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How a Trash-Talking Crypto Founder Caused a $40 Billion Crash

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Do Kwon, a trash-talking entrepreneur from South Korea, called the cryptocurrency he created in 2018 “my biggest invention.” In countless tweets and interviews, he trumpeted the world-changing potential of the currency, Luna, rallying a band of investors and supporters he proudly known as “Lunatics.”

Mr. Kwon’s company, Terraform Labs, raised greater than $200 million from investment firms resembling Lightspeed Enterprise Partners and Galaxy Digital to fund crypto projects built with the currency, whilst critics questioned its technological underpinnings. Luna’s total value ballooned to greater than $40 billion, making a frenzy of pleasure that swept up day traders and start-up founders, in addition to wealthy investors.

Mr. Kwon dismissed concerns with a taunt: “I don’t debate the poor.”

But last week, Luna and one other currency that Mr. Kwon developed, TerraUSD, suffered a spectacular collapse. Their meltdowns had a domino effect on the remaining of the cryptocurrency market, tanking the worth of Bitcoin and accelerating the lack of $300 billion in value across the crypto economy. This week, the worth of Luna remained near zero, while TerraUSD continued to slip.

The downfall of Luna and TerraUSD offers a case study in crypto hype and who’s left holding the bag when all of it comes crashing down. Mr. Kwon’s rise was enabled by respected financiers who were willing to back highly speculative financial products. A few of those investors sold their Luna and TerraUSD coins early, reaping substantial profits, while retail traders now grapple with devastating losses.

Pantera Capital, a hedge fund that invested in Mr. Kwon’s efforts, made a profit of about 100 times its initial investment, after selling roughly 80 percent of its holdings of Luna during the last 12 months, said Paul Veradittakit, an investor on the firm.

Pantera turned $1.7 million into around $170 million. The recent crash was “unlucky,” Mr. Veradittakit said. “Loads of retail investors have lost money. I’m sure a whole lot of institutional investors have, too.”

Mr. Kwon didn’t reply to messages. Most of his other investors declined to comment.

Kathleen Breitman, a founding father of the crypto platform Tezos, said the rise and fall of Luna and TerraUSD were driven by the irresponsible behavior of the institutions backing Mr. Kwon. “You’ve seen a bunch of individuals attempting to trade of their reputations to make quick bucks,” she said. Now, she said, “they’re attempting to console people who find themselves seeing their life savings slip out from underneath them. There’s no defense for that.”

Mr. 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 corporate.) His company claimed it was making a “modern economic system” wherein users could conduct complicated transactions without counting on banks or other middlemen.

Mr. Shin and Mr. Kwon began marketing the Luna currency in 2018. In 2020, Terraform began offering TerraUSD, which is referred to as a stablecoin, a style of cryptocurrency designed to function a reliable technique of exchange. Stablecoins are typically pegged to a stable asset just like the U.S. dollar and aren’t imagined to fluctuate in value like other cryptocurrencies. Traders often use stablecoins to purchase and sell other riskier assets.

But TerraUSD was dangerous even by the standards of experimental crypto technology. Unlike the favored stablecoin Tether, it was not backed by money, treasuries or other traditional assets. As a substitute, it derived its supposed stability from algorithms that linked its value to Luna. Mr. Kwon used the 2 related coins as the premise for more elaborate borrowing and lending projects within the murky world of decentralized finance, or DeFi.

From the start, crypto experts were skeptical that an algorithm would keep Mr. 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. Mr. Younessi sent a note to his boss, explaining that the project could enter a “death spiral” wherein a crash in Luna’s price would bring the stablecoin down with it.

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

As Luna caught on, the naysayers grew louder. Charles Cascarilla, a founding father of Paxos, a blockchain company that provides a competing stablecoin, forged doubt on Luna’s underlying technology in an interview last 12 months. (Mr. Kwon responded by taunting him on Twitter: “Wtf is Paxos.”) Kevin Zhou, a hedge fund manager, repeatedly predicted that the 2 currencies would crash.

But enterprise investment got here 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 shoveled in greater than $200 million between 2018 and 2021, in line with PitchBook, which tracks funding.

In April, Luna’s price rose to a peak of $116 from lower than $1 in early 2021, minting a generation of crypto millionaires. A community of retail traders formed across the coin, hailing Mr. Kwon as a cult hero. Mike Novogratz, chief executive of Galaxy Digital, which invested in Terraform Labs, announced his support by getting a Luna-themed tattoo.

Mr. 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 biggest invention.”

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

Earlier this 12 months, a nonprofit that Mr. Kwon also runs sold $1 billion of Luna to investors, using the proceeds to purchase a stockpile of Bitcoin — a reserve designed to maintain the worth of TerraUSD stable if the markets ever dipped.

Around the identical time, a few of the enterprise capital firms that had backed Mr. Kwon began to have concerns. Hack VC, a enterprise firm focused on crypto, sold its Luna tokens in December, partly because “we felt the market was due for a broader pullback,” said Ed Roman, a managing director on the firm.

Martin Baumann, a founding father of the Hong Kong-based enterprise firm CMCC Global, said his company sold its holdings in March, at about $100 per coin. “We had gotten increasing concerns,” he said in an email, “each from tech side in addition to regulatory side.” (CMCC and Hack VC declined to comment on their profits.)

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

Last week, falling crypto prices and difficult economic trends combined to create a panic within the markets. The worth of Luna fell to almost zero. As critics had predicted, the worth of TerraUSD crashed in tandem, dropping from its $1 peg to as little as 11 cents this week. In a matter of days, the crypto ecosystem Mr. Kwon had built was essentially worthless.

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

A few of Mr. Kwon’s major investors have lost money. Changpeng Zhao, chief executive of the crypto exchange Binance, which invested in Terraform Labs, said his firm had bought $3 million of Luna, which grew to a peak value of $1.6 billion. But Binance never sold its tokens. Its Luna holdings are currently price lower than $3,000.

That loss remains to be only a drop within the bucket for a corporation as large as Binance, whose U.S. arm is valued at $4.5 billion.

Expand Your Cryptocurrency Vocabulary

Card 1 of 9

Bitcoin. A Bitcoin is a digital token that could be sent electronically from one user to a different, anywhere on the earth. Bitcoin can also be the name of the payment network on which this kind of digital currency is stored and moved.

Blockchain. A blockchain is a database maintained communally and that reliably stores digital information. The unique blockchain was the database on which all Bitcoin transactions were stored, but non-currency-based firms and governments are also attempting to use blockchain technology to store their data.

Coinbase. The primary major cryptocurrency company to list its shares on a U.S. stock exchange, Coinbase is a platform that permits people and firms to purchase and sell various digital currencies, including Bitcoin, for a transaction fee.

Web3. The name “web3” is what some technologists call the concept of a latest form of web service that’s built using blockchain-based tokens, replacing centralized, corporate platforms with open protocols and decentralized, community-run networks.

DAOs. A decentralized autonomous organization, or DAO, is an organizational structure built with blockchain technology that is usually described as a crypto co-op. DAOs form for a typical purpose, like investing in start-ups, managing a stablecoin or buying NFTs.

“Many of the V.C.s have the analysts they should assess this stuff,” Mr. Nickel said. “They could have figured they may money out on the backs of retail.”

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

The crash has also devastated the enthusiasts who were constructing start-ups that used the crypto infrastructure developed by Mr. Kwon.

Neel Somani, 24, quit his job as a quantitative researcher at Citadel, a hedge fund, in February to work on a project that connected Luna’s underlying blockchain to Ethereum, one other crypto system.

In April, Mr. Somani joined Terra Hacker House, a monthlong program in a Chicago office sponsored by Terraform Labs and its investors, designed to incubate projects built on Mr. Kwon’s technology. Inside a couple of weeks, Mr. Somani lined up $10 million in commitments for enterprise funding that valued his project, Terranova, at $65 million. He was near hiring three employees, he said, and had 40 customers excited concerning the idea.

After Luna and TerraUSD tumbled, Mr. Somani and his fellow hackers initially thought Mr. Kwon and his partners could turn things around. But by last Tuesday, Mr. Somani realized it was over, and felt relieved he hadn’t yet accepted the funding. He lost around $20,000 of Luna, he said, which didn’t trouble him since he has made money on other dangerous stock and crypto bets.

During the last week, the desks on the hacker house have emptied. A Telegram group called Rebuilding Terra, with nearly 200 members, has been actively discussing the way to salvage projects and funds.

Mr. Somani is sanguine. “For those of us who’re crypto builders, the feast and famine mentality comes really naturally, and that’s perhaps what attracted us to the community,” he said.

On Thursday, he plans to pitch his now-obsolete technology on the hacker house’s demo day. Most other groups have left this system, he said, so he expects less competition for a $50,000 first-place prize.

“It’s in U.S. dollars,” he said. “I asked.”

Kirsten Noyes contributed research.

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