CCC: Cryptocurrency Course slide set

## Motivations
- A big criticism is that cryptocurrencies are too volatile
  - Stablecoins attempt to solve this
- What if you think a cryptocurrency is going to drop in value?
  - Exchange your shares for a stablecoin, then when it plunges, you buy more shares back
  - If you did this with actual US Dollars, you would be paying capital gains taxes on these transactions
    - And short-term sales pay *much* more in taxes
- Creating a stablecoin can still make the creators money
  - Even if it doesn't make as much as, say, BTC or ETH

## Review: Types of currencies

- Commodity currency: made from actual valuable commodities, such as gold
- Representative currency: one that is backed up by a valuable "thing", such as gold
- Fiat currency: established by the government "by fiat"
  - What the US dollar is (now)
- Cryptocurrency (obviously)

## Stablecoins
- A coin whose value is meant to not be *non*-volatile
- Usually *pegged* in value to a fiat currency
  - Most use the US Dollar
- Thus, `$`1 is called the coin's *peg*
- If it's value lowers (significantly) below the peg, it's called *depegged* or *depegging*

## Stablecoin categories
- *Collateral:* property (such as securities) pledged by a borrower to protect the interests of the lender ([ref](https://www.merriam-webster.com/dictionary/collateral))
- *Collateralized* stablecoins means that there is some collateral (financial investment) backing up the value of the stablecoin
  - Ideally as much as the value of the minted stablecoin
    - If less, then it's *under-collateralized*
  - Collateral could be cryptocurrency or fiat currency (typically not both)
- *Uncollateralized* means there is no collateral backing up the value of the stablecoin
  - Fiat currencies are uncollateralized
- *Hybrid* stablecoins use some of both categories

## Stablecoin categories
- *Centralized* means it is run by a single company or entity
  - Government, corporation, individual, etc.
  - They may *use* a smart contract to manage the stablecoin, but it's still a single entity that manages it
- *Decentralized* means it's not run by a single company or entity
  - Instead by a group, DAO, or algorithm
  - Often by a smart contract; these are often called *algorithmic*

## Stablecoin Types

<table>
<thead>
<tr>
<th style="border-bottom:0"></th>
<th>Centralized</th>
<th>Decentralized</th>
</tr>
</thead>
<tbody>
  <tr>
<th style="border-bottom:0;border-right:1px solid">Collateralized</th>
<td>custodial<br>stablecoins<br>(USDC, USDT)</td>
<td>algorithmic<br> <br>(SAI, DAI)</td>
</tr>
<tr>
<th style="border-bottom:0;border-right:1px solid">Non-collateralized</th>
<td>central bank digital currency<br>(XPD)</td>
<td>algorithmic<br>(FEI, TRIBE,<br>FRAX, TOMB)</td>
</tr>
<tr>
<th style="border-right:1px solid">Un(der)-collateralized</td>
<td>???<br>???</td>
<td>undercollateralized stablecoins, seigniorage shares</td>
</tr>
</tbody>
</table>

## Definitions

> Peg: to have the price of one asset (say, a cryptocurrency) exactly match the price of another asset (say, USD)

> Depeg: when the asset (say, a cryptocurrency) looses its pegged price against the other asset (say, USD)

## Coins Studied
- We are going to see a *lot* of coins in this slide set:
- A total of 15: 
[![aust logo](../slides/images/logos/aust-coin-symbol.svg)](https://coinmarketcap.com/currencies/anchorust/)
[![dai logo](../slides/images/logos/dai-coin-symbol.svg)](https://coinmarketcap.com/currencies/multi-collateral-dai/)
[![fei logo](../slides/images/logos/fei-coin-symbol.svg)](https://coinmarketcap.com/currencies/fei-usd/)
[![frax logo](../slides/images/logos/frax-coin-symbol.svg)](https://coinmarketcap.com/currencies/frax/)
[![luna logo](../slides/images/logos/lunac-coin-symbol.svg)](https://coinmarketcap.com/currencies/terra-luna/)
[![mim logo](../slides/images/logos/mim-coin-symbol.svg)](https://coinmarketcap.com/currencies/magic-internet-money/)
[![mkr logo](../slides/images/logos/mkr-coin-symbol.svg)](https://coinmarketcap.com/currencies/maker/)
[![sai logo](../slides/images/logos/sai-coin-symbol.svg)](https://coinmarketcap.com/currencies/single-collateral-dai/)
[![spell logo](../slides/images/logos/spell-coin-symbol.svg)](https://coinmarketcap.com/currencies/spell-token/)
[![tomb logo](../slides/images/logos/tomb-coin-symbol.svg)](https://coinmarketcap.com/currencies/tomb/)
[![tribe logo](../slides/images/logos/tribe-coin-symbol.svg)](https://coinmarketcap.com/currencies/tribe/)
[![usdc logo](../slides/images/logos/usdc-coin-symbol.svg)](https://coinmarketcap.com/currencies/usd-coin/)
[![usdt logo](../slides/images/logos/usdt-coin-symbol.svg)](https://coinmarketcap.com/currencies/tether/)
[![ustc logo](../slides/images/logos/ustc-coin-symbol.svg)](https://coinmarketcap.com/currencies/terrausd/)
[![xpd logo](../slides/images/logos/xpd-coin-symbol.svg)](https://coinmarketcap.com/currencies/petrodollar/)
- They are meant as examples of the concepts taught
- You don't have to memorize them all!

## Collateralized centralized
- Defining characteristics:
  1. A single entity manages the coin
     - The entity could be a bank, company, non-profit, consortium, etc.
     - That entity is typically *not* a smart contract
       - Although they may operate through a smart contract
       - Meaning a centralized agency calls the shots, but uses a ERC-20 contract for the token cryptocurrency
  2. When coins are purchased, the fiat money used for the purchase goes somewhere it can be retrieved
     - Investments, equities, bank account, safe, under a mattress, etc.

## [![usdc logo](../slides/images/logos/usdc-coin-symbol.svg)](https://coinmarketcap.com/currencies/usd-coin/) USD coin (USDC)

- Managed by a consortium named Centre, which is founded by Coinbase (and others)
- As per [coinmarketcap.com](https://coinmarketcap.com/), it has the 5th largest market capitalization (`$`33 billion as of 4/9/23) 
  - After Bitcoin (`$`548 billion) and Ethereum (`$`224 billion) and two others

## [![usdc logo](../slides/images/logos/usdc-coin-symbol.svg)](https://coinmarketcap.com/currencies/usd-coin/) USD coin (USDC)

- Backed by actual monetary investments in various accounts
  - An accounting agency (Grant Thornton) attests monthly to these deposits
- If you buy one, the money you pay goes into these accounts
- But how risky are those deposits?
  - If their value goes down, the number of USDC does not change!
- Not backed by the US government in any way!

## [![usdt logo](../slides/images/logos/usdt-coin-symbol.svg)](https://coinmarketcap.com/currencies/tether/) Tether (USDT)

- Similar to USDC in how it works
- Run by Tether Ltd
- As per [coinmarketcap.com](https://coinmarketcap.com/), it has the 3rd largest market capitalization (`$`80 billion as of 4/9/23) 
- Scandal-ridden (next slide)
  - Many accusations that their reserves are much less than the 1:1 ratio they claim
- Not backed by the US government in any way!

## [![usdt logo](../slides/images/logos/usdt-coin-symbol.svg)](https://coinmarketcap.com/currencies/tether/)  Tether Issues
- February 3, 2021: [Tether pays `$`18.5 million in penalties; NY Attorney General alleges they don't have the cash reserves they claim](https://web3isgoinggreat.com/?id=tether-pays-18-5-million-in-penalties)
- December 4, 2021: [Tether mints `$`3 billion in two weeks](https://web3isgoinggreat.com/?id=tether-mints-3-billion-in-two-weeks)
- January 1, 2022: [Tether adds `$`1 billion to their supply](https://web3isgoinggreat.com/?id=tether-adds-1-billion)
- May 12, 2022: [Tether drops below `$`0.95](https://web3isgoinggreat.com/?id=tether-loses-peg-drops-below-095)

## Disadvantages
- The centralized entity may make risky investments
  - What happens when they lose much of that collateral?
  - If their investments gain value, the owners of the stablecoins aren't getting any of the growth
- Lack of transparency about how *much* collateral there is
  - Even with the "attestations" about the collateral backings
- It's still controlled by a centralized agency
  - Could the government withhold your money?  Perhaps
- It's not regulated like the US Dollar is
  - That can be a good thing or a bad thing

## Uncollateralized centralized
- Because it is *centralized*, it is managed by a single entity
- Because it is *uncollateralized*, it is basically the cryptocurrency equivalent of a fiat currency
- Only a government could issue a fiat cryptocurrency and have anybody consider it to have value
- Thus, these would be a national central bank issued cryptocurrency

## Examples
- In the US: none
- <img src="images/flags/uae.svg" class="flag"> UAE: Dubai issues Emcash (launched in 2017) <br clear='all'>
- <img src="images/flags/venezuela.svg" class="flag"> Venezuela: Petro (launched in Feb 2018) <br clear='all'>
  - [![xpd logo](../slides/images/logos/xpd-coin-symbol.svg)](https://coinmarketcap.com/currencies/petrodollar/) Petro (XPD) is the only one here [listed on coinmarketcap.com](https://coinmarketcap.com/currencies/petrodollar/) <br clear='all'>
- <img src="images/flags/estonia.svg" class="flag"> Estonia: Estcoin (planned in 2018, not launched) <br clear='all'>
- <img src="images/flags/russia.svg" class="flag"> Russia: Cryptoruble (still in development) <br clear='all'>
- <img src="images/flags/sweden.svg" class="flag"> Sweden: E-Krona (still in development, launch in 2022?) <br clear='all'>
- <img src="images/flags/japan.svg" class="flag"> Japan: J-Coin (not actually a cryptocurrency, more like a bank account / credit card combination) <br clear='all'>

## [![xpd logo](../slides/images/logos/xpd-coin-symbol.svg)](https://coinmarketcap.com/currencies/petrodollar/) Petro
- Created in 2017/2018, it was meant to:
  - Bypass US sanctions
  - Shore up the then plummeting bolivar currency
- General reception was quite negative
  - Bloomberg: [Crypto Rating Sites Are Already Calling Venezuela’s Petro a Scam](https://www.bloomberg.com/news/articles/2018-04-03/crypto-rating-sites-are-already-calling-venezuela-s-petro-a-scam), April 3, 2018
- [Wikipedia article](https://en.wikipedia.org/wiki/Petro_(cryptocurrency%29)

## Drawbacks 
- The government can track this
- Many people who get into cryptocurrency do not want government centralization
- It's unclear how this would be better than, say, a credit card or a debit card

## [![dai logo](../slides/images/logos/dai-coin-symbol.svg)](https://coinmarketcap.com/currencies/multi-collateral-dai/) Dai (DAI)

- Originally only backed by (only) ETH, created in 2017
  - An ERC-20 token via a smart contract
  - This coin is [![sai logo](../slides/images/logos/sai-coin-symbol.svg)](https://coinmarketcap.com/currencies/single-collateral-dai/) Sai ([SAI](https://coinmarketcap.com/currencies/single-collateral-dai/)) for Single-Collateral DAI
- In 2019, [![dai logo](../slides/images/logos/dai-coin-symbol.svg)](https://coinmarketcap.com/currencies/multi-collateral-dai/) DAI was created, and is pegged at `$`1 USD
  - An ERC-20 token cryptocurrency we've [talked about before](tokens.html#/dai)
  - All SAI was upgraded to DAI; SAI no longer (really) exists
  - DAI is backed by multiple types of collateral
- [![mkr logo](../slides/images/logos/mkr-coin-symbol.svg)](https://coinmarketcap.com/currencies/maker/) Maker ([MKR](https://coinmarketcap.com/currencies/maker/)) is the governance token
  - [MakerDAO white paper on DAI](https://makerdao.com/en/whitepaper/)
  - The MakerDAO votes to allow additional types of ERC-20 collateral (and their risk factor)
- Source code for [SAI](https://github.com/makerdao/sai) and [DAI](https://github.com/makerdao/dss)

## How to buy DAI
- Create a 'vault' via a smart contract that contains the asset you want to convert to DAI
  - This vault is the collateral; one asset per vault
- Via the MakerDAO contract, one 'locks' the vault (transfers it to the contract) and receives DAI in return
  - Anybody with a vault can do this; you don't need MKR
  - Only the MakerDAO contract can lock and unlock the vault
  - This DAI is the 'debt' -- hence *Collateralized Debt Position (CDP)*
- To redeem (some or all of) the original assets:
  - Pay back the DAI generated above
  - Pay a 'stability fee' (aka interest) on the DAI generated
  - Withdraw the asset(s) from the vault

## Current DAI stats
- See them at https://daistats.com/
  - On the 'Collateral' tab the stability fees are listed
    - It varies by asset, typically 2%-6%, but can be higher or lower
  - ETH-? provides different levels of risk and reward; see [here](https://forum.defisaver.com/t/converting-between-eth-a-eth-b-and-eth-c-maker-vault-types-using-the-loan-shifter/39) for details
  - The "Collat. Ratio" is how much DAI has been minted versus the collateral
    - Above 100% means more collateral is locked than DAI is issued

## Target Rate Feedback Mechanism (TRFM)
- The target price (aka peg) for DAI is `$`1 USD
- If DAI's price falls below the peg, then there is too much supply (or too little demand)
  - Stabilization goal: reduce supply and increase demand
  - The smart contract automatically increases the target rate(s)
  - DAI is now more expensive to mint
    - This decreases supply (fewer DAI for the same collateral)
    - This increases price (DAI are worth more collateral)
- If DAI's price rises above the peg, then there is too little supply (too much demand)
  - The smart contract decreases the target rate(s)
  - The reverse of the above happens

## DAI Liquidation
- [Liquidation](https://makerdao.com/en/whitepaper/#liquidation-of-risky-maker-vaults) is discussed in the [DAI whitepaper](https://makerdao.com/en/whitepaper)
  - Each asset type has a liquidation ratio
    - Determined and adjusted by MakerDAO votes)
  - If the collateral-to-debt ratio 
- [Here](https://itovault.com/how-dai-liquidation-work-makerdaos-mcd-system/) is how it works ([direct image link](https://itovault.com/wp-content/uploads/2020/12/MakerDAO-Liquidation-1024x916.png))
- You can see the recently [liquidated assets](https://makerburn.com/#/liquidations)
- MKR is minted to make up the shortfall
  - This dilutes the MKR price
  - But since it's worth so much, there is typically no shortfall
  - And it' doesn't happen often
- Read more about liquidations [here](https://itovault.com/how-dai-liquidation-work-makerdaos-mcd-system/)

## What keeps DAI's peg stable?
- Stability fees: these fees build additional collateral in the smart contract
- Liquidation if a vault's assets are too low
  - And minting MKR to make up for any difference in bankrupt vaults
- Target Rate Feedback Mechanism

## SAI / DAI stability
- How well does it work?
  - Coefficient of Variation (CV) is the standard deviation divided by the mean
    - It describes the variability of a sample relative to the average
    - Usually expressed as a percentage
    - 0% means no variation
  - For [![sai logo](../slides/images/logos/sai-coin-symbol.svg)](https://coinmarketcap.com/currencies/single-collateral-dai/) SAI, it's 1.33%
  - For [![dai logo](../slides/images/logos/dai-coin-symbol.svg)](https://coinmarketcap.com/currencies/multi-collateral-dai/) DAI, it's 0.83%
  - For [![eth logo](../slides/images/logos/eth-coin-symbol.svg)](https://coinmarketcap.com/currencies/ethereum/) ETH, it's 131.6%
  - These values as of 4/9/23
- We can also see it as a graph...
  - I included SAI data until the end of 2019; DAI was introduced Nov 19, 2019; SAI's price has fluctuated quite a lot since then

## Two Sub-categories
- Uncollateralized or Under-collateralized stablecoins: FRAX, FEI, IRON, OHM, Gyroscope
  - There can be little or no collateral backing the stablecoin
    - Zero collateral backing usually doesn't interest many investors, so most are under-collateralized
  - Of those, [![fei logo](../slides/images/logos/fei-coin-symbol.svg)](https://coinmarketcap.com/currencies/fei-usd/) FEI has the highest market capitalization (#91 as of 4/9/23)  
- Seigniorage shares: Basis, Maker (as a backstop), Tomb, Frax
  - Similar to the previous category, but uses a different mechanism to maintain the peg

## Under-collateralized: [![fei logo](../slides/images/logos/fei-coin-symbol.svg)](https://coinmarketcap.com/currencies/fei-usd/) FEI
- [![fei logo](../slides/images/logos/fei-coin-symbol.svg)](https://coinmarketcap.com/currencies/fei-usd/) Fei [FEI](https://coinmarketcap.com/currencies/fei-usd/) is a stable coin pegged at `$`1 USD
  - Launched in March 2021
  - Main website is [fei.money](https://fei.money/); [whitepaper](https://fei.money/static/media/whitepaper.7d5e2986.pdf)
  - An ERC-20 token on the Ethereum blockchain
- [![tribe logo](../slides/images/logos/tribe-coin-symbol.svg)](https://coinmarketcap.com/currencies/tribe/) [TRIBE](https://coinmarketcap.com/currencies/tribe/) is its governance (DAO) token
  - The TRIBE DAO can allow:
    - More DEXes to be used (Uniswap was the only one at first)
    - More assets to be used as collateral
    - Etc.

## Collateralized stablecoin disadvantages
- With many stablecoins, you can withdraw your collateral at any time
- But what if:
  - A lot of people, or a whale, withdraw at once?
  - The price has fluctuated greatly?
- This could lower the overall price

## [![fei logo](../slides/images/logos/fei-coin-symbol.svg)](https://coinmarketcap.com/currencies/fei-usd/) Fei (FEI)
- FEI will not allow withdrawal of collateral
  - The collateral is locked into the contract, and used to help maintain the peg
  - One can trade the FEI for other assets, of course
    - But that's not "redeeming" one's collateral, but few would see the difference
  - They call this *Price Controlled Value* (PCV)
    - Used to help maintain the peg
- Direct incentives
  - FEI holders get benefits from holding or using FEI
  - Examples: better interest rates, DEX transaction fees, etc.

## [![fei logo](../slides/images/logos/fei-coin-symbol.svg)](https://coinmarketcap.com/currencies/fei-usd/) Fei (FEI)
- If the price drops below the peg...
  - Then the liquidity is used to buy back FEI tokens, increasing supply
  - Thus increasing the price
- If the price rises above the peg...
  - Then there is more demand than supply
  - More FEI tokens are issued until the price stabilizes
    - Usually distributed to existing stakers or holders

## Seigniorage

(pronounced *senior-idge*; [source](https://www.investopedia.com/terms/s/seigniorage.asp))

> Seigniorage: the cost of a unit of currency minus the cost to create it

Examples:

- A USD `$`20 bill cost 11.5¢ to make in 2019
  - Seigniorage: `$`19.885
- A USD `$`100 bill cost 14.2¢ to make in 2019
  - Seigniorage: `$`99.858
- A USD penny cost 1.5¢ to make in 2016
  - Seigniorage: -0.5¢

## Seigniorage: Keeping the peg
- An algorithmic (aka decentralized) stablecoin
- If the value of stablecoin rises above the peg, then more are minted
  - Usually distributed to existing stakers or holders
- If the value of the stable coin dips below the peg...
  - A bond is issued: basically an IOU for more of the stablecoin
  - Those bonds are sold for lower than the peg amount
  - People buy these bonds, with the intent to redeem them for the stablecoin once the price rises to the peg, this making a profit
- [Reference](https://dailydefi.org/articles/what-are-seigniorage-stablecoins/)

## Seigniorage: Keeping the peg
![](https://upload.wikimedia.org/wikipedia/commons/1/1d/Cribbage_board_with_pegs2.jpg)
- Some (not many!) will burn coins that holders *have*
  - This means that the amount you own can *vary*
  - Few people like this
- Which is more important: keeping the peg, or keeping your account balance the same?
  - Most would choose the latter, but these coins choose the former

## Seigniorage: the name
- There is a *cost* to making this money
  - The bonds are issued at a lower price, then sold at a higher price
  - Or one loses their shares if they are burned
- Hence the name: *seigniorage* is the value of the money minus the cost to make the money

## Seigniorage Stablecoins
![](https://sciencevibe.com/wp-content/uploads/2017/01/sc-death-spiral.jpg)
- But what if it never rises to the peg?
  - Then more bonds are issued as the price decreases
  - As the price drops, people lose faith, decreasing demand to buy the bonds
  - The price continues to decrease
  - This repeats as the price continues to drop
- This is called the *death sprial*
  - A disadvantage of this type of mechanism to maintain a peg

## Seigniorage Stablecoins
- These coins have often had trouble holding their peg
- Consider the [top seigniorage coins by market cap](https://www.coingecko.com/en/categories/seigniorage) (as of 4/9/23):
  - [![frax logo](../slides/images/logos/frax-coin-symbol.svg)](https://coinmarketcap.com/currencies/frax/) [FRAX](https://coinmarketcap.com/currencies/frax/) (#51 overall, #1 top seigniorage) has been fairly stable
  - Number 2 is Frax Share, the DAO for FRAX, at #95
  - Number 3 is Terra Classic USD, at #120
    - We'll talk about this shortly; it's a "stablecoin" worth 3.5¢
  - [![tomb logo](../slides/images/logos/tomb-coin-symbol.svg)](https://coinmarketcap.com/currencies/tomb/) [TOMB](https://coinmarketcap.com/currencies/tomb/) (#4,628 overall) has not been stable at all
    - A "stablecoin" worth 3.1¢
  - The next highest is #955 overall, so clearly it's not used much
  - The one after that is #2,781...

## [![frax logo](../slides/images/logos/frax-coin-symbol.svg)](https://coinmarketcap.com/currencies/frax/) FRAX
- An ERC-20 token on Ethereum, launched in November 2020
- It's "Fractional-Algorithmic", aka hybrid
  - Some of it is collateralized, some of it is algorithmic
- If it is trading below the `$`1 peg...
  - The ratio of collateralized to algorithmic is *increased* (more collateral) to bring the price back up
- If it is trading above the `$`1 peg...
  - The ratio of collateralized to algorithmic is *decreased* (more algorithmic) to bring the price back up
  - Has been fairly stable, relative to other seigniorage stablecoins

## Oracles
![](https://upload.wikimedia.org/wikipedia/en/f/f0/The_Oracle_%28i%29.gif)
- A smart contract can only use the data on the blockchain
- Complex situations require more data than that:
  - Current exchange rates
  - Random numbers
  - The ability to interact with other blockchains
- The solution: Oracles

> Oracle (n): a person who delivers authoritative, wise, or highly regarded and influential pronouncements

## Oracles
We can easily create an oracle:

```
contract Oracle {
    address deployer;
    uint public price; // public, so creates a getter

constructor() {
        deployer = msg.sender;
    }

function updatePrice (uint update) external {
        require (msg.sender == deployer, 
                 "Only the Oracle can update this");
        price = update;
    }
}
```
- Getting people to trust it is another matter

## Oracle: trusted signer
![](images/stablecoins/oracles/oracles.dot.1.svg)
- The oracle signer (often the deployer) updates the price, and anybody can read it
  - This works well when the source is centralized
  - Examples: the oracles on Ethereum that interact with the Polkadot or Polygon chains
- Can be a set of trusted signers, any one of which can update the oracle
- But a corrupt signer can maliciously manipulate the price

## Oracle: $m$ of $n$ signers
![](images/stablecoins/oracles/oracles.dot.2.svg)
- So we have multiple signers
- We expect some variance in the values
  - Different exchanges will provide slightly different exchange rates
- We have to take the *median* value, not the *mean*
  - We'll see why next

## Oracle: $m$ of $n$ signers
![](images/stablecoins/oracles/oracles.dot.3.svg)
- What if some nodes are corrupted?
- We have to take the *median* value, not the *mean*
  - Here the mean is `$`71
  - The median is `$`101
- If more than half are trustworthy, then the oracle will have a (mostly) correct price
  - Less than half can be traitors!

## Oracle: Schelling oracles
![](images/stablecoins/oracles/oracles.dot.4.svg)
- Each signer puts a *stake* in their vote
- We accept the value that has the most stake
- Traitors have their stake *slahsed*
  - Although we allow for some variance in the price
  - But if we allow for too much variance, a traitor can just give a valid, but low, price

## Schelling oracles & whales
![](images/stablecoins/oracles/oracles.dot.5.svg)
- A *whale* could put in a huge stake to manipulate the price
  - Knowing full well s/he will lose their stake
  - Presumably so s/he can make a (bigger) profit off of the price difference

## Terra, LUNAC, and USTC
- Terra is the ecosystem, built upon the Cosmos SDK
  - Company is called Terraform Labs
  - Allows devs to build custom blockchains for dApps
- [![luna logo](../slides/images/logos/lunac-coin-symbol.svg)](https://coinmarketcap.com/currencies/terra-luna/) LUNA Classic ([LUNAC](https://coinmarketcap.com/currencies/terra-luna/)) is the (volatile) cryptocurrency <br clear='all'>
  - Was backed by billions in Bitcoin
  - Previously just LUNA; had a high of `$`118.74 on April 5, 2022
  - Terra vs LUNAC is like the difference between Ethereum & ETH
- [![ustc logo](../slides/images/logos/ustc-coin-symbol.svg)](https://coinmarketcap.com/currencies/terrausd/) USD Terra Classic ([USTC](https://coinmarketcap.com/currencies/terrausd/)) (previously just UST) is the stablecoin that was pegged at `$`1 USD <br clear='all'>
  - The LUNAC cryptocurrency was used to keep the USTC stablecoin on its peg
  - It's an Ethereum ERC-20 token

## The Terra Crash
- See the [graph of LUNC](https://coinmarketcap.com/currencies/terra-luna/)
- $45 *billion* was wiped out in the crash of LUNAC in one week alone
  - Which caused the stable coin to crash as well
- This dragged down the broader crypto market, causing losses of 100s of billions of dollars
- But why did this happen to a respected cryptocurrency?

## Do Kwon

- Kwon Do-hyung, known as Do Kwon, is the founder of Terraform Labs (along with Daniel Shin)
- Stanford graduate, Korean national
- Founded Terraform Labs in Singapore
- Was on CoinDesk's [2021 Most Influential list](https://www.coindesk.com/policy/2021/12/10/most-influential-2021-do-kwon/)
- Now widely reviled, and many legal actions are pending against him

## Do Kwon's current status

- The [Do Kwon Wikipedia article](https://en.wikipedia.org/wiki/Do_Kwon) sums it up nicely:
- On 23 March 2023, Kwon was arrested in Montenegro, while attempting to travel to Dubai using falsified documents. Following his arrest, he was charged by a US federal grand jury of eight counts, including securities fraud, commodities fraud and wire fraud and conspiracy.

## Terra bridges
- The Terra protocol allows cross-chain transfers
  - The particular one between Terra and Ethereum is called the Shuttle ([source code](https://github.com/terra-money/shuttle))
- As far as I can tell:
  - Both sides have ERC-20 (or equivalent) contracts
  - And an Oracle for the other blockchain
  - When you transfer assets into one, the oracle on the other sees that, and gives you assets on the other blockchain
  - Likely done via the minting and burning of tokens on each side
- Also, Terra can presumably read from other blockchains other than its own

## Abracadabra
- Abracadabra is the protocol at [abracadabra.money](https://abracadabra.money/)
  - [![spell logo](../slides/images/logos/spell-coin-symbol.svg)](https://coinmarketcap.com/currencies/spell-token/) Spell ([SPELL](https://coinmarketcap.com/currencies/spell-token/)) is their native token 
  - [![mim logo](../slides/images/logos/mim-coin-symbol.svg)](https://coinmarketcap.com/currencies/magic-internet-money/) Magic Internet Money ([MIM](https://coinmarketcap.com/currencies/magic-internet-money/)) is the stablecoin
  - Abracadabra / SPELL / MIM is analogous to Terra / LUNA / USTC
- Their promise: a non-interest bearing asset (coin or token) can be used to generate interest
  - Like staking
- The relevant product is called Degenbox
  - It "deploys strategies" to generate interest on non-interest bearing coins/tokens

## Abracadabra's Degenbox
- On the Ethereum blockchain:
  - You deposit an asset into a 'cauldron' and MIM is minted
    - Similar to depositing an asset into a 'vault' for DAI
    - Only some assets are allowed; we'll only talk about USTC
  - 15% stays on Ethereum mainnet for withdrawals
  - 85% of that is bridged back to the Terra blockchain
- On the Terra blockchain:
  - The 85% bridged back is deposited into the [Anchor Protocol](https://www.terrablockchain.org/anchor) (also [here](https://theanchor.io/)) to generate aUST
  - [![aust logo](../slides/images/logos/aust-coin-symbol.svg)](https://coinmarketcap.com/currencies/anchorust/) AnchorUST ([aUST](https://coinmarketcap.com/currencies/anchorust/)) was their stablecoin, and was interest-bearing ([coingecko.com](https://www.coingecko.com/en/coins/anchorust) has a price graph) <br clear='all'>
  - Those aUST are then bridged back to Degenbox on Ethererum mainnet

## Degenbox
- The assets bounce back and forth between the blockchains
- The users see only this:
  - On Ethereum, they deposit an asset (coin or ERC-20 token)
  - They get another ERC-20 asset (aUST) on Ethereum worth the same amount that is generating interest
  - That ERC-20 asset, aUST, can be used like any other asset

## Looping Stablecoin buys
- What if you could use your aUST to borrow more USTC
  - As aUST is a stablecoin and can be collateral to obtain more USTC
    - Perhaps using an intermediary coin between aUST and USTC
  - Then you can invest the USTC into more aUST
  - Then take use that aUST to borrow more USTC
  - And so on...
- This is *looping* a stablecoin buy
  - It artificially increases demand, since more and more USTC is being minted

## So what happened?

- See [FatMatTerra's twitter thread](https://twitter.com/FatManTerra/status/1535623662153437185)
  - And a [watcher.guru article](https://watcher.guru/news/how-do-kwon-allegedly-cashed-out-2-7b-from-terra-network) that helps explain it (but not all that well)

## The Big Terra Error
- The founder of the company had full access to the Bitcoin liquidity
  - It wasn't, say, locked in a smart contract
  - Or controlled by a DAO that required many people's votes to liquidate
- This allowed him to plunder these assets and (gradually) transfer them to himself

## Takeaways
- Most people who invested in LUNA didn't know much about what it did
- The scam to loot LUNA was quite complex
  - Beyond the knowledge of most (almost all?) LUNA investors

## References
- [Medium: Abracadabra Degenbox -- Let’s cast spell on UST](https://everythingblockchain.medium.com/abracadabra-degenbox-lets-cast-spell-on-ust-7d2dd8d6e43c)
- [How To Use The Terra Bridge](https://www.altcoinbuzz.io/bitcoin-and-crypto-guide/how-to-use-the-terra-bridge/)
- [A Complete Guide to Abracadabra Money – SPELL, MIM and sSPELL](https://blocmates.com/blogmates/a-complete-guide-to-abracadabra-money-spell-mim-and-sspell/)
- [Article on LUNA / UST background](https://www.coindesk.com/learn/what-is-luna-and-ust-a-guide-to-the-terra-ecosystem/)
- [Overview of the crash](https://www.cnet.com/personal-finance/crypto/terras-luna-crypto-crash-how-ust-broke-and-whats-next/)
- [Do Kwon reportedly cashed out $2.7 billion in the span of a few months prior to the LUNA/UST collapse](https://watcher.guru/news/how-do-kwon-allegedly-cashed-out-2-7b-from-terra-network?c=70) (and [twitter announcement](https://twitter.com/watcherguru/status/1535707516784476163?s=21&t=cZ9G69kuatTgBDdnliEieQ))
  - [This reddit thread](https://www.reddit.com/r/CryptoCurrency/comments/v9ypa6/heres_how_do_kwon_cashed_out_27_billion_using/) describes the article also
- [Votium](https://votium.app/) and [Votium quick start guide](https://docs.votium.app/explainers/quickstart-guide)
- [Convex](https://www.convexfinance.com/)

## So many choices...
- Stablecoins have been created using a large number of algorithms
  - Some algorithms have not really succeeded
  - But may in the future; FRAX was the first seigniorage coin to do well
- The most stable have been the collateralized versions (USDC, USTC, SAI, and DAI)
- New algorithms will surely come out

## Coef of Variations (as of 4/9/23)
- [![dai logo](../slides/images/logos/dai-coin-symbol.svg)](https://coinmarketcap.com/currencies/multi-collateral-dai/) Dai (DAI): 0.83%
- [![eth logo](../slides/images/logos/eth-coin-symbol.svg)](https://coinmarketcap.com/currencies/ethereum/) Ether (ETH): 131.6%
- [![fei logo](../slides/images/logos/fei-coin-symbol.svg)](https://coinmarketcap.com/currencies/fei-usd/) Fei (FEI): 3.41%
- [![lunc logo](../slides/images/logos/lunac-coin-symbol.svg)](https://coinmarketcap.com/currencies/terra-luna/) Luna Classic (LUNC): 193.7%
- [![sai logo](../slides/images/logos/sai-coin-symbol.svg)](https://coinmarketcap.com/currencies/single-collateral-dai/) Sai (SAI): 1.33%
- [![usdc logo](../slides/images/logos/usdc-coin-symbol.svg)](https://coinmarketcap.com/currencies/usd-coin/) USD Coin (USDC): 0.47%
- [![usdt logo](../slides/images/logos/usdt-coin-symbol.svg)](https://coinmarketcap.com/currencies/tether/) Tether (USDT): 1.58%
- [![xpd logo](../slides/images/logos/xpd-coin-symbol.svg)](https://coinmarketcap.com/currencies/petrodollar/) PetroDollar (XPD): 57.92%
  - XPD's as of Nov 2022, as the price history no longer available

## Sketchy-ness
- Stablecoins still are subject to scams and sketchy-ness
- And, for some, the government can take away your funds
- But are still not regulated
  - Or taxed, until you sell them