Over the Event Horizon, Governance's Last Stand
Meet the Terra Rebels, the decentralized dream team fighting grim odds to restore a governance premium in LUNC.
I decided to stop following “Terra Classic” a month or so ago. There was nothing I could do about being down horrendous in it, or making good to friends I’d shilled it to who were also down horrendous. It was long past time to move on.
But Terra Classic, already a dumpster-fire, took on a new, can’t-look-away morbidity as hundreds of thousands, if not millions, of new investors piled in along with the 500,000 or so from the pre-crash days. Kwon’s hijacking of the network, and silent refusal to implement any governance votes which passed, represented everything that could possibly go wrong with proof-of-stake network governance. I was curious how a large group of people might collude or conspire to break Kwon’s grip on the network, which retained considerable market value ($300-600M). I was also surprised that other proof-of-stake protocols didn’t publicize stronger views about Kwon’s temporary-turned-permanent takeover of Terra Classic, given its negative implications for future PoS governance crises.
After Kwon seized network control of the Terra Classic network in the final innings of May 8-15, there were no indications, 3 weeks and multiple ignored governance votes later, that Kwon had any interest in relinquishing his extreme chokehold over Terra Classic. I felt that Terra Classic’s memestonk investors would meet the same sad end as Terra’s prior investor cohort of too-clever-by-half financial engineers.
Until the Terra Rebels came along.
[Quick Recap] Terra Classic’s post-collapse governance death spiral played out as follows.
After UST/LUNA was clearly over the hyperinflation event horizon, Do Kwon & TFL staked around 200 million hyperinflated LUNA across a range of validators, raising the amount of staked LUNA from ~350 million to a peak of ~610 million.
After staking the additional 200 million LUNA, Kwon “temporarily” suspended further LUNA delegation, “to protect from a potential governance attack.” In reality, he had just hijacked the network. At the same time he (correctly) pulled the plug on further LUNA money-printing.
Jump Crypto and other legal entities unstaked their staked LUNA and exited the network, bringing the total staked LUNA (now LUNC) back down to around 330 million.
Kwon and the remaining LUNC stakers, who controlled 330 million out of 6.9 trillion (1/20,000th, or .005%) of all LUNC now in circulation, raked in a final, massive glut of transaction fees all for themselves.
Kwon capitalized on an overdose-of-copium narrative (about an orchestrated attack that un-pegged UST) to justify starting a new Luna 2.0, and set the airdrop allocation as if the “attack” had barely happened (on extremely favorable terms for pre-crash insiders who didn’t insert more capital into the network, i.e. himself).
Kwon never produced any accounting of the LFG Reserve, the $3 billion of BTC which was supposedly used to defend the UST peg, despite having the extremely strong incentive of clearing his name prior to launching Luna 2.0.
The LFG Reserve was allegedly spent buying back UST at around .90 UST:USDC average price. Even after accounting for a ~15% drop in BTC during that time, it would compute to at least 2.75 billion UST. However, almost 2 months later, the LFG wallet has only 1.85 billion UST(C). At least 900 million USTC, allegedly purchased at a market value of $800M+, vanished without explanation.
Kwon aggressively coerced the Terra 1.0 ecosystem dapp operators (90% of whom were TFL employees) to publicly pledge allegiance to the Terra 2.0 ecosystem.
In the most outrageous case of coercion, according to to 2 separate accounts from current TFL employees, Kwon directly threatened Ryan Park, the acqui-hired founder of the dapp which became the Anchor Protocol (whom Kwon paid $30,000 per year in salary), with being “made the fall guy” to regulators for the collapse of the Terra ecosystem if Park didn’t fully, publicly rebuild on Luna 2, in addition to complying with other undisclosed pieces of blackmail. (Park, as of fairly recently, was refusing to cooperate with Kwon.)
Kwon inadvertently confirmed TFL employees’ suspicions that Kwon had cashed out huge amounts of money when Kwon, on an all-hands internal TFL call, declared that “we [TFL with its 60+ employees] have years of runway, money is not a problem,” and all TFL employees would get double salary plus additional perks for 6 months as long as they stayed with the company.
Kwon launched Luna 2.0, all technical support for Terra Classic ceased, and TFL-operated Terra Classic dapps like Anchor ceased to function.
On Luna 2.0, Kwon informally communicated to Luna 2.0 validators that he intended to launch a new algostable in the next 6-12 months.
At this point, the game theory seemed straightforward. Kwon held majority control of the LUNC network with .003% of LUNC tokens outstanding. He was launching a new blockchain with a new algostable to compete with USTC, and was thus fully invested in aborting the Luna 1.0 experiment as clinically as possible. Terra Classic was dead.
A glitch in the matrix
At this late hour, the tide began to shift.
USTC’s market cap settled at ~$100M (USD $.01 per token or so, of which there were around 10 billion remaining), backed by the equity of LUNC’s ~$300M post-apocalyptic market cap.
At these relative levels, LUNC was theoretically solvent again, in the sense that if its mint/burn mechanism was reactivated, most of the USTC bad debt could be equitized into LUNC (and essentially retired) without much further hyperinflation if the seigniorage-arbitrage model were tweaked.
LUNC’s army of retail investors organized a vote among existing validators to re-enable validator delegation, i.e., open up staking to hyperinflated LUNC and return control of the LUNC network to LUNC owners. The proposal passed with 91% support (150 million out of 165 million votes).
TFL could’ve ensured that this vote failed by voting against it (they control 220 million staked LUNC today, and an individual staker can override a validator’s vote). However, Kwon/TFL was too afraid to exercise that authority, as it would explode their legal liability for Terra 1.0 investors’ losses, and completely destroy any legitimacy of Terra v2.
At the same time, if TFL undelegated their LUNC from rebellious validators, they’d have to re-delegate it elsewhere, which would afford anyone else the same possibility.
The success of the vote to re-enable validator delegation seemed like a big glitch in Kwon’s Matrix. Like a dictator who’d brought more troops to the protest than there were protesters—but wouldn’t give the order for his troops to fire on the crowd—Kwon seemed unwilling or unable to flex his paper muscle despite holding all the cards.
What could a couple million randomly distributed users all around the world do to rescue a proof-of-stake network held hostage?, I wondered.
After the vote had passed to re-enable validator delegation, I was initially very optimistic. There’s no such thing as law on the blockchain, but refusing to abide by a successful network vote on such a basic matter as this (even after rigging the vote heavily in your own favor) is the crypto equivalent of a capital offense. Had Kwon overridden the vote, it would’ve destroyed any remaining legitimacy of his Terra 2 network, in addition to exploding Kwon’s/TFL’s legal liabilities to UST depositors. Maybe luck and opportunity had cornered Kwon in a way that laws, shame, and basic morals could not.
After the vote finished, days passed. Nothing happened. TFL was playing dead, and Kwon was silently rejecting the outcome of the vote. No judge or jury was going to force Kwon to give up network control.
The Terra Rebels’ moonshot
I wandered into the Terra Rebels Discord and stuck around out of curiosity, more than anything else. Terra Rebels struck me as “built different” than other LUNCatic-revivalist projects. Its most public-facing leader, Zaradar, spoke the language of tech product management: carefully measured terms around achievable near-term iterative goals, avoiding items likely to cause internal discord and controversy, without tipping his hand on longer-term targets which he and his core team clearly had in mind.
The Terra Rebels team is an impressive group of 30 or so people, led by a core team of eight Discord members: ek826, Zaradar, Marventus, echel0n, A.E., Vegas, Resolvance, and Raider70. (A majority self-doxxed when they published the Terra Rebels’ inaugural white paper.) Its supporting cast includes multiple Wall Street specialists, mechanical and computing engineers, and 15+ developers across a spectrum of relevant programming languages.
As I learned more about the Terra Rebels’ organization and drive, I became more and more impressed. Terra Rebels reminded me of the beginning of “Wild Wild Country,” where a crazy-but-capable hippie movement improbably turned 80,000 barren Oregon acres into a self-contained kingdom of private jets, 200 Rolls-Royces and much more. (It ends quite badly, but I’m not referring to that part.) As the team rapidly coalesced, broke off into informalized Maker-style “core units,” and got to work, I began to wonder if this decentralized, globe-spanning tribe of experts could actually pull off not one, but two impossible feats: unshackling Terra Classic from Kwon’s control, and cleaning up the mess Kwon left behind.
Unfortunately, though, every blockchain has at least one central point of failure: control of the network gitbook, the core codebase that runs the blockchain. What if, after a network passed a vote, whoever controlled the gitbook just played dead and refused to hand over the keys, as TFL was now doing? Why would TFL, with a new algostable in the works, take its boot off the Rebels’ neck?
Beneath its surface inaction, TFL was showing other clear signs of hostility. The “Terra Classic” official Discord server and public media accounts remained under the control of a TFL skeleton crew, whose only job seemed to be to misdirect people. People who posted links to the Terra Rebels discord were banned. People who asked about the Terra Rebels Discord in the Luna 2.0 Discord were told, “not sure what you’re talking about, the official Terra 1 Discord is [link], ask your questions there.” People who went to the official Terra 1 Discord encountered a ghost town of idle retail trader gossip and zero support. People who asked about successful LUNC governance proposals on the Terra 2 Discord were given bogus redirections, with responses such as, “that proposal was text-only and had no devs willing to implement it.”
Then the Terra Rebels Steering Group hosted an open call on the Terra Rebels on Sunday, 6/26. Zaradar explained that there was in fact a technical solution if TFL indefinitely refused to hand over the Terra Core gitbook: if a voting majority of validators validated a single coding update, the new code would become the source of truth, and the validators who refused to certify the new code would be slashed until their staked LUNC went to zero. It wouldn’t require any forking, which would cause severe user attrition. In effect, Kwon-supporting validators who refused to certify the new source of truth would be hard-forked out of the network, along with their incumbent gitbook that they refused to hand over to the new majority.
Zaradar’s insight was a positive shock to the community. Trading volume on LUNC exploded as LUNC’s governance premium went from zero to hero. LUNC’s market cap tripled from $350M to $1 billion, and USTC’s from $80M to $700M.
Zaradar shared other experiences and insights with the listeners. He reiterated a willingness to work with TFL constructively, but also enumerated some of TFL’s many behind-the-scenes sabotage attempts. As the Rebels subsequently explained in their just-released white paper, the Rebels’ efforts have been open, good-faith, exhaustive, and completely ignored.
The most egregious of TFL’s many gaslighting attempts is that “[the multiple governance proposals which passed since the network halt] have no code and no developers willing or able to develop them.” Most of the rest of the Rebels’ white paper shows actual code submitted to the Terra Core gitbook (and ignored).
Meanwhile, TFL employees seem to hold an even more negative view of Kwon than the public does. Their fear of Kwon, fear of government retribution if the government can’t pin Kwon down, and difficulty of finding new work during the bear market has cornered them into public silence as they ghost-work on projects for other chains.
At any rate, while the Terra Rebels (who seem to dislike their own name) continue taking the high road with regards to TFL, it’s obvious that Kwon is acting in maximum bad faith, constrained only by potential legal liability and public appearances. I think the Terra Rebels should embrace their name and adopt a motto consistent with that spirit, such as “Do Kwon, Go Fork Yourself.”
The Rebels’ assets, liabilities, and roadmap
The LUNC network has a unique mix of assets and liabilities.
On the one hand, between the 400-500k pre-crash users and the punters who arrived after the crash, LUNC/USTC is probably one of the most broadly held cryptocurrencies today outside of BTC and ETH. This is the opposite of most young networks’ “lots of tokens but no users” problem: LUNC has lots of users, but no (spare) tokens. Therefore, LUNC won’t have to bootstrap app development the way most young protocols do; delivering users will be the easy part.
Also, the 165 million votes in favor of reauthorizing validator delegation were 37 million votes above a quorum. As long as the LUNCatics get a majority of a quorum, they believe they can hardfork Kwon and his lackeys out of the network. But that assumes Kwon won’t flex his 220 million staked LUNC to override pro-forking validators under a gaslighting public pretext (such as “protecting USTC holders from further losses”). The validators can vote their consciences only so long as Kwon doesn’t override those votes.
On the other hand — assuming Kwon doesn’t flex his autocratic majority of staked LUNC — the Rebels face a very steep hill to climb. They have a stablecoin with 10.25 billion tokens in circulation trading at $.05/USD. Mathematically, they need to do a blend of:
a) equitizing 90-95 percent of the USTC (converting it into LUNC) in circulation to restore the peg
b) not decimating LUNC holders with another round of hyperinflation while that happens
c) once the peg has been restored, collateralizing a significant percentage (40-70% imho) of remaining USTC with BTC or some other blend of decentralized assets
d) hoping the USTC/LUNC reflexive-collateralization model doesn’t break again when the LUNC supply is ~doubled in order to accomplish that goal.
Why LUNC matters to the rest of the industry
Within crypto, governance has turned into a major disappointment. Even supposed examples of good governance, like MakerDAO, have been plagued by grifting and attempted insider dealing at the expense of the DAO. But Terra’s situation, in which a founder’s arrogance blew up his own network, then attempted to cover his tracks with gaslighting, and is now sabotaging others’ salvage efforts, remains at the bleeding edge of the falling knife of DAO governance.
Accordingly, the “governance premium” in tokens has evaporated. Much of this has to do with the savage crypto bear market, but in other asset classes, very large governance premia persist even during bear markets. A governance premium is really just a rule-of-law and rule-of-predictable-incentives premium. For example: if you own a share of Google or Facebook, you own literally no governance rights (the founders control >50% of voting stock) and no entitlement to any economic payment stream. You really just own a sh*tcoin that happens to be the same sh*tcoin that employees of those companies are paid in, so the companies are strongly incentivized to redirect cashflows into those sh*tcoins if they want to keep quality employees.
Maintaining governance premia is important, because it allows a sector to raise capital more cheaply and efficiently. However, crypto tokens can’t maintain governance premia when people like Kwon consistently get away with the things they do, and step on the throats of capable people cleaning up the mess, with impunity.
Could you provide a new invite to the Terra Rebels discord? Much appreciated!
Great piece of work. How did you do all of this research?