Algorithmic Stablecoin Demand Flaw

Shaan Puri shares his experience with the Terra/LUNA crash, where he lost over $200K. He explains how the project's fundamental flaw - requiring continuous demand growth - led to its collapse, and reflects on his investment approach and emotional response to the loss.

Key Points:

• Terra/LUNA Project Structure:

  • Created two coins: UST (stablecoin pegged to $1) and LUNA (backing currency)
  • Initially focused on e-commerce payments in Korea
  • Pivoted to offering 20% interest rates for deposits

• Project's Fatal Flaw:

  • Required continuous demand growth to maintain stability
  • Critics warned about potential "death spiral" if demand dropped
  • Vulnerable to coordinated attacks with sufficient capital ($1B+)

• The Crash:

  • Coordinated selling pressure of $1B+ triggered the collapse
  • UST lost its dollar peg
  • LUNA went from $116 to less than a penny
  • Wiped out approximately $48B in value

• Personal Investment Experience:

  • Initially invested $25K
  • Added $200K more at ~$40/LUNA (40% discount to market)
  • Total loss around $225K
  • Was up 3x at peak ($750K)

• Investment Philosophy & Response:

  • Understood and documented risks before investing
  • Limited exposure to 15% per project due to "black swan" risks
  • Views it like a "flush draw that got beat" in poker terms
  • Uses loss as motivation to focus on earning through work
  • Maintains emotional distance from losses
  • Doesn't obsessively check portfolio during downturns

• Leadership Lessons:

  • Project leader's (Do Kwon) arrogance and dismissal of critics contributed to downfall
  • Previous failed attempt at similar project (Basis Cash) should have been red flag
  • Importance of humility and taking critics seriously