Total capitulation of an $18 billion stablecoin, systemic risk as nearly $500 billion wiped off the total crypto market cap, Bitcoin down 25% percent in the matter of four days… just another week in crypto.

This marks the fifth major crash we’ve seen in the crypto space and the biggest capitulation since the covid crash in March 2020. But while the covid crash was a global, marketwide crash, Luna and UST has been contained to the crypto sphere.

UST is a stablecoin in the Terra ecosystem that is pegged to 1 USD. It was widely known for its too good to be true fixed yield of nearly 20%.

Stablecoins solve two very important problems in the crypto space. Firstly, they provide a bridge between volatile cryptocurrencies and fiat currencies. Secondly, and even more importantly, they provide a safe and efficient global payments infrastructure that can effectively supersede the archaic banking system.

The most widely known stablecoins on the market are USDT (Tether) and USDC (Circle). These are collateralized stablecoins, meaning that they are assumed to have enough assets backing them to promise a 1:1 redemption, even if the price dips below peg (USDT was trading below peg briefly after UST crashed but still managed to handle $7 bil in 1:1 redemptions).

Now while collateralized stablecoins may sound safer because they are backed, they betray a fundamental ethos of crypto — centralization. These institutions can effectively censor individuals by freezing their coins if they wish.

Then there’s the question of scalability. The global FX market is estimated to have a daily volume of over $6.6 trillion while stablecoins have a market cap of only $170 billion. In order to take a significant market share of that volume, an enormous amount of collateral would have to be locked up in a bank.

Which brings us to our next problem: trust.

Placing our trust in the global banking system is no issue for most people, even though we are well aware that it would not be able to withstand a bank run due to the fractional reserve system (see Greek capital controls in 2015 for example).

Stablecoins, however, are not so well established and therefore not easy to trust. We expect them to be overcollateralized so that such bank runs are impossible, which in turn leads to inefficient capital deployment. Safety over efficiency.

UST was an algorithmic stablecoin created in an attempt at crypto native base money, with the hope of solving this issue. They created a triforce of flywheels, including protocol loops through UST and Luna, on-chain loops through Mirror (synthetic stocks) and Anchor (lending and borrowing), and off-chain loops through Chai and Memepay (payment networks). If enough people adopt it, and trust it, we won’t need to worry about over-collateralization, right…?

Source: TheTie

So how an algorithmic stablecoin works is by using smart contracts to manage the supply in circulation. The particular model UST uses involves its sister coin LUNA — when UST dips below $1, UST supply is contracted and Luna is expanded to buy back the peg. When it goes above, UST is expanded and LUNA is contracted. Arbitrageurs are presented with an opportunity to restabilize the protocol by purchasing the cheaper asset and redeeming it for the more expensive one, pocketing the difference.

However, LUNA is a volatile asset. This model cannot sustain such a high yield alone without new money constantly entering (which is what is said to have saved the protocol in May 2021). There was an asset-liability mismatch — market participants are always just looking for the most efficient route to profit.

On May 7, a cascade of sell orders knocked UST off its peg, starting with an $85 mil sell order from an anonymous address that happened conveniently at the same time Terraform moves $150 mil of UST out of the 3CRV + UST pool to deploy a planned 4pool.

Low liquidity = high volatility. UST saw lows of 0.985 on the dollar that evening. LUNA also dropped by 10%, striking fear in the hearts of holders.

Hence the bank run. Imagine having $100,000 of your savings staked in Anchor at a comfy 19.5% APR when all of a sudden it’s worth $98,500. Stampede for the fire exit.

To make matters worse, as everyone was trying to redeem their UST, Terra’s chain got congested, withdrawals were suspended on multiple centralized exchanges, and collateralized positions, liquidated.

When the dust settled LUNA was down from an all time high of nearly $120 to fractions of a penny and UST was trading at approximately $0.07.

Then, as the Luna Foundation Guard sold 80,081 BTC and upward of 75k ETH to protect the peg, this cascaded into the broader crypto market as a whole.

Now if you’ve been following over the past few months, you probably saw the top signal from a mile away. It all started when an anon account on Twitter named @FreddieRaynolds was posting threads about how Luna could fail, and back in March, $22 million was escrowed in two separate bets between crypto Twitter influencers AlgodTrading, GiganticRebirth and Do Kwon, the founder of Terraform (which has since been moved to FTX for unknown reasons).

There have been several attempts at revival over the past few weeks, the most recent proposal having passed with airdrops of 30% unlocked at genesis and 70% vested over 2 years with a 6 month cliff for holders of 10k LUNA or less pre-attack. Protocols such as Astroport and Spectrum have signaled their interest to continue developing on Terra 2.0.

Now when a crypto ecosystem that’s half the size of Enron fails, regulators can’t help but take notice. Janet Yellen spoke about how stablecoins are not yet ”a real threat to financial stability” but have the potential to present further risks due to their rapid growth.

The EU has renewed its proposal for a ban on stablecoins over €2 million from Facebook’s Libra days, which is effectively coercion against any protocol’s future attempts at becoming base money.

Add this to Gary Gensler’s warning about how many other tokens will fail which will cause harm for retail investors, and we have a clear signal of regulation on the horizon.

While many like to scowl at regulators stealing our freedom, we cannot deny that some informed regulation would help, especially when customers are being misinformed about what kinds of investment products they are being sold.

Post originally published on Nov 21, 2022

On November 11, 2022, the second biggest exchange in crypto declared bankruptcy. The once revered Sam Bankman Fried (SBF) has now turned into villain number one of the industry. How did a company that was once valued at $32 billion capitulate so quickly? How did a CEO that was once compared to Warren Buffet on the cover of Fortune manage to evaporate his net worth of $16 billion overnight?

During a bull market, everyone is a genius. But it takes real talent to manage risk and preserve capital during a bear market. Unfortunately, everyone was leveraged to the max, lined up for the supercycle, committed to 6 figure bitcoin…

Even veterans of the industry who have seen it all were shocked by last week’s events. This is not your average story of failure. This is a story of a man who portrayed himself as an effective altruist taking advantage of an entire industry. This is a story of such recklessness that even Adam Neumann would be appalled.

SBF was once a Jane Street quant trader who made his millions by arbitraging cryptocurrency in its early days when price gaps were significant. He used this trading model to raise capital for Alameda Research, his first trading fund, and subsequently the crypto exchange FTX in 2019.

As time went on, it appeared that Sam was invincible. Even in the wake of the Terra / Luna / UST chaos, FTX and Alameda not only managed to stay afloat, but they also bailed out Voyager Digital. They were widely perceived in the space as superhuman genius math-nerd traders.

However, the first cracks started appearing on November 6 when the CEO of Binance, Changpeng Zhao (CZ) announced that Binance was planning to liquidate the $2.1 billion of assets it received when exiting their FTX equity last year “due to recent revelations that have come to light”. $500 million of this equity was in the FTX exchange native token FTT.

Despite CZ promising to do it in a way that “minimizes market impact”, there was quite the commotion ripping through the market. Traders were nervous about a report leaked on CoinDesk the previous week about the balance sheet holes of FTX’s trading firm Alameda Research — $8 billion of loans against $14.6 billion of assets, but the majority of which were unlocked FTT at $3.66 billion and FTT collateral at $2.16 billion.

Most of these assets were illiquid. Alameda was holding more tokens than the current circulating supply — collateral essentially created out of thin air. With a market cap of $3.35 billion, any significant sale of FTT would immediately tank the price.

Which is exactly what happened.

The 28-year-old CEO of Alameda, Caroline Ellison, tweeted immediately that they would buy all of the FTT that Binance wanted to sell at $22. SBF followed on, reassuring that FTX assets are fine. The wall did not hold, however, as the market did not trust Alameda’s liquidity. Both have since deleted their tweets.

Users proceeded to rush for the fire exit as FTX saw $6 billion of deposits fleeing the exchange in 72 hours before withdrawals were halted due to a lack of liquidity.

Meanwhile, SBF was said to have been running around frantically trying to find $6 billion to plug the black hole in their balance sheet. Binance stepped in to sign a non-binding LOI to acquire FTX, which they later backed out of after due diligence.

As users were trapped on the exchange, a few peculiar opportunities emerged. First there was excitement that withdrawals had resumed, but in fact this turned out to be only a “family and friends” round. Various other windows opened for limited periods of time, including NFT purchases for millions of dollars to move balances, bribes for transfers through FTX Bahamas based accounts (claimed to be open because of the local Securities Commission but in fact done to recover personal funds), and FTX Turkey offramps. The oddest of all was a public offering of balance redemptions by Justin Sun through his ecosystem tokens, at an 85% haircut on the underlying value.

Just when things couldn’t get any worse, the exchange was hacked. Exchange balances were reported at $0 and there was suspicious on-chain activity as the exchange wallets were sending funds out to sell on decentralized exchanges, causing asset prices to drop further. Although not proven yet, it is believed to have been an inside job as “there is no way to have this much root access so quickly.”

Meanwhile, mysterious FTX co-founder Gary Wang was still committing code.

It later came to light that FTX had been transfering user funds to Alameda. Early estimates place unaccounted user funds between $1–2 billion, but actual amounts could be as high as $10 billion. Reuters reports SBF had built a backdoor into the accounting software to “alter the company’s financial records without alerting other people, including external auditors.”

Multiple warning signs had appeared before the event. On-chain transactions show $8.6 billion worth of FTT being moved on September 28. $4 billion worth of that transaction interacted with the FTT ICO contract, which was vested automatically and then sent back to FTX. Lucas Nuzzi of Coinmetrics believes that Alameda had actually blown up during the Luna eclipse of Q2 and used these vested tokens as collateral to secure funding from FTX to avoid bankruptcy and therefore forced liquidation of their vested FTT tokens in September. Supporting evidence can be found in the BTC and ETH balances on-chain declining significantly after the Luna collapse.

What makes this even more interesting is that leading on-chain analytics and fraud prevention firm Chainalysis did not alert the public to this comingling of deposits — perhaps because they also were a creditor of FTX. Chainalysis was also responsible for FTX’s AML and KYC systems.

It appears that SBF bailed out Blockfi and Voyager (who Alameda was a debtor to) in order to prevent their assets from being sold off in a bankruptcy auction — remember the circulating supply of FTT was too low to handle large sales. Plus this allowed SBF to put forth an image of “responsibility” and solvency in the face of industry turmoil.

Which brings question to his relentless agenda for regulation. This may even be the root cause of the initial spat between SBF and CZ before all the selling took place. Sam was pushing a DCCPA bill that would have had crippling effects on the industry by effectively requiring centralized oversight for all DeFi protocols. Sam had also previously called for “Blocklists” and the ability to freeze funds, despite not being able to explain why regulation is needed.

Such stifling policy would have destroyed the permissionless and trustless ethos that drives this industry.

A bit of digging into Sam’s background shows he is very well connected. Clinton and Blair (not to mention the second largest donation to the Democrat party), the WEF, the SEC, to name a few. The press coverage was cringeworthy — Fortune magazine compared him to Warren Buffet and J.P. Morgan, Bloomberg portrayed him as Robin Hood, and Nas Daily called him the most generous billionaire.

Even worse was how the mainstream media covered his blatant fraud. Reuters said he did the financial system a favor, NYTimes made it look like an accident (not to mention that he was sleeping just fine), The Washington Post celebrates his political contributions and lobbying efforts. They were too busy coloring him as an innocent entrepreneur who expanded too fast and was attacked by a competitor to notice that he had zero awareness of risk and had been taking the media for a ride all along.

Other coverage was more than revealing. In a series of chat screenshots to Vox, he admitted he regretted filing for bankruptcy and effective altruism was just a sham. Lending out customer deposits was “messier and more organic than that” and he seems to think he can still raise $8 billion. The NYMag published a complete exposé on him, including how he has been manipulating the press.

Meanwhile, Sam looked for every excuse possible. First, over the span of 48 hours he tweeted out “WHAT” and then “HAPPENED” letter by letter. Then he claimed Alameda and FTX had enough assets as of Nov 7 — which was a lie, provable by the blockchain. Then he blamed it on leverage — but exchanges write the rules of leverage.

More and more stories have been emerging about Sam’s reckless past. A billion dollar loan to himself. Exemption of Alameda from liquidation. His amphetamine abuse. Romantic relations with co-workers. Caroline’s strange Tumblr reflections. $74 million of company funds on Bahamas real estate.

So when FTX finally filed for chapter 11 bankruptcy on 11/11 after their assets were frozen by Bahamian regulators, it looked like a death blow to the industry and that we would be settling in for a long, harsh winter. The Bahamas Security Commission has seized all FTX assets. Depositors will likely receive 5 cents on the dollar according to the Block.

As John Ray III took the helm of the ruined FTX to supervise its bankruptcy with his 40 years of legal and restructuring experience from criminal activity and malfeasance at Enron to cross-border asset recovery and maximization at Nortel and Overseas Shipholding, he admitted that he had never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

This is truly the story that never ends. Early estimates place losses at over $15 billion, but just how far reaching the contagion will be is yet to be fully understood. Nearly all FTX Ventures Portfolio Projects had used FTX as their treasury and will see their tokens auctioned off in bankruptcy court to reimburse user funds.

One of the more concerning issues is just how much the Grayscale Bitcoin Trust Fund is wrapped up in this mess. The GBTC, a “protected” investment in BTC by the SEC, has reached an all time low of -46% to its underlying BTC. What’s more is that they refuse to provide proof-of-reserve, citing “security concerns.” Some on-chain analysts have already started taking steps to identify GBTC addresses. Coinbase has since confirmed that it holds 635k bitcoin secure for the GBTC.

Counterparty risk runs deep in crypto, especially as entities become overly entangled in highly leveraged trades, helplessly hoping for the supercycle to resume. Here’s the latest updates.

• FTX contagion chart, including Galois Capital who had half of its assets and Ikigai who had a large majority of their assets on FTX.

• Paradigm have marked their FTX investment down to zero.

• Multicoin, who had 10% assets under management on FTX, lost 55% of its capital

• Silvergate, one of the only two banking relationships that US crypto firms have, has reportedly been subpoenaed for money laundering.

• Digital Currency Group has a $1.1 billion balance sheet hole and Genesis is halting withdrawals. Investigation into their balance sheets has revealed some “amazing coincidences.”

• Tether is tied with FTX’s chief regulatory officer and an online poker scandal.

Trust has been shattered in the industry, at least in the short term. However, a long winter is not nearly as bad as the dystopian regulation that SBF was gunning for. Crypto may have lost the battle but it looks like it may be positioned to be winning the war in the long term.

I once wrote a 21-part chronicle of the Tour de France while live reporting it. It was an experience equal parts gruelling and enriching. I was so close to giving up almost every day that went by, and yet, with every step I took to gather perseverance, I became a better creator. In the end, I wrote my most powerful piece to date. And, promptly lost it to a software error.

The frustration and pain of this experience is one of the reasons why I learned to love onchain publishing and the main reason I still do it, despite the uncertainty and frustrations of being an earliest adopter.

You've probably experienced something similar to me at some point: a video you loved taken down from YouTube, a childhood photograph lost to mold, or a teenage memory going away with a stolen phone.

We trust the internet and our devices to contain aspects of us, and we're left a little emptier when that fateful software update or code depreciation makes them obsolete.

Now that we can ensure smart contracts and blockchains survive pretty much any physical or digital threat to the information they contain, how does that affect these pieces of ourselves we seed onchain?

Onchain platforms have proven time and again that even when the company maintaining the contracts goes under, as long as we entrust our code to the chain, their core functionality will still work, even sometimes with a new front end to breathe a second life to their creation.

The only problem lies in why would anyone want to build on top of an abandoned project, it’s a well-known meme how most of the internet is thanklessly maintained by a sole developer keeping the lights on for an open-source repo. Onchain, things are different, the speed of building and the advances in the tech even to this day mean that there’s little to no backward compatibility except on very rare occasions.

All it takes is a network upgrade or a new and cleaner way to send a particular type of transaction, and your hard-fought smart contracts pile up to turn Ethereum (and any similar chain) into a graveyard of protocols. All technically functioning (like the previous versions of Uniswap), yet close to none living up to the promise of immutable code as law.

As I mentioned above, being part of the early adopter bucket of a new technology can be frustrating at times. This piece came to me as I considered migrating my writing onto a more traditional platform. The Permaweb is great at making content endure, but it does a pretty bad job of making it readily available for people to engage with.

I know this sounds sacrilegious to some of you, but the ability to fetch data and display it anywhere doesn't mean anyone will want to read it.

In his 2021 piece "What Comes After Open Source?" Mirror co-founder Denis Nazarov explores how onchain data, or "State," when compounded towards a particular use, can be both a moat and a catalyst, depending on how accessible it is to outside believers and creators. This, in a nutshell, is what motivated me to experiment with onchain media in the first place. 

Few people still realize how much potential is held in readily available onchain transactions and protocols to be built on top of the different behaviors we pool into the largest open database in the world.

Even when left to rot onchain. An abandoned protocol is still a gold mine of a capsule of people transacting, believing, and engaging with the platform while it was still active. Stuff like sybil prevention, vampire attacking projects, or retroactive airdrops are among the few who have learned how to harness this information properly; but that’s barely skimming what could be unlocked with the aggregate data that shows how people’s ways of interacting onchain have evolved over the years.

Ironically, Mirror is also an example of how this state moat can sometimes be forced upon you. A few months back, while helping build an onchain article aggregator, I learned just how much is still being done internally (i.e. not composably) to display what we call "onchain publishing." Yes, the data is there for you to aggregate and display. But things like attribution, NFT minting, and splits are still far from what the ideal of composability would lead you to believe.

I always took Mirror as an impregnable protocol, even besides the team and company building it. What they created was a new primitive so much has been built on top of, from being the inspiration behind the Jokerace as a governance medium, to experimenting with splits, permissioned mints and many other experiences that we take for granted today. Mirror’s impact on our current onchain paradigm can’t ever be denied.

And now that the baton is being passed to the Paragraph team to steward the protocol into a new era of onchain publishing, I’m left to wonder what the OG writing NFT protocol will be used for if the turning of the page inevitably means the contracts will be made obsolete when the new big thing drops.

____

Does anyone remember Glass protocol? They were among the first projects that sought to make onchain video streaming; before the days of Livepeer's dominance over this department, Glass took on a curated and Vimeo-like approach to video minting.

The technology wasn't there at the time. Ethereum gas fees and little interest in video patronage led to them migrating to Solana in an attempt to curb the high premiums attached to their core idea. After agonizing years of trying to make it stick, they officially folded in 2023.

In their announcement tweet, the Glass team made it clear that all of their smart contracts would still be available for anyone to use and interact with. But I'm left to wonder, what's the point of that? If there's no one to tell the story, did any of Glass' drops really happen?

____

I've also been here long enough to remember when Hic et Nunc's developer ragequit their project and left it at the mercy of the Tezos chain. I remember standing in awe as the community came together and reclaimed the contracts and mints to give them a new home, a place where they're still alive and thriving today.

To me, this is the prime example of what could happen in an ideal scenario if any of our media protocols were to die. The thesis of progressive decentralization can only really matter if there are people with the excitement and know-how to tend to the lore left onchain with every mint and every contract call.

There are countless stories similar to this: former bull-run NFT collections that are handed off to the community after their founders take the cash and leave (like Pudgy Penguins, Cryptopunks, Moonbirds, and Mooncats). The circumstances behind each are unique. Sometimes, it's the noble pursuit of giving back to the community, and sometimes, it's a corporate acquisition not dissimilar to what we’d find in Silicon Valley. But the constant remains. Every protocol is only as valuable as the people who are willing to make it endure.

We've all joked about how crypto can sometimes feel like a cult. But I mean it when I say this comparison goes much deeper than the chants and the rituals.

When thinking about this piece's core question of "What happens when a protocol dies?" I often drew parallels with religions and languages.

I grasped to find any other instance in human history when something truly permanent is created, and what happens when society leaves it behind. 

With human-made edifications, nature will eventually reclaim its land. With artifacts and names, history will do its thing and bury it all beneath the sand. The only real thing we humans can create that will truly outlast us, as I've said time and time again, is stories.

Protocols are just a digitized version of this. As I briefly touched upon in Whole Earth Theory, you can build a database big enough to contain every possible interaction and piece of content, but you can't put a limit to the ways people believe and tell stories around that information.

No matter what company goes under, or what treasury runs out of funds, as long as there is a way to give the protocol back to its believers, and there are people to believe in it in the first place, there will be a Rosetta Stone that revives and re-contextualizes any piece of media we leave behind onchain.

To preserve the memory and culture of platforms like Mirror, we at Autopsy look to collect and analyse data on the demise of protocols and web3 projects aiming to surface the fragments of code, learnings and people who could support future builders in bringing on the next iteration of onchain media platforms. This is the start of Autopsy’s Media Protocols section.

To submit an Autopsy, share your story here and get in touch if you would like to contribute to the open knowledge repo of failed companies hello@getautopsy.com. Follow for updates @getautopsy.

Autopsy exists to debunk and pull the opaque cloak on the tech startup and venture capital ecosystem, to bring attention to the over-glamorisation of being a tech founder in an industry that has gated its learnings that can help emerging builders and company valuations led by VCs as a game to control the market narrative.

In line with the recent launch of the Autopsy Paragraph publication, we will be sharing content coverage on the performance and demise of web3 protocols and companies to serve as an archive of openly accessible learnings for an early market on the rise.

To share your learnings from building an idea or company that didn't quite stick, submit your Autopsy here.

Resources
Autopsy Medium Publication (link)
Key Research Reports (link)
Autopsy Sample Dataset (MVP interface)
Academic Publication with Politecnico di Torino University 'Startups’ Roads to Failure'

Autopsy writer contributors include
@mmazco @tyscharf and @K41R0N

To contribute to Autopsy, please email hello@getautopsy.com

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