Elon's Path for Crypto Twitter and Luna's Meltdown
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TLDR
A look at Elon Musk’s controversial history with cryptocurrency and the crypto friendly investors who contributed to his purchase of Twitter.
Terra’s crash shocked the market, what was the buildup that led up to the crash?
Accounting for DAOs, Mark Cuban’s thoughts on the current market, and the SEC is stepping up crypto enforcement.
Will Elon Musk’s Purchase of Twitter be a Net Positive or Negative for Crypto?
What will Twitter look like after Elon Musk takes the company private? And will the new era of Twitter be a positive for cryptocurrency or a negative?
Twitter is arguably the quickest way of distributing information to the masses and has the power and reach to give a platform to nontraditional users, including several Web3 projects. It also has the power to influence elections and spread misinformation. This article will not debate whether the purchase of Twitter by Elon Musk will be positive for free speech and inclusivity but rather to look at one specific aspect of that formula. Will Elon Musk taking Twitter private be an overall positive for cryptocurrency or a negative?
Elon Musk is a controversial figure, both in everyday households and in cryptocurrency. Elon has been vocal about his love for the meme coin Dogecoin, has publicly stated he owns Bitcoin, Dogecoin, and Ethereum, and his company Tesla made waves when they announced that they would be accepting payments for their cars in Bitcoin, only to withdraw that offer soon after. As it stands now Tesla accepts Dogecoin payments for its merchandise, currently the only cryptocurrency the company accepts. On the B Word podcast Elon called money an “information system for labor allocation” and that the current system is neither secure nor efficient. He stated that he believes Bitcoin could replace the status quo.
However, it hasn’t been all positive from Elon. He has criticized Web3 in several tweets, stating “Web3 sounds like bs'' and asking “Has anyone seen Web3? I can’t find it”. He views Web3 as a “marketing buzzword” and former Twitter CEO Jack Dorsey has also criticized Web3.
He further doubled down on this thought replying to Elon’s tweet asking if anyone has seen Web3 in a now famous response stating “it’s somewhere between a and z” in reference to the VC fund a16z.
Could Elon’s reluctance towards NFTs and Web3 slow down or even stop the progress Twitter had previously made implementing it onto its platform? Twitter has previously partnered with OpenSea, allowing users to verify their NFT profile pictures and has implemented a ‘crypto unit’ to explore more opportunities in Web3.
Elon is not purchasing Twitter with only his own money. It was announced that Binance is contributing $500 million to Elon’s $44 Billion purchase of Twitter. Other crypto friendly investors include Fidelity ($316 million), Sequoia Capital ($800 million), and a16z ($400 million). Changpeng Zhao, Binance’s CEO, stated to CNBC “We hope to be able to play a role in bringing social media and Web3 together and broadening the use and adoption of crypto and blockchain technology.” Both Zhao and a16z’s Ben Horowitz have stated that preventing cryptocurrency giveaway scams is a must. These crypto friendly investors could have the tools and influence to implement blockchain technology into twitter.
However, Elon’s actions regarding cryptocurrency isn’t the only action that’s likely to split opinions of crypto twitter. Elon has described himself as a “free speech absolutist” and he has ruffled feathers with the likes of Elizabeth Warren, Alexandria Ocasio-Cortez, the SEC, and Bill Gates, amongst others. It was also just announced that Musk vowed to reverse Trump's Twitter ban, calling it “morally wrong”. Many have pledged to leave Twitter following the announcement of his purchase because of these actions. In terms of crypto, the most important social media platforms are Twitter, Discord, and Telegram. While no one is saying twitter will go away, could Elon’s purchase cause a significant chunk of crypto twitter to leave the platform?
Even more alarming is the potential loss of staff, something Twitter harped on as a concern in a filing to the Securities and Exchange Commission (SEC). A mass exodus of employees following taking Twitter private could lead to operability issues, leading to frustration amongst users.
At times Elon Musk has been an advocate of cryptocurrency and at other times he’s been a critic. It would be an overstatement to say that the entire future lies in Musk’s hands, after all he has to answer to other investors contributing to his $44 billion purchase, but as the majority owner he has the ability to influence the future.
The Luna Ecosystem Crashed the Market
Terra made news this week for its massive crash leading to the depegging of its stablecoin $UST. TerraUSD ($UST) is an algorithmic stablecoin which currently sits as the #48 crypto on Coingecko. Unlike fiat backed stablecoins, $UST maintains its peg to the US dollar by its incentivization of arbitrage. This is done by creating a working relationship between the stablecoin and the currency Terra ($LUNA). This relationship works such that if $UST is valued over $1, more $UST is made and given to people who trade in their $LUNA tokens for a small profit. If $UST is valued under $1, people can trade in their $UST for $LUNA, also for a small profit.
The Luna ecosystem quickly grew to the most popular algorithmic stablecoin and grew so big that it secured a $40 million dollar sponsorship deal with the Washington Nationals. This rapid growth was due in part to the Anchor Saving Protocol. Terra’s anchor savings protocol promised people a return of 20%. This high return drew a lot of new users and investors into the ecosystem. Anchor had billions of dollars locked up into this savings protocol.
In the beginning of May, a new rate structure was enacted that would make rates more variable in the Anchor protocol. Rates were expected to lower by about 1.5% per month until the rates stabilized. Despite the expectation that users would begin to withdraw their funds from the Anchor protocol because of the lower interest rates, the opposite happened. The Anchor protocol reached its highest deposit amount in early May at around $18 billion dollars.
Historically, most algorithmic stablecoins eventually lost their peg, in what is known as a ‘death spiral’ (example being $IRON/$TITAN), where people quickly lose faith in the project and sell off the coins. Since these coins are not collateralized, or at least fully collateralized, by assets the price of the stablecoin falls below its peg. So why was the $LUNA/$UST pairing viewed as the pairing that will break through as the first truly successful algorithmic stablecoin. Additionally, there was a recent purchase by Luna Foundation Group (LFG) of $230 million worth of Bitcoin to help back the terraUSD stablecoin.
However, it was not all clear skies for Terra. The market reached a down point in early May, leading to a sell off of many currencies, including $LUNA. This sell off of $LUNA caused downward pressure on $UST, which took it off its $1 peg around May 7th. On May 9th, the Fed announced an interest rate hike, leading to a crash in stock and crypto markets. This caused more selling pressure on both $LUNA and $UST, leading to a dramatic drop in the price of both $LUNA and $UST. The break of the peg caused a lot of users who were leveraged to be liquidating, increasing the selling pressure.
There are rumors that Blackrock and Citadel were involved in the collapse of LUNA, but those are unsubstantiated. In total, $LUNA fell almost 50%, while $UST depegged all the way down to about 20 cents. The Anchor protocol saw almost $7 billion dollars withdrawn over a couple of days.
Can Terra recover from this massive crash? Terra is voting to tweak the algorithm of $UST to get the $1 peg algorithm to work faster, however this would be at the expense of $LUNA. TerraForm Labs could also try to use its Bitcoin reserve to help bring back $UST to its peg of $1 and stabilize the price of $LUNA. Unfortunately, this is also likely to bring increased regulatory pressure from the SEC, especially considering that Terra has previously been subpoenaed by the SEC.
This is a down time for the entire market, and a myriad of unfortunate circumstances caused Terra to spiral downwards very quickly. However, it wouldn’t be unreasonable to expect $UST and $LUNA to succeed in the future if it can last through the next few months.
Around the Fire: Community Updates
Chainforest member Vasanth featured in Twali’s newsletter discussing accounting for DAOs. A link to the article can be found here: Accounting: the Most Pressing Need for Crypto w/ Twali's Accounting Guild & Vasanth Thiruvadi
Mark Cuban had a thoughtful thread about the current state of the market:
The SEC is gearing up to enforce crypto tax evasion by doubling the size of its crypto asset enforcement unit: https://www.sec.gov/news/press-release/2022-78
Chainforest hosted its second Twitter Spaces with Moonshot Research and Beanstalk. A link to the recording can be found here: https://twitter.com/i/spaces/1nAJEYQwpMaJL.