Crypto in Plain English - by cryptohunt.it

Latest Episodes:

What is a zero-sum game and why should you care about it with crypto? - Crypto in Plain English - Episode 173 - by cryptohunt.it May 26, 2022

Show notes

What is a zero-sum game and why should you care about it with crypto?

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

Today: What are zero-sum games and why should you care?

In the context of financial systems, zero-sum games describe a market where someone’s gain is someone else’s loss.

Let’s take a look at a slot machine in the casino. When you win, your wins are only possible because numerous other people have lost at that machine in the past.

Crypto is the same: When hedge funds invested a few million dollars in Terra Luna, and exited with hundreds of millions before the collapse, that money came from the other people who put their money in after them, which pushed Luna’s price up. A plus for hedge funds, a minus for everyone else: Makes zero in sum.

But why should you care? Because when things look too good to be true, they probably are. Always do your own research on things you are interested in investing in. Ask yourself: If everything is a zero-sum game, who stands to benefit from me putting money here? And if you don’t like the answer, walk away.

Come visit us at www.cryptohunt.it if you are interested in learning more. We have dozens of small, easy to understand lessons to empower you to make your own decisions. No crypto knowledge required!

Disclaimer: This podcast references our opinion and is for information purposes only. It is not intended to be investment advice. Do your own research and seek a duly licensed professional for investment advice.

Where do those high interest rates and yields in crypto come from? - Crypto in Plain English - Episode 172 - by cryptohunt.it May 25, 2022

Show notes

Where do those high interest rates and yields in crypto come from?

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

Last time we layed out how stable coins are risky, without the benefit of potential rewards. But by now you will have probably screamed: “Not so fast, what about those interest rates I can make?”

And we’ll give it to you: All over the crypto world, projects are paying out crazy high interest rates just for depositing your stable coin. What could possibly go wrong?

Let’s look at the Anchor Protocol, the project that brought down the entire Terra Luna blockchain and ultimately destroyed $80-100 billion dollars in investments. They promised you 20% returns - but let’s look at how that worked.

First, they would loan out your TerraUSD to others, where they asked for 10% interest. You were the one eating the risk that those borrowers won’t return the money. They would also ask the borrowers for collateral - other types of crypto, which they lend out again for interest. Fine, as long as prices increase. Once they decrease, everyone is losing. And lastly, a large part of the remaining interest was given back to you in ANK tokens, their own native asset which fluctuated wildly in value.

Sounds a bit like someone was trying to obfuscate things? We think so.

And that’s why it is important to realize that financial systems are zero-sum games. Someone gains what somebody else loses. And in the next episode, we’ll look into that more and why it is a dangerous game to play.

Why Stablecoins are almost always a bad investment - Crypto in Plain English - Episode 171 - by cryptohunt.it May 24, 2022

Show notes

Why Stablecoins are almost always a bad investment

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

As an avid listener of this podcast, you will have noticed: We have spent a lot of time explaining stable coins. This is somewhat of a passion for us: We love the idea, but we think the risks are not clearly communicated.

So, what makes stable coins so risky? They are, after all, stable right?

And that’s the problem. In theory they do represent a value that only fluctuates minimally. But many stablecoins have fundamental flaws: They may not be fully backed. Or their algorithms don’t hold up under pressure.

Whatever the risk, the most important thing to realize is that there is no reward by design. You will never get MORE for them than you paid. But they can collapse, like TerraUSD did. And let’s take another look at Tether USD: The company refuses to tell you where the money is parked, yet it is the third largest cryptocurrency in the world.

We want you to consider this: Risk with no reward. Is it worth it? We think maybe, for temporary money transfers or payments, but not to hold. But as always, do your own research - we are not here to give you investment advice, we want to teach you the basics to make the best decisions possible.

TerraUSD meltdown, part 6: What’s next for Terra, Luna, and the world of stable coins? - Crypto in Plain English - Episode 170 - by cryptohunt.it May 23, 2022

Show notes

TerraUSD meltdown, part 6: What’s next for Terra, Luna, and the world of stable coins?

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

Remember the last episode, a chilling history of mass withdrawals of Terra triggering the Terra and Luna coin collapses? Welcome to the last part of our one-week special. Today: What will happen now?

First, let’s speculate about the future of the Terra Luna blockchain. The organization running it has spent billions of their reserve, trying to stabilize the system, and it was all for nothing. They have no more powder left and it is safe to assume that the blockchain is dead forever, as public confidence is destroyed.

Second, let’s talk about stable coins in general. As a frequent listener of this podcast, you remember that not all stable coins are as stable as they claim to be. Yet, many investors put their life savings into them because they trusted the claims. It’s likely that governments will crack down and put a lot of pressure on those instruments.

There will also be a wave of other collapses as investors are withdrawing from stable coins. If you have money parked in them, consider one thing: By definition, stable coins don’t appreciate in value. But if they collapse, you could lose everything. It’s a very single-sided risk.

And lastly, this is a great reminder for us all: Knowing the history and understanding the complicated inner workings of crypto is really crucial to making good decisions. We hope that this podcast is giving you the inspiration to learn and the confidence to choose wisely.

Thanks for listening to this special, and if you have any feedback or questions, email us at podcast@cryptohunt.it. We would love to answer your questions!

TerraUSD meltdown, part 5: Who killed TerraUSD: Malicious attack, or simply a weak design? - Crypto in Plain English - Episode 169 - by cryptohunt.it May 20, 2022

Show notes

TerraUSD meltdown, part 5: Who killed TerraUSD: Malicious attack, or simply a weak design?

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

Welcome back to part five of our one-week special on the TerraUSD collapse. Today: What caused the stable coin algorithms to stumble and lose the peg? If you haven’t followed from the beginning, please jump back a few minutes of listening time to episode 165.

Last time we talked about the magic machine that exchanges eggs for dollar bills to stabilize egg prices. And we learned that this is exactly how TerraUSD worked - using a fixed exchange rate for Luna, it guaranteed the price of Terra.

But we also said: A machine has its limits.

And so did the Terra Luna stablecoin rubber band: A black swan event, one where many things happened at once, gave it a mighty kick and it lost balance.

One major contributor was a project called Anchor Protocol. There, you could deposit Terra stablecoins for a crazy 20% interest, but as that became impossible to maintain, the project slashed interest rates overnight. People made a run for the 14 billion dollars parked there and flooded the Terra Luna stablecoin algorithm. As the machine couldn’t keep up, people were willing to take a discount on their stable coins to get out of the market, and that snapped the rubber band.

But even worse: Now there was a ton of new Luna, printed by the machine when it exchanged Terra for it. The more Luna it created, the more the Luna price drove down. Eventually the panic crept into the general crypto market and everything dropped. In total, the market wiped out over $80bn dollars.

And while there have been speculations about foul play, none of them have been proven. Some say it was a bad actor holding a massive short position. Others claimed popular hedge funds have something to do with it. But either are just conspiracy theories at this point.

And it doesn’t really matter. What matters is that many investors had money in an ecosystem without knowing the real risks. So, in the next final episode, let’s talk about what’s next for Terra Luna, stablecoins, and what we can learn from it.

TerraUSD meltdown, part 4: TerraUSDs Fatal Flaw - Crypto in Plain English - Episode 168 - by cryptohunt.it May 19, 2022

Show notes

Episode 168: TerraUSD meltdown, part 4: TerraUSDs fatal flaw

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

Welcome to part four of our one-week special on the TerraUSD collapse. Today: How did TerraUSD collapse?

Remember last episode, where we explained how an algorithmic machine can create a stable price for eggs between you and your friends? If not, jump back one episode to 167 because you’ll need the background.

So now we understand that through the process of guaranteeing a stable exchange rate between eggs and dollars, and creating or destroying each in that exchange, we can stabilize prices.

And that’s exactly how Terra worked. It has a sister currency called Luna and the two work just like those eggs and dollars. Get it? Terra - earth, grounded, stable. Luna - moon, space, volatile in value.

The algorithm, just like your magic egg-dollar machine, is the rubber band between the two: It exchanges Terra for Luna and vice versa for a fixed rate, while destroying either one of the other in the process.

But what could possibly go wrong? The system seems solid, doesn’t it?

Well, say the unthinkable happens in our egg market: Overnight everyone turns into a vegan and wants to sell their eggs immediately. That machine would have to act very fast. Destroy egg! Print dollar! Destroy egg! Print dollar!

But every machine has its limits. So did the Terra Luna exchange algorithm. It collapsed under the weight of too many requests to exchange.

In the next episode: Let’s look at the history of what exactly happened on May 9th 2022, and why the Terra Luna machine was flooded with withdrawal requests.

TerraUSD meltdown, part 3: How TerraUSD worked - the story of the magic egg-dollar machine - Crypto in Plain English - Episode 167 - by cryptohunt.it May 18, 2022

Show notes

TerraUSD meltdown, part 3: How TerraUSD worked - the story of the magic egg-dollar machine

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

Welcome to part three of our one-week special on the TerraUSD collapse. Today: How did TerraUSD actually work before it collapsed?

The people behind Terra wanted to create a stable coin for easy online payments. And a decision was made: Let’s use a self-stabilizing algorithm instead of central reserves.

So, let’s look under the hood and explain how that works… with an analogy as always. Let’s go!

Say that you and your friends agree that – from now on – one egg is always worth one dollar. You all keep your promise for a while and trade happily, until one friend gets tired of eggs and wants to dump them all for 80 cents a piece. Suddenly, the entire market adjusts, and egg prices aren't stable anymore.

So you invent a really powerful machine: It can create eggs, destroy eggs, print dollar bills, and burn dollar bills.

And the machine operates by two basic laws:

Law one: If you give it a dollar, it burns it and creates you an egg.

Law two: If you give it an egg, it destroys it, and prints you a dollar.

Immediately, everyone would see the opportunity: Buy those cheap eggs directly from your friend for 80 cents, and exchange them for a full dollar through the machine. They just made 20 cents, a 25% profit!

Bankers call this arbitrage and they love it. Once they are in on the action, there are soon only eggs worth $1 left for sale. And whenever a small discount pops up again, the bankers will make sure to close that.

Your magic machine just created stable-eggs. And it’s exactly like that algorithm that powered TerraUSD.

And in the next episode, we’ll look at the machine's fatal flaw.

TerraUSD meltdown, part 2: What is an algorithmic stablecoin? - Crypto in Plain English - Episode 166 - by cryptohunt.it May 17, 2022

Show notes

TerraUSD meltdown, part 2: What is an algorithmic stablecoin?

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

Remember the last episode about a peg, the rubber band that keeps a stablecoin stable? Welcome to part two of our one-week special on the TerraUSD collapse. Today: How does an algorithmic stablecoin actually work?

Let’s remember the rubber band analogy. If the value of a stable coin moves too high, the rubber band has to snap back, and the same happens in the opposite direction.

There are two types of stable coins: Collateralized and algorithmic. Collateralized coins are easy to understand: There is real money in a central reserve backing them, and whenever someone wants to exchange a stablecoin back, the real money gets taken from the reserve.

Algorithmic stablecoins are different. They use computer code to balance their price automatically. The most simple ones just create more of their own coins - which decreases the price - or invalidate existing ones - which increases the price.

But since computer code can do much more complicated things, people have also built far crazier mechanisms into stable coins. The problem is that these work in 99.9% of the real-world use cases, but in those rare moments of extreme tension, the rubber band tears and the system collapses.

And that’s exactly what happened with TerraUSD. The algorithm tripped, fell on its nose, and kicked off a snowball that turned into an avalanche. So, in the next episode, let’s look behind the curtains of how TerraUSD was working to understand what went wrong.

TerraUSD meltdown, part 1: What is a peg? - Crypto in Plain English - Episode 165 - by cryptohunt.it May 16, 2022

Show notes

TerraUSD meltdown, part 1: What is a peg?

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

What is a peg and what does it do for stablecoins? Welcome to part one of our one-week special on the TerraUSD collapse.

You probably heard about the crypto meltdown of the not-so-stable stablecoin TerraUSD. And it all started with it losing its “peg”. But what is a peg anyhow, and what does losing it do?

A peg describes a very close relationship in value between two financial instruments. The price of one always follows the other’s very closely, something finance called “peg”.

In this case, TerraUSD was pegged to the US Dollar, which is just a fancy way of saying that its own value is always very close to one actual US Dollar.

Unlike other crypto currencies which fluctuate a lot in value, one TerraUSD should have always been worth one US Dollar.

But the system isn’t perfect, think of the peg like a rubber band between the two. In normal times, a TerraUSD could be worth 99c, or a dollar and a cent. The rubber band keeps them close enough for those differences to be very, very small and not matter in practice.

Until it lost the peg. That rubber band snapped, and the stablecoin lost its value and plummeted. It currently sits at just 17c, a total loss of 9 billion dollars which makes this one of the largest crypto meltdowns ever.

So: How on earth did that happen? Let’s dig into the inner workings of TerraUSD’s rubber band in the next episode.

Why does crypto go down when interest rates go up? - Crypto in Plain English - Episode 164 - by cryptohunt.it May 13, 2022

Show notes

Why does crypto go down when interest rates go up?

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

Today, let’s try and understand the recent events in the stock and crypto markets.

You’ve seen the news: The US Federal Reserve is raising interest rates and suddenly the markets freak out. What does one have to do with the other?

When a governments’ central bank raises interest rates, it means that they will guarantee a certain amount of return on investment to anyone. For you, that means you will soon get more interest for money in your savings account, thanks to the government.

But more money in savings accounts also means that more people will take money out of risky investments, such as stock and crypto, and put it back into savings. The reason is simple: It’s much safer, and will now make them enough to be happy with.

And because those people sell that stock and crypto, it drives prices lower. And suddenly other people get worried and also sell, causing a downward spiral.

So, why on earth would governments want this? Right now, it helps reduce high inflation: People lose some money in their investments, they spend less, prices have to go down. And it gives them another powerful tool: When central banks need to, they can now lower interest rates to induce the opposite effect: Increase stock prices when markets need stimulation.

Now you know why investments have lost value recently. Hang in there and keep learning!

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