SBF: UST was bad, but not the blockchain version of Theranos
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SBF: UST was bad, but not the blockchain version of Theranos
Not all bad things can be lumped together.
Navigating Web3 tides with focused insightsBy FTX
The LUNA crisis continues to this day, placing Terra blockchain founder Do Kwon squarely in the public spotlight.
Many believe Do Kwon deceived the public. Foreign media outlet CoinDesk even compared him to Elizabeth Holmes, the central figure behind the Silicon Valley unicorn fraud chronicled in the book "Bad Blood."
On this point, FTX founder SBF has something to say.
"Not all bad things are the same bad things"
(Not all negative events should be lumped together)
Elizabeth Holmes founded Theranos, a blood-testing company that claimed it could diagnose diseases—such as cancer, high cholesterol, and diabetes—using only a drop of blood collected via its proprietary device and analyzed by its miniLab system within half an hour.
This revolutionary technology attracted massive venture capital investment. By 2014, Theranos was valued at $9 billion, becoming one of the most prominent unicorns. But just one year later, the company was exposed as a fraud. It dissolved in 2018, and by 2021, Elizabeth Holmes was sentenced to prison.
CoinDesk columnist David Z Morris argues that Do Kwon, who launched TerraUSD (hereafter UST), is the crypto equivalent of "Bad Blood"¹, having promised investors something exciting (i.e., a decentralized stablecoin) without any real innovation or solid methodology.
[Note*1]: "Bad Blood," published in 2018 by John Carreyrou, details the Theranos unicorn fraud.
SBF: UST Was Bad, But Not the Crypto Version of 'Bad Blood'
FTX founder Sam Bankman-Fried believes that LUNA/UST (referring to TerraUSD) was a terrible failure with a disastrous outcome.
However, while both were catastrophic, SBF argues that Elizabeth Holmes’s Theranos was fundamentally different because the mechanism behind LUNA/UST was quite transparent.
According to SBF, although LUNA/UST failed spectacularly, the core criticism of Elizabeth Holmes isn’t simply that Theranos failed—but that she lied.
"Specifically, Elizabeth Holmes repeatedly claimed Theranos was revolutionizing technology when in fact it wasn’t. She committed fraud by presenting fake reports to investors. But LUNA was not like that."
SBF believes Do Kwon did not misrepresent the LUNA/UST mechanism to the public. He never claimed UST had 1:1 USD backing. On the contrary, Do Kwon clearly stated that UST's reserves consisted of 'volatile assets.'
"Do Kwon didn't tell people UST was backed 1:1. Instead, he explicitly said the reserves were volatile assets. It was clear these assets could lose value—and if they did, other consequences would follow.
Let me emphasize: I'm not defending UST. I also think they made mistakes. But UST and Theranos are not the same."
Many have used the UST collapse to generalize that 'blockchain is all scams.' SBF acknowledges there are indeed Ponzi schemes in crypto—like Plus Token—but insists UST was not one of them. If anything, SBF views LUNA/UST’s marketing as a failure, due to its inability to properly communicate the correct mechanisms and risks to the public.
"Most bad investments aren’t Ponzi schemes. Some losses come from being scammed, some from bad luck, and some from both.
Here are investments that dropped over 50% since the beginning of the year: 1) NFLX 2) LUNA 3) AMC 4) ARKK."
1) Not all bad things are the same bad thing— SBF (@SBF_FTX) May 14, 2022
FTX Community Partner Benson Sun: LUNA’s Debt Ceiling Was the Problem
For the blockchain industry, UST was a fascinating experiment. Looking back, where exactly did UST’s mechanism go wrong?
FTX community partner Benson Sun believes the issue lay in the lack of a proper "debt ceiling."
He uses Maker’s stablecoin DAI as an example. DAI implements a debt ceiling because Maker understands that during large-scale liquidations, system stability still depends on the liquidity of collateral. Therefore, Maker sets limits for each type of collateral—those with higher liquidity, such as Ethereum (ETH), receive higher debt ceilings.
Despite major liquidation events like those on March 12 ("Black Thursday") and May 19, DAI remained stable. This demonstrates the success of Maker’s risk management framework.
But LUNA was different.
LUNA did not impose a cap on system debt—instead, it amplified growth through a flywheel effect ². This flywheel originated from UST’s design: when market demand for UST rose, users would buy and burn LUNA to mint new UST.Terra continuously attracted external capital into the system via Anchor’s 20% annual yield, causing UST issuance and LUNA price to surge together. However, when UST supply grew too large, the buyer-side liquidity of LUNA became insufficient to support the price peg, ultimately leading to collapse.
In contrast, Maker accepts multiple asset types as collateral when minting DAI. The overall system’s liquidity does not rely solely on internal tokens, making it significantly more secure.
Benson likens LUNA to corporate assets and UST to liabilities. Clearly, the team failed to set a debt ceiling, resulting in an excessively high debt-to-asset ratio.
"At its peak, LUNA had a market cap of about $41 billion, while UST reached $18 billion—meaning debt accounted for roughly 40% of assets. Given that crypto market caps often vastly differ from actual buyer liquidity, it was evident that LUNA lacked sufficient liquidity to sustain such a debt level."
[Note*2]: The flywheel effect refers to a phenomenon where, once a critical threshold is reached, the momentum and inertia of the wheel itself become part of the driving force. After that point, minimal additional effort keeps the wheel spinning rapidly.
He notes that Terra was aware of UST’s overreliance on LUNA and began introducing external liquidity and reserve assets to strengthen UST’s resilience—including purchasing Bitcoin as reserves and establishing liquidity pools on Curve Finance. Unfortunately, none of this could compensate for the absence of a hard debt ceiling:
"In a way, Terra was like someone skydiving. There was a parachute on their back—the applications and protective mechanisms of UST. Before hitting the ground, Terra needed to deploy that parachute successfully. Sadly, the parachute never opened.
If Terra had wanted, they could have tied the debt ceiling (UST issuance limit) directly to LUNA’s market cap—for example, capping it at 1/10 of the market cap. Sacrificing some upside potential for greater safety would have made the system sustainable and increased the chance of deploying the parachute before impact."
Additionally, Benson shared his thoughts on the recent chaos surrounding LUNA.
He believes media outlets, influencers, and KOLs (key opinion leaders) should refrain from amplifying stories of individuals who became rich overnight during the LUNA crisis. These cases are largely unreplicable and heavily reliant on luck.
It's undeniable that every major event produces a few winners. Yet the LUNA crash erased tens of billions in market value across the crypto space. Far more people lost money than made gains. There's no need to exacerbate market anxiety when most investors suffered losses—or even lost everything.
"There's absolutely no need to pay attention to posts about getting rich by bottom-fishing $LUNA—it only adds unnecessary anxiety. Throughout $LUNA’s decline, how many people thought $10, $1, $0.1, or $0.01 was cheap enough to jump in, only to get buried? Those who tried to buy the dip in $LUNA undoubtedly lost far more than those who profited. Some faced long liquidations, others saw grid bots hit zero—all becoming exit ramps for $UST holders."
Finally, he reminds investors to always consider the 'risk factor' of their investments.
Before the UST death spiral, many KOLs were actively promoting its fixed annual yield. While some did mention risks, Benson questions whether those warnings were thorough enough or included clear guidance on when to exit.
He personally never promoted UST, as understanding its systemic risks and monitoring relevant data in real time is extremely difficult for average users.
So how can ordinary investors evaluate investment products?
Benson suggests first understanding the industry’s average returns and maintaining skepticism toward yields that exceed norms.
"For crypto investors, an unreasonable yield that exceeds market averages must come with trade-offs.
For example, suppose the average annual return in the market is 5%, but an exchange offers 12–15%—with a deposit cap of $2,000. In that case, the intent is likely user acquisition.
But if you see a product offering 20% annual yield with no deposit limit, you must investigate the underlying risks."
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