Crypto Icarus: A Cautionary Tale

Remember the story of Icarus from middle school literature class? His dad built him some wings out of wax and feathers and warned him not to fly too high or too low. As soon as Icarus got airborne he was betrayed by his own hubris and flew too close to the sun. His wings melted and he died crashing into the sea. The stories include images of feathers falling away from Icarus’ melting wings until he was flapping only his bare arms.

Now imagine a retelling of Icarus; same story, but the stakes are much higher. Imagine that this time he’s flying with a tactical nuke strapped to his back. When he falls to Earth he not only kills himself but wipes out the population and causes an economic catastrophe. 

That’s pretty much what happened in crypto last week. 

A young man named Do Kwon developed a new blockchain called Terra and a new stablecoin called UST. Stablecoins are digital tokens pegged to the dollar (or price of gold or Euros or whatever.) The three most commonly used stablecoins, USDT, USDC, and DAI, are backed one-for-one by paper dollars or other financial instruments. 

Do Kwon’s UST was different. UST was pegged to the dollar, but backed by another digital token Do Kwon developed called LUNA. The idea was that if UST lost its $1 value, Terra would mint and sell enough LUNA to prop up the new stablecoin.  It seems that Do Kwon really believed he’d invented perpetual-motion money. It seemed like an innovation.

Do Kwon - Image from Coindesk

Do Kwon encouraged UST investment by offering a generous 20% interest rate on the token. He paid the interest by minting more LUNA tokens. The algorithmic stablecoin idea generated excitement from trusted voices who in hindsight should have known better. Massive investment funds poured money into the scheme, thrilled for the returns. Plenty of smart people criticized Do Kwon’s wax wings, posting publicly that the fundamentals were wrong, that UST was a house built on sand. Do Kwon answered criticism with name calling and replies that basically said “come at me bro.”

 An unknown actor with deep pockets took Do Kwon up on the invitation, and used $1B in bitcoin to launch an attack on the Terra protocol. Maybe if the overall economy had been healthy the attack wouldn’t have been as devastating. Maybe if Do Kwon hadn’t been so obnoxious the attacker might have chosen another target. The attack was brutally successful. UST couldn’t hang on to its $1 value, and the value of both UST and LUNA plummeted to the earth in literal minutes. 

To make it all worse, The Terra team didn’t seem to have a contingency plan, no parachute to deploy as their feathers melted away. Terra flapped its bare arms and went into a flat spin. Their lack of planning for a crisis, not executing an emergency checklist, demonstrates that the Terra team couldn’t imagine contingencies. 

The Terra crash detonated that tactical nuke and contaminated an already down-bad crypto market, wiping out $34B in investments and dragging every other asset down further into the darkness. Worse, Terra’s crash contaminated the narrative. Terra proved the crypto critics right this time: (a) it’s all a big ponzi scheme (it was,) and (b) crypto bros are a bunch of techie grifters (these were.) Terra Reddits and Discord channels are now full of suicide hotline postings; limitless hubris can have an actual human cost. 

Icarus’ dad told him not to fly too high, but also not too low. We’re all messing around with crypto because we can’t imagine flying low. We all probably think we’re a little smarter than our normie neighbors who’ve maybe heard of bitcoin. The crypto narrative is full of “fortune favors the bold” messages, featuring explorers and astronauts, and Larry David rejecting no-brainer good ideas. We’ve got a higher risk tolerance than those normies for sure.

It takes some hubris to do great things. Really it takes some hubris to do any new thing. The people who start a landscaping service or open a coffee shop have to be willing to fail, willing to chat about their failed enterprises over dinner with the inlaws. Without some hubris we don't do anything worth doing.

For decades the highest of all high-fliers was Chuck Yeager. Yeager fearlessly broke every speed and altitude aviation record. He was famous for many things, including: his (a) down-home humility (he named the fastest plane ever built after his wife), and (b) his relentless discipline about the fundamentals of aviation. Chuck was religious about the basics of airmanship, and he certainly had a plan for when things went sideways.

Chuck Yeager

Yeager crash landed over and over again. That’s what happens when you push the envelope, when you fly close to the sun. When he had to ditch he put the plane down in empty lake beds, far from the nearest population. During his last bailout he melted his own face and hands, but walked to the rescue helicopter with his parachute folded up under his arm the exactly the way the flight manual directed.  

Do Kwon was a brilliant high flier, but seemed more inclined to celebrate obnoxiousness than focus on the fundamentals. He was not receptive to criticism. In November 2021 a Twitter user detailed a potential attack vector against UST that looked like a blueprint for the eventual attack. Instead of instituting the relevant security measures to the LUNA/UST protocol, Do Kwon called the critic “stupid” and the critisim“retarded.” Six months later $34B was deleted from the Terra ecosystem and who knows how much from the overall crypto market.

All wings are made of wax and we high-fliers live to take risks. For miners (and everyone else) the object lesson from Do Kwon may be to ensure that the swagger we need to get airborne is built on knowledge, experience, and rigor. Flying too high for miners may manifest in overextension of capabilities; more machines, more wattage, more ventilation. We overclock ourselves to squeeze out a little more hashrate. Most business models are built on everything going right. Running ourselves and our facilities at 110% makes us fragile when something goes wrong. 

When you’re overleveraged, even mentally overleveraged, a small glitch becomes a cascading failure. Which reminds me, pollen season has come and gone and it’s time for the spring filter change.

Andy Howell

Community & Policy Lead | Print Crypto, Inc