9
Of Builders and Villains…

For ardent critics of decentralized finance (DeFi), cryptocurrency is frowned upon as fool's gold, and it is not hard to see why. Drawn by the attractiveness of high returns, investors literally throw their life savings in crypto without any prior research into the risks surrounding digital currencies and lose everything in some cases.

A nonsensical, Ponzi scheme of an investment with no real value backing it, which just looks good because of prospects and hype: fool's gold.

But little do we know that the old adage that was coined during gold rushes of the past was originally meant to refer to other forms of metals and minerals that were mistaken for the precious metal at the time. The three main culprits are pyrite, chalcopyrite, and weathered mica. They are shiny and have industrial use cases but hold nowhere near the value of gold.

Likewise, the fool's gold that critics refer to in crypto are projects covered with smokescreens hiding their true balance sheets. And there are plenty of these threatening to destroy what the DeFi movement has worked so hard to build over the past decade and a half.

Cryptocurrency was meant to bank the unbankable, not create another gold rush, although that seems to be inevitable with today's unceasing flow of information and misinformation driven by social media content. Cryptocurrency is literally referred to as “digital gold” by both well‐versed financial industry players as well as social media influencers who know little to nothing about what they are investing millions in or promoting. So it is naturally confusing for anyone who wants to venture into this new territory. What more for the man on the street who doesn't understand blockchain terminology or how the economy works?

Because of all the hype and aping going around, some retail investors are not prepared when markets take a dip, make a correction, or downright crash. On the flipside, they are more than willing to follow the crowd when things are bright and shiny. Billions of dollars have been lost as a result of poor due diligence, as well as homes seized by creditors and lives wrecked – people do not deserve this even if they are gullible.

The public does not deserve to be duped by villains who are really just bad actors masquerading as legit among committed builders who are working to create value‐based blockchain ecosystems. And if you think that only ignorant retail investors have been victims, think again.

Government‐owned traditional financial institutions and giant private hedge funds, with all their experts armed with their analytical and technical chart readings and predictions, were not immune to the lemming effect. This effectively means that even though you haven't placed a single cent into any crypto token or project, some pension fund, bank, or state‐run financial institution that manages your money, did.

The fall of Terra (LUNA) and FTX, which brought down the whole cryptocurrency industry along with them, showed that even reliable institutions that are entrusted with state capital can make mistakes. However, what regular people don't have are large reserves to continue trading to cover losses from erroneous buy calls. For many, this would be the end of the road.

With both LUNA and FTX's crashes making headlines, it is hard to ignore the negative backlash and distrust that they have brought onto the industry. Those were not ordinary crashes caused by FUD (fear, uncertainty, doubt), like we've seen before when China banned crypto or when a big exchange gets hacked, like in 2014 with Mt. Gox. Even the pandemic did not cause this much damage to crypto markets.

In 2019, LUNA launched at US$1.31. After a dismal first 18 months, LUNA started to climb and hit its peak of US$119.18 in April 2022. Barely a month later, things started to go downhill.

The original LUNA market cap was about US$41 billion and was alleged to be backed by US$3.5 billion in Bitcoin reserves in the event of a major incident. This would make the company one of the top 10 BTC holders. But in May 2022, that market cap fell to below US$1 billion.

The project's related “stablecoin” TerraUSD (UST) boasted a 20% yield for investors who stored their coins in the system. Like Binance, investors are able to stake their owned crypto and receive deposit yield. This works like how traditional banks pay you an interest for keeping your money with them. TerraUSD's highly attractive yield, which was way better than interest you'd get from cash deposits at traditional banks, and LUNA's short and wild rise to its peak price were what attracted many investors.

As of 3 December 2022, the price of LUNA sits at US$0.000 182 – a massive fall that can be calculated in a variety of ways to paint a picture as grievous as any seen in the history of wartime hyperinflation.

Both LUNA and the “algorithmic stablecoin” TerraUSD that LUNA is meant to stabilize by being minted and burned according to supply and demand are the brainchild of Singapore‐based Terraform Labs, which was co‐founded by South Korean CEO Do Kwon.

Listed in Asia Forbes' “30 Under 30” list in 2019, Do Kwon's arrogant social media persona and constant flaming of rival blockchain projects gained him notoriety in the industry. However, he was still able to earn the trust of veteran fund managers and leading e‐commerce players, until over US$45 billion was lost by his company in less than a week.

FTX, which started and crashed around the same time as LUNA, was the world's second‐largest crypto exchange at one point. The company's CEO Sam Bankman‐Fried, or SBF, became known as a philanthropic billionaire – one popular YouTuber labeled him as the “World's Most Generous Billionaire.” His net worth, in just two short years, reached a whopping US$26 billion. SBF rubbed shoulders with Jeff Bezos and numerous celebrities, while big financial institutions like BlackRock, SoftBank, and Temasek invested in FTX. But while praised for his confidence (he made a multi‐billion‐dollar deal over the phone while playing League of Legends), the 30 year old was actually running the exchange's operations out of the Bahamas with a small group of friends.

It has been nothing short of one of the greatest swindles in the cryptocurrency space thus far, complete with bizarre amphetamine‐fueled rantings of sister company Alameda Research CEO Caroline Ellison and amorous relationships between the group of crypto kids that ran the show.

Some US$51 billion was lost in the company's collapse. It is highly likely we will see a Netflix documentary on FTX in the near future. Collectively, both FTX and LUNA crashes wiped out over US$500 billion in the global crypto market.

Critics of DeFi have been up in arms ever since the fall of these two giants. Some even pointed out that the fall this time was caused by the very same thing that DeFi was trying to oppose: the unscrupulous practices and deceit used by bankers in the United States that caused the Global Financial Crisis of 2007–2008.

It is not worth asking if crypto will ever recover to the highs it reached in November 2021 if we can't look into the mirror and ask ourselves, “Am I just following a crowd that is following a villain?” FTX and LUNA are the lessons we need to learn before we move on. They have become DeFi's Day of Reckoning.

Let's prevent the same from happening again by taking a closer look at both of these bad actors…

Walking on the Moon: The Rise and Fall of Terra LUNA

The idea was to create a price‐stable crypto payment system backed by the biggest e‐commerce platforms. It was an idea that was worth exploring at the time, but it did not go beyond that: an idea. Not until investors started pouring in and exposed the flaws of the system that turned out to be a smartly concealed Ponzi scheme.

Usually, stablecoins are backed by real‐world assets, mainly with fiat USD itself, and have a cap or limit based on their reserves. But TerraUSD (UST) is different. It is an “algorithmic stablecoin” that worked based on another digital currency called LUNA, which would be minted and burned to stabilize the price of UST.

Stablecoins are seen by investors as a safer alternative to the unpredictable fluctuations of cryptocurrencies. The goal of stablecoins is to provide a fixed 1:1 exchange rate with the dollar or any other currency it sets out to be pegged to. This is not always the case; stablecoins do fall in value themselves, but there is seldom a significant difference. Prices might fall to US$0.94–0.98, and a dip to US$0.90 will trigger some selling pressure. However, no stablecoin has tanked as much as UST, which is now only worth around US$0.019, or over 98% down from its initial price.

LUNA did not have any other reason to exist besides its function of stabilizing UST. It was the smokescreen disguised as the system itself. A widget that is bought and sold to create USD value for UST. It is preposterous as it was unnecessary. If there were no real‐world assets backing one digital currency (UST), then using another (LUNA) to generate that was extremely suspicious.

To give the illusion that LUNA had value besides being a stabilizer for UST, investors were offered a mouth‐watering 20% yield for deposits, beating traditional banks by a significant amount and attracting many ordinary folk who were just getting started in crypto and ironically thought that this would be a safer alternative. The magical yield that appeared out of nowhere soon took precedence over the original idea to be a price‐stable e‐commerce currency. Greed took over and won.

But no one should take the blame more than co‐founder and CEO Do Kwon.

The Terra Network was launched by Do Kwon and Daniel Shin in January 2018 with the goal to create an e‐commerce payments application called Chai, which would have its own price‐stable crypto. They were looking to take on the likes of Alipay and Paypal, and with the volatility of other cryptocurrencies making it hard for crypto to be used as everyday currency, their currency had to be branded as a “stablecoin.”

Eventually, Terraform Labs was created in April 2018 in Singapore, and with it, LUNA and UST were born, supported by the Terra Alliance – a consortium of 15 Asian large e‐commerce companies.

It is noteworthy that they chose Singapore, a country known for its strict regulations on financial products, as its headquarters. The move definitely gave the company a more trustworthy appearance.

However, according to insiders who spilled the beans to crypto‐related media such as ColdFusionTV, Do Kwon was a control freak who was as narcissistic as he was charismatic, often berating his employees to the point that most of the core team left on a bitter note after a year or two, with legal suits filed against him.

One thing is evident from his Twitter feed: Do Kwon was not only fond of criticizing other blockchain projects, which made him a dark horse, but also not respected among builders in the community.

Other crypto experts, like MakerDAO's head of risk Cyrus Younessi, voiced their concerns early in the project's inception. As a former research analyst at Scaler, he explained to his former employer why UST and LUNA did not make sense and gave a doomsday scenario that came true about four years later.

Nevertheless, a year later, in January 2019, LUNA's initial coin offering (ICO) saw early investors going in at US$0.18 per token during its seed round, and US$0.80 per token at a private sale. A flimsy white paper called Terra Money, written by Do Kwon and several other co‐authors, followed in April 2019. White papers should always come before any ICO.

Fast forward a year later, in 2020, LUNA now has a staking product on a South Korean exchange. The Anchor protocol, a platform built on Terra, is announced soon after, allowing investors to earn a high yield on their deposits and borrow against their crypto holdings.

Deposit returns were guaranteed to be 20%. The news drove more retail investors as well as big institutions into the madness.

Terra blockchain's stablecoin, UST, came out later that year with its sights set on being launched on the Ethereum and Solana blockchains.

By December 2021, LUNA's price was close to reaching its peak, now at above US$90. It seemed like LUNA really was digital gold when you think about a more than 90 times rise in value from just three years ago.

The following month, Do Kwan publicly denied the probability of an overload to the algorithm as the result of one massive pump‐and‐dump action on LUNA that would consequently cause a spiral in UST's value. There was still no cap to the limit of minting and burning of LUNA at this point.

To maintain UST's peg to the dollar, LUNA would keep minting, or so the logic went. It would work on small dips, but if UST's price fell too low and investors kept on selling, new LUNA tokens would continue to be minted to the point of hyperinflation.

This is not the case for normal cryptocurrencies like Bitcoin, Ether, or even altcoins that temporarily crash for a variety of reasons like panic selling or stop losses. Their supplies are fixed, meaning the amount of coins in circulation and those that are yet to be minted are finite and regulated. Crashes do not create or destroy these coins, hence, when markets recover so do the coins, as their intrinsic value and tech does not change.

As if to answer skeptics who questioned how the system could operate stably while paying out such a high yield, the Luna Foundation Guard was formed around this time with the aim to safeguard UST by building up reserves amid market volatility.

The foundation raised up to US$1 billion through the sale of LUNA tokens to buy Bitcoin to be used as UST reserves. Three Arrows Capital and Jump Crypto, two well‐known trading and investment firms, walloped most of the offer.

On Twitter, influential crypto trader Algod called out UST and LUNA as a Ponzi scheme and bet US$1 million that the price of LUNA would be lower in a year. “Cool, I'm in” replied Do Kwon. Supporting Algod's claim, another trader who went by the handle GiganticRebirth raised the stakes and bet US$10million that LUNA would “pump short term” but in one year, the current narrative would be lost. Do Kwon agreed to match the stakes.

Setting crosshairs on MakerDAO and its token DAI, Do Kwon tweeted “By my hand $DAI will die” as he initiated a hostile takeover of the decentralized stablecoin's liquidity on decentralized crypto exchange Curve.

Declaring war on a well‐known Decentralized Autonomous Organization (DAO) that created a respectable decentralized stablecoin did not sit well with most in the DeFi community, but a rift was already brewing in the stablecoin camp.

Allies of Do Kwon, companies with their own algorithmic stablecoins, grouped together to form liquidity cartels. They spoke about how overcollateralized stablecoins like DAI (which is backed by reserves of ETH and USDC) were taking a free ride on exchanges as they did not give back investors a yield that could compete with undercollateralized stablecoins.

The Luna Foundation Guard went on to bag an alleged US$3.5 billion in BTC reserves, making it one of the top 10 bitcoin holders in the world. For a while, it seemed like UST and LUNA would emerge as the dominant stablecoins in the market.

Despite the clear and present danger sounded by others in the community, the project was able to raise more capital and investors were happy. When LUNA's price hit its all‐time high of US$119.2 on 5 April 2022, they were walking on the moon.

UST became the third largest stablecoin while Terra held the fourth largest market cap in the industry. The circulating supply of LUNA reached an all‐time low of 346 million tokens as more LUNA tokens were burned to meet the demand for UST.

Because Do Kwon wanted a fixed 20% yield to entice investors, as opposed to paying a variable percentage based on the market, his company was paying out about US$7 million every day. Investors were also allowed to withdraw their deposits at any given time.

The risk of mass withdrawals, coupled with the high yield factor, was a recipe for exploitation and disaster.

Fanatic supporters of LUNA, who called themselves LUNATICS, ignored the simple possibility of a George Soros‐style attack. Instead of stopping to think and adding more self‐regulations, as one should as a member of the DeFi community, LUNATICS simply wanted Do Kwon to make them more money.

In an interview, when asked about how he views his competition, Do Kwon answered that 95% of them are going to die, adding that “there's also entertainment from watching companies die.”

And then, the crash happened.

Leaked documents showing that Do Kwon filed to dissolve Terraform Labs days before UST and LUNA collapsed, managed to alert some investors, but not all.

A number of large dumps brought UST's price down to US$0.985. It is not a large dip as seen before with other stablecoins, which prompts Do Kwon to joke about the minor incident.

Source: Coindesk https://www.coindesk.com/layer2/2022/05/11/the-luna-and-ust-crash-explained-in-5-charts/

From 9 May 2022 onward, UST went on a downward spiral. When it reached US$0.92, the media started taking note. A series of major withdrawals followed that saw US$4 billion dumped. UST's 1:1 peg to USD had clearly failed despite the company's BTC reserves.

The Luna Foundation Guard announced a US$1.5 billion loan to rescue the peg, but overall, selling pressure maintained as the price fell below US$0.50. Meanwhile, LUNA hyperinflated and plunged further.

Do Kwon tweeted, “Deploying more capital – steady lads.” More than half of traders on 11 May believed him and bought into LUNA, despite the drop a couple of days ago.

The next day, 12 May, LUNA's price fell by 96%.

In an attempt to save the peg, almost all of the Luna Foundation Guard's resources were depleted, in just a few days BTC reserves totaling around 80 000 BTC had been reduced to 313 BTC.

In the United States, regulators demanded an explanation for the crash from Do Kwon. One politician went as far as to call UST a modern‐day pyramid scheme.

Source: Coindesk https://www.coindesk.com/layer2/2022/05/11/the-luna-and-ust-crash-explained-in-5-charts/

In Terraform Labs' defense, some have said that there are no signs of fraud committed on Do Kwon's part. However, it does not negate the fact that he knew that the Terra ecosystem could not sustain the rapid growth it was experiencing and that it was vulnerable to attacks.

Instead, Do Kwon was driven by greed himself and promised the heavens just to make his project grow. And it does not look like he has learned his lesson.

Later in the same month as the crash of UST (now worth around US$0.02) and LUNA (now only US$0.0 001 972 per token), a hard fork proposal was passed to rename Terra to Terra Classic (LUNC) and to launch a new Terra (LUNA) on a second blockchain.

However, in October 2022, the law came down on Do Kwon. As a South Korean national, authorities in the country wanted to have a word with him.

Rumored to be in Dubai at the moment, South Korean authorities are investigating him and his company under multiple charges including fraud and violation of the Capital Markets Act following the collapse of his project that caused a US$60 billion loss in crypto market capitalization.

The Seoul Southern District Prosecutors' Office issued an arrest warrant with passport nullification, and subsequently asked Interpol to launch a red notice on Kwon, which the agency passed. The red notice now allows global law enforcement to locate and arrest him.

From technopreneur to international criminal, Do Kwon's days might just be numbered now.

Good.

Sex, Drugs, and Balance Sheets: How a Bunch of Kids Created and Destroyed FTX

If there was ever a chance for Netflix to get in on some real‐life drama involving the crypto world, this would be it and the documentary would start with one man, Sam Bankman‐Fried (or SBF for short).

He was the CEO of FTX, the second largest crypto exchange in the world, trailing only behind Binance. SBF was also known as the most generous billionaire at one point in his short career. But all would come undone when he lost billions over a weekend.

SBF was born into a politically well‐connected family. His father, a law professor, would later help his son to raise funds for his company.

After graduating from the Massachusetts Institute of Technology, SBF joined New York trading firm Jane Street Capital, where he would meet future members of FTX. Discovering a loophole where he could buy crypto in the United States and sell it in Japan for a higher price, SBF started shifting up to US$25 million a day.

With his profits, he started Alameda Research with some of his former college friends and Jane Street workmates. He suggested that Caroline Ellison, his former colleague, join Alameda in 2017. She would later go on to become the CEO of the company and be romantically involved with SBF.

Apparently, it was a thing in the company as a report in Fortune said that Alameda Research was “run by a gang of kids in the Bahamas” who all dated each other. The young group was known for partying hard, but Ellison herself would go on to publicly expose a disturbing personal trait on her Twitter account: admitting to being a regular and unabashed amphetamine user.

She would go to state on her Tumblr blog that she supports polygamous relationships with hierarchy and competition for lovers. Bizarrely comparing it to an “imperial Chinese harem” except with equality among genders, Ellison said “everyone should have a ranking of their partners, people should know where they fall on the ranking, and there should be vicious power struggles for the higher ranks.”

Alameda Research was a crypto hedge fund that carried out trades, matched buyers and sellers, and supposedly gave investors a return. They promised 15% annualized fixed returns with no downside. As with LUNA's high yield, it was a magical number that appeared out of nowhere. And likewise, people bought it.

FTX, on the other hand, as SBF put it, was started because he saw that other crypto exchanges only catered to inexperienced traders. He wanted to give more options like futures and options trading for crypto, and tokenized stocks of real companies.

Both Alameda and FTX were based in the Bahamas and owned by SBF. Alameda Research later received US$10 billion in FTX customer funds without the knowledge or consent of customers, effectively a misuse of funds amounting to fraud.

SBF raised eyebrows when he managed to raise US$2 billion in funds for FTX, from various banks and investment companies including from BlackRock. According to a blog post from one of his major investors, venture capital firm Sequoia Capital, SBF was playing the game League of Legends when he closed a US$210 million deal with them.

SBF's ease of acquiring funds for his start‐ups raised more questions regarding his politically connected family.

Nevertheless, crypto was rising at the time and things were going good for SBF. FTX was averaging US$10 billion a day in trades, breathing down the necks of rival exchange Binance.

SBF brought FTX to the world. In the United States, the company bought naming rights for sports stadiums. Ad campaigns starring the biggest celebrities were aired on TV. The celebrities were paid with FTX equity. Actor Tom Brady was reported to have put his US$650 million fortune into FTX to increase his equity.

In 2022, the United States was also ready to embrace its own Central Bank Digital Currency (CBDC), with government regulators and big banks backing the idea. SBF wanted FTX to be at the center of it.

As FTX became a household name, SBF became highly influential. The founder projected his life philosophy in Positive Altruism, which is basically all about finding the best version of yourself and what you can do to serve society. He wanted to appear as humble as possible to the world.

He chose to brand himself as a modest billionaire, choosing to drive a regular Toyota, to appear more trustworthy.

It was so convincing that even international governance lobbying groups were looking toward Sam for fresh ideas. FTX subsequently became a partner of the World Economic Forum and built the infrastructure for funds to reach Ukraine DAO amid the Russian invasion.

To gain political leverage, FTX had both sides of the coin in their pocket. SBF donated US$5 million to Joe Biden in 2020, and a total of US$50 million to Democrat politicians ahead of the 2022 mid‐term elections, whereas FTX co‐CEO Ryan Salame donated US$23 million to Republican politicians.

However, even with a net worth of US$26 billion, SBF ran FTX mainly by himself and refused to form a Board of Directors. As founder of Alameda and FTX, he had the power to move assets around within both his companies.

In the second half of 2022, risk assets took a dive as the Fed raised interest rates to combat rising inflation. Cryptocurrencies were among the hardest hit. Alameda started making huge losses from trading and while trying to bailout companies it invested in.

SBF thought he could buy crypto at record low prices but did not count on reserves running out. But even before that happened, he cooked the books.

After Alameda lost money while trying to rescue crypto company Voyager from bankruptcy, Sam secretly moved at least US$4 billion from FTX to prop up Alameda's balance sheet. The currency he moved is in the form of FTT, which is FTX's native token.

FTT is FTX's own centrally controlled, printed out of thin air, token. And it generated most of the capital used to build FTX when it was sold to early investors.

Publicly, SBF stated it was just a routine involving “rotating a few FTX wallets” that are mostly non‐circulating, adding that “we do this periodically” and it “won't have any effect.”

It was the largest transfer of tokens on an exchange ever. People got suspicious. All these FTX wallets were technically transferring to just one recipient, which was a wallet at Alameda.

A probably tweaked out Ellison made matters worse when she slipped up during a call with a reporter from the Wall Street Journal, when she admitted that FTX used customers' monies to help Alameda resolve its liabilities.

On 2 November 2022, leaked documents revealed that most of Alameda's US$14.6 billion assets were in the form of FTT tokens. This meant that Alameda had close to nothing in its vault and had been trading with a potentially valueless currency: a fake token.

As the crypto market slid, the liquidity of FTT tokens fell. Suddenly, people were not as interested in FTT as when the token was going up in price and making them money.

In the early days of FTX, Binance founder‐CEO Changpeng Zhao, commonly known as CZ, bought 20% of the company for US$100 million. SBF would later buy back the stock at US$2 billion, paid in FTT.

CZ's relationship with SBF began to sour as SBF quietly lobbied for a brokerage‐like trading license in the United States that would effectively give FTX an edge over all of its competition. Binance, being the largest exchange and biggest rival to FTX, would lose out the most.

The political connections in SBF's family, as well as Caroline's family, began to emerge. It has been reported that Gary Gensler, Head of the Securities & Exchange Commission (SEC) and Caroline's father Glenn Ellison, both worked at MIT as professors. The senior Ellison was Gensler's boss.

Another alleged leaked email suggests that the SEC gave FTX a conditional “no action relief” and looked the other way when faced with claims that FTT was being used to deceive investors.

CZ, at the revelation of the leaked documents, knew he had the power to bring down FTX with the US$2 billion worth of FTT.

On 6 November, less than a week after the leaked documents revealed FTT's true form, CZ tweeted that Binance would liquidate all FTT tokens on their books. Effectively mass dumping FTT on the open market “due to recent revelations.”

SBF went on the defense and tweeted: “A competitor is trying to go after us with false rumors. FTX is fine. Assets are fine.” However, in correspondence with staff, SBF admitted that a giant withdrawal surge was happening and that six billion tokens were withdrawn in the last 72 hours.

SBF tried to keep his cool. “Obviously, Binance is going after us. So be it,” he reportedly told staff. FTT went down 80% over the next two days, depleting FTX reserves even further.

FTX had US$9 billion in liability and only US$900 million in liquid assets. This meant they could not pay out all of the withdrawals.

As a final effort to glue their house of cards from falling apart, Ellison tweeted to CZ offering to buy up Binance's FTT holdings. “Alameda will happily buy it all from you today at $22!”

Source: Bloomberg https://www.bloomberg.com/opinion/articles/2022-11-11/ftx-collapse-don-t-start-dancing-on-crypto-s-grave-just-yet

CZ replied, “Liquidating our FTT is just post‐exit risk management, learning from LUNA. We gave support before, but we won't pretend to make love after divorce… we won't support people who lobby against other industry players behind their backs.”

Following this, SBF called CZ to offer FTX up for sale. CZ agreed to buy FTX “to save them,” but in reality, he was consolidating power by buying up FTX at an extremely discounted price. Once CZ got a chance to look into FTX's books however, the deal was off.

FTX's gap between liabilities and assets was underestimated by everyone, coming short of a reported US$8 billion. Soon, the US Department of Justice began to investigate the US$10 billion of FTX customers' funds that were mysteriously channeled into Alameda.

With no liquidity and resources, FTX was forced to stop withdrawals. On 11 November, FTX and Alameda filed for bankruptcy. The news shocked the market and erased more than US$152 billion in three days. The exchange, valued at US$32 billion earlier in the year, was wiped off the face of the earth, leaving a permanent scar on the whole crypto market. How could things have changed so fast?

Source: Coindesk https://mishtalk.com/economics/crypto-crash-is-led-by-a-whopping-88-percent-plunge-in-ftx

FTX had a web of investments and acquisitions, mainly brokered with FTT. The crash of FTX affected overall investor confidence in crypto, waves of retail and institutional investors left. Many projects that received FTX support in the form of FTT went into bankruptcy as well.

If this wasn't enough, it was discovered that US$1 billion of customers' money that was transferred to Alameda had vanished.

And then FTX got hacked!

As though the fall from grace had not ended, FTX claimed that a hacker drained whatever remained of their funds which sat at around US$600 million in crypto. Many customers who still had access to the platform despite its legal and financial woes, started noticing that their balances were now showing zero.

Write downs from institutions followed. SoftBank wrote down nearly US$100 million, its former COO expressing regret and cited FOMO for the blunder. Singapore's Temasek wrote down US$275 million in addition to its reputational damage. Hedge fund Galois Capital, which was among the few that spotted the crash of LUNA before it happened, still has half of its capital trapped in FTX, while the Ontario Teachers' Pension Plan had US$95 million stuck in FTX during the crash.

Collective liabilities, including that of all affiliated companies of FTX, are estimated to be US$50 billion.

Sam is currently under house arrest in the Bahamas. Once carrying a net worth of US$26 billion, SBF was now worth a negative sum.

US officials are now in talks with the Bahamian government to extradite SBF to the United States for trial, so we might just see some justice served. Whether the missing funds will be found is another story.

Speculation, the Language of Fools

The ICO boom from 2017 to 2022 saw a lot of new players entering the crypto world. While we welcome the enthusiastic arrival of new brethren DeFi projects, we have to watch out for the wolves in sheep's clothing.

The irony is that both Terra LUNA and FTX started out with good intentions, but greed and hubris took them in a different direction.

Stablecoins have a use and it was to offer people a chance to avoid the volatility of crypto, while properly managed exchanges are essential to bring crypto to a wider world.

However, Do Kwon and SBF turned out to be bad actors in a bull market. A lot of innocent people were hurt and even the DeFi community was divided.

There are a lot of similarities between these two cases, one striking point is that Do Kwon and SBF acted as central powers within their own projects. Even though they worked in small teams, there was little to no democracy, and a lot of intimidation tactics. They were unscrupulous dictators digging their own graves.

Like the traders who called out LUNA before it crashed, the community needs to come together to heighten our knowledge‐sharing and call out villains or bad actors. We need to stop them before they are able to launch their projects and swindle more money. We need to shame them for the damage to the reputation of DeFi.

As the whole crypto industry is driven by speculative value, the crash of FTX and LUNA is a wake‐up call for us to embrace utility value. Utility is what will separate the real cryptos from the fakes. Currency only has value when it has use.

The more we realize what value really is, the faster we will conclude that it does not always have to be in the form of traditional money. Payment solutions do not necessarily have to be limited to an amount of dollars for a day's work.

This is why there are some who are more bullish on seeing DeFi work in the gaming and entertainment industries rather than in the financial realm. Sometimes, seeing is believing, as with non‐fungible token (NFT) where utility is tangible and expandable in countless ways.

People will always want to play good games and have quality entertainment even when the market is down. The utility from NFTs can transcend market sentiments and set a precedent for the adoption of crypto later on. Crypto should never be invented as just a means to an end. All blockchain projects must have a mission statement; a token cannot just be there to serve or stabilize another coin.

A blockchain's mission statement shapes its utility. Investors should only go into projects that bring intrinsic value to the real world.

Moving forward, we need more regulation and due diligence for higher standards of trading, especially with venture capitalists and hedge funds as they can influence the market. At the end of the day, it is the retailers who follow these big institutions that get hurt the most.

Self‐policing the DeFi community means that we all have to play our part in identifying the Builders from the Villains. The largest blockchain needs to come together as soon as possible to form consortiums to set up watchdogs and regulators.

If we wait for regulators or the government to step in, it would be too late. We cannot afford the reputational damage that future bad actors might wreak. It is better for us to set ourselves straight, have each other's backs, and stay vigilant.

The joyride is over, please fasten your seatbelts.

And remember, not all that glitters is gold.