for
the show is tech Stuff HSW or you can download
the iHeartRadio apps free to downloads free to use. You
can navigate over to tech stuff a little search bar.
You'll see a little microphone icon on there. If you
click on that, you can leave me a voice message
up to thirty seconds in length. Let me know what
you would like to hear, and I'll talk to you
(48:28):
again really soon. Tech Stuff is an iHeartRadio production. For
more podcasts from iHeartRadio, visit the iHeartRadio app, Apple Podcasts,
or wherever you listen to your favorite shows.
TechStuff News
Hosts And Creators
Oz Woloshyn
Karah Preiss
Popular Podcasts
24/7 News: The Latest
The latest news in 4 minutes updated every hour, every day.
Therapy Gecko
An unlicensed lizard psychologist travels the universe talking to strangers about absolutely nothing. TO CALL THE GECKO: follow me on https://www.twitch.tv/lyleforever to get a notification for when I am taking calls. I am usually live Mondays, Wednesdays, and Fridays but lately a lot of other times too. I am a gecko.
The Joe Rogan Experience
The official podcast of comedian Joe Rogan.