By Frances Yue
At the start of 2022, Neel Somani was a quantitative research analyst working at Citadel, billionaire Ken Griffin’s powerhouse hedge-fund firm, which manages about $47 billion. But at age 24, Somani quit in late February with dreams of getting rich in crypto and helping to build a more decentralized financial system.
Somani chose to focus on Terra, one of the most popular blockchain networks, and its related cryptocurrency, USDTerra , ranked among the 10 largest cryptocurrencies by market capitalization at the time.
Last week, the $50 billion Terra blockchain collapsed, handing investors massive losses and crushing Somani’s dream just weeks after he started to pursue it.
USDTerra, or UST, was known as a stablecoin, meaning it was structured to always trade one-to-one against the U.S. dollar. But starting on May 9, UST fell below $1. The fall rapidly accelerated, with the coin trading as low as 5 cents at one point. The price of its sister coin, Luna /zigman2/quotes/232264652/realtime LUNAUSD -1.50% , which backed UST, plunged to close to zero in less than a week, from over $80 in early May. Along with the price drop, the Terra blockchain was halted twice on May 12, once to “prevent governance attack,” tweeted Terraform Labs, which backs the blockchain.
More than $48 billion of market capitalization in UST and Luna evaporated in a week, and the impact was felt broadly among cryptocurrencies. To defend UST’s peg, Luna Foundation Guard, which supports the stablecoin, spent over 80,000 bitcoin /zigman2/quotes/31322028/realtime BTCUSD +2.17% in its reserve, adding selling pressure to the cryptocurrency, which recently changed hands at levels some 56% lower than its all-time high.
As recently as early April, Somani was bullish on UST. He tweeted on April 5, “I quit my job at Citadel to build a project in web3!” On May 13, he retweeted the same post, with a touch of self-mockery, “I quit my job at Citadel to get wrecked in web3.”
Somani, who graduated from the University of California, Berkeley, with a triple major in computer science, mathematics and business administration, had worked at Citadel as a quantitative research analyst, with a focus on commodities. He also once worked at Airbnb as a software engineer, according to his LinkedIn page.
On a recent video call with MarketWatch, Somani, sitting in his apartment in Chicago, seemed calm, though he said he is now “essentially unemployed,” and had to scrap his newly started venture and lost about $20,000 from his investments in Luna.
Still, he doesn’t regret his decision. “I recognize this was a setback, but also it comes [with] the territory. I knew what I was getting myself into when I quit my job to do crypto,” Somani said in the interview.
When Somani left his job to start his own business, his parents hated the idea. “Because they saw how much I was making at Citadel, and they were confused why that was not enough,” he said. He got more support from his friends, who are mostly at his age. Some had become “very successful” in crypto.
Somani declined to reveal his salary at Citadel. The average annual compensation of a quantitative researcher at Citadel comes to over $400,000, according to Glassdoor, based on 176 salaries including 11 that reported cash bonuses.
Somani said he made the move to crypto because it was more interesting, and “there’s also the potential to make more money.”
“Crypto seemed like a good intersection between my interests and what I wanted to do with my career,” Somani said, adding that he has always wanted to become an entrepreneur. “I just saw this cycle of feast and famine, where people made a ton of money and lost everything. I wanted to take on more risk in my career, honestly. So I thought this is the right field.”
In fact, a few years ago, when Somani was still in high school and was given free fractions of bitcoin at hackathons, he threw them away. “I thought they were useless at that time,” he said.
During the past two years, especially after seeing how the cryptocurrency was used amid Russia’s invasion of Ukraine, he recognized that “we actually do need some kind of decentralization to prevent big authorities or big corporations from basically blocking access to financial freedom,” Somani said.
Despite Terra’s collapse, Somani has not been deterred from trying to make it big in crypto. He is already drafting his next business idea, still in crypto, and is preparing to announce it in the coming weeks.
Of course, Somani is not the only true believer who has left a well-paying, stable job in more traditional finance, or tech, to work in crypto. Hiring has been fast, as the nascent industry evolves quickly. In 2021, crypto hires surged 73% from two years earlier, according to a study by LinkedIn Economic Graph published in April. In contrast, the number of hires in traditional finance declined by 1% over the same period.
Terra’s death bell?
Somani was not, however, oblivious to the risks he and others were taking. He understood the key issues around Terra. In a blog post published on April 5 where he outlined his business plan , Somani highlighted that “history will view algorithmic stablecoins as either a) a disaster as inevitable as the subprime mortgage crisis or b) the greatest recent innovation in financial history.”
He pointed out the risk of a “death spiral,” a concern that had been shared by some other critics of Terra.
Based on Terra’s design, investors are supposed to be able to exchange one UST for $1 in Luna, and vice versa. In relatively stable market conditions, when UST is trading below $1, traders have an incentive to buy one UST and exchange it for $1 of Luna to make a profit. In theory, as UST is burned to mint Luna, the former’s supply would be reduced and its price pushed up back to $1. That’s how the stablecoin is supposed to maintain its peg to the U.S. dollar.
However, the design had weaknesses. During broad selloffs, when a massive amount of UST is sold, the stablecoin could fall below $1. As arbitrageurs are incentivized to burn UST and mint Luna, the latter’s supply could rise and its price fall sharply. Such a development could, in turn, shake investors’ confidence in the ecosystem and further reduce demand for UST. This is what appears to have occurred last week, analysts noted.