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The hedge fund manager said Terra failed because the system was designed to enrich investors and the team.
While many investors were shocked at the massive fall of Terraform Labs’ native digital currencies, TerraUSD (UST) and LUNA, some crypto enthusiasts have noted that they saw it coming because the signs were there.
Kevin Zhou of Galois Capital is one of the crypto enthusiasts who did not only see the risks associated with Terra, but he has been calling on people to desist from investing in the project.
In an interview with the Odd Lots podcast as published by Bloomberg, Zhou noted that after discovering the systemic risk Terra posed to the entire cryptocurrency space, he issued warnings to investors as a way of public service since the beginning of this year, asking them to desist from the project.
Zhou Slammed Terra’s Design
Zhou, who has been an early crypto enthusiast since 2011, noted that the Terra “box” was designed to enrich insiders as opposed to investors, with many believing that they would be rewarded with massive returns of nearly 20% by depositing their funds in the Anchor protocol.
While investors thought Terra’s Anchor yield was designed to have them compete with each other to get the highest yield on a first-come-first-serve basis, they never knew they were competing against the system.
“But what I’m saying is that this is even worse than that because it’s not really just users competing against users. It’s more like users thinking they’re competing against other users, but really getting all their funds siphoned out by investors and the inside team.”
Zhou disclosed that the 20% ROI Terra used to entice users into investing in UST is obtained from the sale of the huge stash of LUNA, which unlocks over a specific vesting period.
“So what they would do in order to finance their operations and to also finance the Anchor Yield Reserve, they would sell large clips of this to willing investors at some kind of discount that also has a one-year cliff or some kind of vesting schedule, something like that,” Zhou said.
He added that Terra would use the funds realized from the sale of LUNA to finance their operations and to also top up the Anchor protocol on their yield reserve.
The veteran cryptocurrency enthusiast noted that Terra also got some of the yields from new users who kept on depositing in the Anchor protocol in order to become beneficiaries of the 20% ROI.
With many users joining Terra’s yield program, the company started paying about $7 million to investors as ROI even when they had about $80 million in the reserve, Zhou noted.
During the interview, Zhou noted that the team was forced to bolster the reserve to $450 million and then slowly, the funds also got exhausted following the entrance of more investors seeking to benefit from the program.
“One way to think about Luna is that it’s a perpetual motion machine, something doomed to fail as the energy needed to sustain it eventually dwindles to nothing. But another way to think of it is as a Rube Goldberg machine in which someone’s turning a hand crank to keep the system going,” Zhou said.
Meanwhile, investors are still trying to recover from the massive loss they incurred from Terra’s ecosystem tokens as the team behind the project thinks of ways to compensate investors for their losses.