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Patterns repeat, similar to water’s path.
It is a well-known fact among those who have been involved in the cryptocurrency industry for a period of time that losses are an inevitable part of the game. Many individuals in the crypto space have suffered financial losses due to a variety of reasons, such as trading mistakes, DeFi rug pulls, scams, hacks, or project failures. These unfortunate events occur on a regular basis and can have a significant impact on those affected by them. While some scams and fraudulent activities can be easily identified from the outset, others may require a more thorough investigation to be detected. With that in mind, it is important to be diligent and cautious when navigating the cryptocurrency industry. It is for this reason that we often focus on identifying common factors that may contribute to these types of losses in order to help prevent them from occurring. However, it is important to note that this information should be used as a general guide and not as a guarantee of protection against potential losses.
Please note that I am not a financial adviser and the information provided should not be taken as financial advice. This is for educational purposes only, and the mentioned projects may still be in operation despite any reported failures.
A bit of context
My biggest loss in the cryptocurrency market so far has been with Terra’s UST de-pegging and its sister coin, Luna. While I was not left financially devastated by this event, it was still my largest loss due to my significant exposure to UST, the stablecoin in the Anchor Protocol, which serves as a savings account within the Terra network. The second largest loss I experienced was with the infamous Time Wonderland. To provide some context, Wonderland is a fork of OlympusDao, which is a protocol that utilizes a bond and stake mechanism to provide extremely high yields to token holders. Wonderland is essentially a copy of this concept, but with even higher yields. Although Terra and Wonderland have different goals and perspectives, they share more similarities than I initially realized.
1 ) An arrogant founder is a bad sign
Do Kwon, the creator of Terra UST is a talented individual who is knowledgeable in his field. However, his overconfidence has led to negative consequences. Not only was he quick to dismiss criticism as FUD (fear, uncertainty, and doubt), but he also made bets on the future of Terra on Twitter. Furthermore, Do Kwon made multiple negative comments about competitors such as MakerDao’s DAI and Paxos PUSD.”
To make matters worse, the founder of Terra was even openly inviting people to attack his own project in order to demonstrate his confidence in it. While this should have been a clear warning sign, it was instead perceived as a sign of strength. more about Terra below.
In the case of Daniel, the founder of Time Wonderland, he had already built a multi-billion dollar ecosystem comprising Abracadabra Money, Popsicle Finance, and Time Wonderland. Abracadabra is one of the most innovative decentralized finance (DeFi) protocols available, allowing holders of interest-bearing assets to borrow or mint a backed stablecoin called MIM (Magic Internet Money). It is similar to MakerDao, but with more leverage options. While Wonderland may not have been as well-known as Terra, Daniel’s active presence on Twitter gave the impression that it was a major player in the market. He spends more time on Twitter than any other founder I know, with the possible exception of Charles Hoskinson. He was also known for criticizing competitors such as DAI and OlympusDao.
2 ) Higher yield than the market cannot last forever
It is clear that Terra and Wonderland have attracted significant capital in a short period of time due to the high yields they offer to investors. The Anchor Protocol, for example, provides a savings account with an annual percentage yield (APY) of 20%, which is significantly higher than other protocols in the market. As a result, Anchor has been able to absorb a large portion of the total UST in circulation, reaching a peak of more than 80%. The recent market conditions, which have not been particularly bullish, have also contributed to this trend, as investors have sought to purchase or mint UST and deposit it into anchor. Similarly, Wonderland has attracted significant liquidity due to its extremely high yield of 100,000% APY for Time stakers. While this yield is unsustainable due to hyperinflationary token economics, it has attracted a large amount of attention and investment in the short term.
3 ) Creepy names for the community won’t make it.
Cryptocurrencies are often accompanied by communities that support and promote the project. While this can be beneficial in terms of fostering interest in the project’s success, it can also lead to a lack of openness to suggestions and critical feedback. The adoption of unconventional names or acronyms by these communities, such as the “frog nation” in the Wonderland community or the “Lunatics” in the Terra community, can also indicate a tendency to dismiss concerns as “FUD” and a failure to address weaknesses.
4) Mint and Burn is simply a money printer 2.0
Almost all cryptocurrency projects have a mechanism for minting and burning tokens. For example, Ether is minted as a reward for validators when a new block is added to the blockchain and is also burned when a transaction is made and gas fees are paid. However, the minting and burning mechanism we are discussing here is different. While Ether and Bitcoin do not require a liability to offset the asset, as their value is derived from the blockchain itself, projects like Terra and Wonderland do require a liability to offset the asset. This is because if they continue to mint and burn tokens without a corresponding liability, there is no value in the tokens. In the case of Wonderland, for every $1 bond it sells, it prints $3 worth of tokens. In the case of Terra, for every $1 worth of Luna that is burned, it prints $1 worth of UST. However, if the value of Luna drops significantly, the value of the asset (UST) may be worth more than the liability (Luna), as occurred with Terra.
5) A centralised project and team are chaos
One of the primary factors contributing to the widespread popularity of cryptocurrency is its emphasis on decentralization. It is this decentralization that distinguishes cryptocurrency projects from those that are not based on blockchain technology. Despite the fact that most current blockchain projects, including Terra and Wonderland, exhibit some level of centralization at the chain, core, or infrastructure layers, having a decentralized core layer, i.e. a team of developers, is a positive indicator of a project’s ability to avoid a single point of failure. However, both Terra and Wonderland are run by a single individual, DO and Daniel, respectively, which grants them significant authority and trust, potentially creating a potential risk for disaster.
Final words
It is clear that investing in cryptocurrency involves inherent risks, even if one is able to completely avoid scams. There is always the potential for investments to be completely lost. While it is acceptable to lose money as long as valuable lessons are learned from the experience, repeatedly making the same mistakes demonstrates a lack of intelligence. It is likely that there are additional lessons to be learned from these two projects, and if any readers have learned other lessons not mentioned in this article, we welcome them to share their insights in the comments section.
Thanks for Reading!
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