Inside the $58b meltdown of trash-talking crypto bro’s ‘greatest invention’

Kathleen Breitman, a founder of the crypto platform Tezos, said the rise and fall of Luna and TerraUSD were driven by the irresponsible behaviour of the institutions backing Kwon. “You’ve seen a bunch of people trying to trade in their reputations to make quick bucks,” she said. Now, she added, “they’re trying to console people who are seeing their life savings slip out from underneath them. There’s no defence for that.”

Kwon, a 30-year-old graduate of Stanford University, founded Terraform Labs in 2018 after stints as a software engineer at Microsoft and Apple. (He had a partner, Daniel Shin, who later left the company.) His company claimed it was creating a “modern financial system” in which users could conduct complicated transactions without relying on banks or other middlemen.

Shin and Kwon began marketing the Luna currency in 2018. In 2020, Terraform started offering TerraUSD, which is known as a stablecoin, a type of cryptocurrency designed to serve as a reliable means of exchange. Stablecoins are typically pegged to a stable asset like the U.S. dollar and are not supposed to fluctuate in value like other cryptocurrencies. Traders often use stablecoins to buy and sell other riskier assets.

But TerraUSD was risky even by the standards of experimental crypto technology. Unlike the popular stablecoin Tether, it was not backed by cash, treasuries or other traditional assets. Instead, it derived its supposed stability from algorithms that linked its value to Luna. Kwon used the two related coins as the basis for more elaborate borrowing and lending projects in the murky world of decentralized finance, or DeFi.

From the beginning, crypto experts were sceptical that an algorithm would keep Kwon’s twin cryptocurrencies stable. In 2018, a white paper outlining the stablecoin proposal reached the desk of Cyrus Younessi, an analyst for the crypto investment firm Scalar Capital. Younessi sent a note to his boss, explaining that the project could enter a “death spiral” in which a crash in Luna’s price would bring the stablecoin down with it.

“I was like, ‘This is crazy,’” he said in an interview. “This obviously doesn’t work.”

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As Luna caught on, the naysayers grew louder. Charles Cascarilla, a founder of Paxos, a blockchain company that offers a competing stablecoin, cast doubt on Luna’s underlying technology in an interview last year. (Kwon responded by taunting him on Twitter: “Wtf is Paxos.“) Kevin Zhou, a hedge fund manager, repeatedly predicted that the two currencies would crash.

But venture investment came pouring in anyway to fund projects built on Luna’s underlying technology, like services for people to exchange cryptocurrencies or borrow and lend TerraUSD. Investors including Arrington Capital and Coinbase Ventures shovelled in more than $US200 million between 2018 and 2021, according to PitchBook, which tracks funding.

In April, Luna’s price rose to a peak of $US116 from less than $US1 in early 2021, minting a generation of crypto millionaires. A community of retail traders formed around the coin, hailing Kwon as a cult hero. Mike Novogratz, CEO of Galaxy Digital, which invested in Terraform Labs, announced his support by getting a Luna-themed tattoo.

Kwon, who operates out of South Korea and Singapore, gloated on social media. In April, he announced that he had named his newborn daughter Luna, tweeting, “My dearest creation named after my greatest invention.”

The downfall of Luna and TerraUSD offers a case study in crypto hype and who is left holding the bag when it all comes crashing down.

“It’s the cult of personality — the bombastic, arrogant, Do Kwon attitude — that sucks people in,” said Brad Nickel, who hosts the cryptocurrency podcast “Mission: DeFi.”

Martin Baumann, a founder of the Hong Kong-based venture firm CMCC Global, said his company sold its holdings in March, at about $US100 per coin. “We had gotten increasing concerns,” he said in an email, “both from tech side as well as regulatory side.” (CMCC and Hack VC declined to comment on their profits.)

Even Kwon alluded to the possibility of a crypto collapse, publicly joking that some crypto ventures might ultimately go under. He said he found it “entertaining” to watch companies crumble.

Last week, falling crypto prices and challenging economic trends combined to create a panic in the markets. The price of Luna fell to nearly zero. As critics had predicted, the price of TerraUSD crashed in tandem, dropping from its $US1 peg to as low as 11 cents this week. In a matter of days, the crypto ecosystem Kwon had built was essentially worthless.

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“I am heartbroken about the pain my invention has brought on all of you,” he tweeted last week.

Some of Kwon’s major investors have lost money. Changpeng Zhao, CEO of the crypto exchange Binance, which invested in Terraform Labs, said his firm had bought $US3 million of Luna, which grew to a peak value of $US1.6 billion. But Binance never sold its tokens. Its Luna holdings are currently worth less than $US3,000.

That loss is still only a drop in the bucket for a company as large as Binance, whose US arm is valued at $US4.5 billion.

“Most of the VCs have the analysts they need to assess these things,” Nickel said. “They may have figured they could cash out on the backs of retail.”

Much of the pain of the collapse has instead been felt by regular traders. On a Reddit forum for Luna evangelists, users shared lists of suicide hotlines as people who had poured their savings into Luna or TerraUSD expressed despair.

This article originally appeared in The New York Times.

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