Analysts say that the secret to the “20% annual return” that has driven the global craze of cryptocurrency Luna and Terra UST was a “phone fraud” that guarantees profits to existing investors with funds from new investors.
Bloomberg reported on the 15th (local time) the story of Kevin Zhou, a veteran of the cryptocurrency industry who had pointed out the dangers of Luna and UST early on.
Zhou, who entered the cryptocurrency industry in 2011, worked at a cryptocurrency exchange called “Buttercoin” and established and operated a cryptocurrency investment hedge fund “Galua Capital.”
According to him, the secret to Terra UST and Luna popularity was the annual return of 20% provided by the program Anchor Protocol run by publisher Terraform Labs.
Terraform Labs has vowed to provide an annual return of 20% if investors deposit UST.
However, this is a return that is difficult to guarantee even famous hedge funds on Wall Street, raising public questions about how to achieve it.
Zhou found the secret to this high profit in Luna owned by Terraform Labs.
Luna is a virtual currency that is used to peg the value of UST, a stable coin, for 1 dollar.
It is said that it sold Luna owned by Terraform Labs at a discounted price and used it to provide the promised return.
“When we don’t know where the profits come from, it can be said that they actually come from the future bag holder,” he said.
In other words, it was a typical Ponzi scheme in which investors who belatedly entered the cryptocurrency market paid for the profits of current investors.
In theory, things could have improved if Terraform Labs had lowered the return provided by the anchor protocol, but Bloomberg pointed out that there was a risk that investors would leave the UST market itself.
Zhou diagnosed that the reason why the UST ecosystem, which was in full swing, collapsed was that Terraform Labs bought a large amount of Bitcoin to support the value of UST.
Initially, he claimed that the UST ecosystem was designed as a system that was automatically restored based on complex algorithms, and explained that the purchase of Bitcoin as an alternative in case of an emergency was a self-confessed system that the UST ecosystem could not roll on its own.
In the end, Luna is a “similar permanent institution” that cannot be sustained unless more money is constantly invested from outside.
Zhou said, “Once the mechanism collapsed, there was no circuit breaker to stop it. There were no emergency loans from the Federal Reserve, and there were no bailouts from private investors.