“What we need to remember always our true North Star of why we started this in the first place, and that is to make sure that our money is the most decentralized and the most useful on the face of this f*****g planet!” That’s what Don Kwon, 30-year old founder of TerraLabs stated confidently on stage in New York back in 2021.
“At the end of this process, what is going to be beautiful is that TerraLabs is going to follow the organic trajectory of any other thing in the environment. We [are] going to come from nothing and go back to nothing,” explained the South Korean founder, aspiring to create a decentralized system that would eventually run itself.
At the time, he was a rising crypto celebrity that had created one of the fastest-growing projects in the crypto space. His two interrelated cryptocurrencies, TerraUSD (UST) and Terra (LUNA), were worth approximately $15 billion, a value that quadrupled over the months that followed.
Those fateful words became a self-fulfilling prophecy, as in mid-May this year, UST and LUNA collapsed to nearly $0, wiping out $60 billion of investor money. The scale of the disaster certainly matched that of Kwon’s ambitions.
From being seen as a “psychopath” by critics, to a misunderstood “genius” by his almost cult-like online community, Kwon fell from the top, leaving more questions than answers. So, as investors worldwide mourn their losses, should the dynamic founder be held accountable for his project’s massive failure? The answer is a resounding yes!
The Flight to the Moon and the Tragic Crash
Kwon managed to convince everyone with his vision of a new payment system that would upend the status quo and replace the world’s currencies. Terra became a hit in the crypto sphere, inspiring an almost devotional following of Kwon by so-called ‘LUNAtics’. The online community bought into Kwon’s ideas for the future of decentralized finance and the opportunity to become rich.
Large swathes of people put moon emojis in their names on social media, creating glorified memes about Kwon. Mike Novogratz, the billionaire founder of crypto asset management firm Galaxy Digital, showed his own commitment by getting a LUNA-inspired tattoo on his arm. In April, Kwon announced the birth of his daughter, whom he had named Luna, tweeting, “My dearest creation named after my greatest invention.”
Kwon’s ambitious idea was based on having two interrelated digital currencies that were designed to balance each other out. the stablecoin, TerraUSD (UST), was supposed to stay pegged at $1. Generally stablecoins are backed by tangible assets that sit in actual bank accounts, such as the U.S. dollar. However, UST was backed by its algorithmic relationship with the LUNA digital token.
LUNA was used as a protocol token as a way of reducing the volatility of the stablecoin on the Terra blockchain. In theory, the trick to keeping the stablecoin’s value at $1 laid in one’s ability to exchange one currency for the other at a fixed value.
However, on May 7th, preceding the considerable withdrawal of TerraUSD by users across the spectrum, things started to fall apart. The interconnected design of the ecosystem resulted in UST plummeting far below its dollar peg and entering a death spiral with LUNA. Kwon swiftly deployed much of the crypto’s reserves in order to try to bring the price of UST back up to a dollar, but the efforts proved to be made in vain. Within couple of days, Terra became practically worthless.
Despite some early resistance from the community, Kwon relaunched the collapsed network by hardforking to a new chain called ‘Terra 2.0’, and a new token was launched with the promise of helping to retrieve lost funds.
Experts’ Warnings and Kwon’s Arrogance
While the community of ‘LUNAtics’ called the crash an “attack,” blaming Wall Street giants for conspiring to destroy them, Terra’s downfall seems to have been inevitable. Indeed, analysts warned that it was written into the code of the project itself.
Experts had tried to warn Kwon that the balance between the two tokens was vulnerable to undergoing a collapse if too many people pulled their money out simultaneously. However, intoxicated by the vision of himself as the next coming of Satoshi Nakamoto, Kwon neglected the criticism.
In 2018, Cyrus Younessi, an analyst for crypto investment firm Scalar Capital, foreseen that this type of project could enter a “death spiral”, a situation in which a crash in the price of Luna would bring the stablecoin down with it. In an interview, he asserted: “This is crazy. This obviously doesn’t work.”
Kevin Zhou, a hedge fund manager at Galois Capital, repeatedly predicted that the two currencies would crash. Some even went so far as to name the project a Ponzi scheme. Charles Cascarilla, a founder of Paxos and rival stablecoin, expressed doubts about the underlying technology behind LUNA. Kwon responded to Cascarilla patronizingly, tweeting, “Wtf is Paxos.”
Wtf is Paxoshttps://t.co/yhnZBAqDEs
— Do Kwon 🌕 (@stablekwon) April 18, 2022
Despite the debatable technological solidity of the foundations of the project, Kwon confidently promoted the safety of his UST stablecoin across social media. “Those of you waiting for the earth to become unstable – I’m afraid you will be waiting until the age of men expires,” he tweeted with hubris.
Those of you waiting for the earth to become unstable-
I’m afraid you will be waiting until the age of men expires
Cities have returned to the dust
Oceans have gone bone dry
The map of continents have been drawn anew
And dinosaurs once again roam the earth
— Do Kwon 🌕 (@stablekwon) May 8, 2022
Indeed, just a week before UST lost its peg to the U.S. dollar, Kwon had been bragging, and ironically stated in an interview that “there’s also entertainment in watching companies die.”
Even days before the ultimate crash of Terra, Kwon looked down on doubters, calling them “poor”: “Anon, you could listen to C.T. influensooors about UST depegging for the 69th time, Or you could remember they’re all now poor, and go for a run instead.”
I’m up – amusing morning
Anon, you could listen to CT influensooors about UST depegging for the 69th time
Or you could remember they’re all now poor, and go for a run instead
— Do Kwon 🌕 (@stablekwon) May 7, 2022
Irresponsible Hubris, or a Deliberate Scam?
The crash happened a month ago, but its repercussions are still being felt across the industry. Scandal follows scandal, probably preventing Kwon from sleeping at night. More than 2,000 investors have since filed a class-action lawsuit against the CEO, while the U.S. Securities and Exchange Commission has opened its own investigation into potential money laundering. Just a couple of days ago, Kwon was accused by an alleged Terra insider of manipulating votes in the Terra community.
Some have speculated that Kwon was aware that Terra was about to collapse months in advance, and allegedly pulled out a large sum of money from corporate coffers during that time. Kwon himself denies the accusations, claiming that he also lost everything in the crash.
The collapse devastated traders; interestingly, investment firms cashed out early for some reason. Some sources claim that Kwon may have used his nonprofit organization, the LUNA Foundation Guard, to bail out whales by moving huge amounts of Bitcoin onto Binance and Gemini, using it to purchase UST from them for close to $1 at a time when UST was worth approximately $0.60 on secondary markets. To add to the long list of accusations and worries for Kwon, South Korean authorities have also accused TerraLabs of tax evasion.
With the investigation still ongoing, there is no final conclusion on whether Kwon is guilty or not. Regardless of the eventual decision made by law enforcement, Kwon has already been handed his sentence by the crypto community. The failure of TerraLabs was so immense that it shook the entire crypto asset class, erasing half a trillion dollars from the sector’s market cap, and leading to a break down of trust throughout the space.
Terra’s stablecoin led to the uncomfortable realization that not everything named “stable” is truly stable, and Kwon is primarily to blame for hyping up the promise that UST would always be safely pegged to $1. Stablecoins function in the same capacity as centralized bank deposits, so the rhetoric around them should be just as cautious.
Kwon and TerraLabs willfully concealed the potential dangers of their algorithm-based stablecoin, but continued to build up hype about its safe and stable yields. USDT was advertised on the same level as the dollar-backed USDC—a primarily false claim. If it were not a deliberate scam, then it was certainly an unforgivable lack of responsibility.
Legendary financier Bernie Madoff, who ran the biggest Ponzi scheme in history worth close to $64.8 billion, was sentenced to 150 years in prison. It is seemingly not a crime to be a lousy CEO under the current legal system. In this yet vaguely regulated crypto world, multi-billion-dollar mistakes and scams have little to no checks or balances in place. Even though Kwon has gone low profile since the crash, he still walks a free man, and may even be trying to rebuild his crypto empire: this should not be the case—Kwon needs to take responsibility for his house of cards.