After Do Kwon indicated that he would inject $300 million into the reserves that underpinned the 20% yield of his cryptocurrency luna, a Twitter user asked him where would the money come from.
Kwon’s response was succinct: “Your mother, of course.”
Now the brash 30-year-old Korean, who regularly mocks his critics as ‘poor’, is being asked to report on the $40 billion collapse this month of a creation he has once described as “the oldest and most widely used algo”.[rithmic] existing stablecoin”, before adding: “Bow to the king”.
As the casualties mounted, South Korean news reports linked the crash to a local increase in online searches for Seoul’s Mapo Bridge, a notorious suicide spot. Local police announced increased patrols around the bridge in response.
South Korean prosecutors opened an investigation into Kwon’s Terraform Labs on Friday after five Korean crypto investors with combined damages of 1.4 billion won ($1.1 million) filed a criminal complaint alleging fraud and violation of financial regulations.
“Do Kwon was like a successful cult leader,” said Donghwan Kim of Blitz Labs, a Seoul-based crypto consulting firm. “But now he’s the most hated man in Korea.”
Kwon attended an elite foreign language high school in Seoul and studied computer science at Stanford University. In 2018, he co-founded Terraform Labs in Singapore with Daniel Shin, the prominent founder of Korean unicorn Ticket Monster.
The pair launched the stablecoin terraUSD in 2020. Terra is expected to hold a stable value of $1. Its peg to the dollar was maintained by an algorithmic relationship with the cryptocurrency luna. To buy terra, users need luna, and vice versa.
This seesaw dynamic is supposed to keep the price of terra stable, but in early May, a run took place. As luna’s supply was sold, the value of the cryptocurrency plummeted towards zero, undermining the delicate algorithmic balance of the ecosystem and breaking the peg of the earth to the dollar.
The Luna Foundation Guard, a non-profit organization supporting the terra ecosystem, failed to mobilize enough bitcoin reserves to safeguard terra’s stability, and faith in the model evaporated.
“The market capitalization of coins grew too fast while their reserves or tools to defend their value were not yet ready,” said a former colleague close to Kwon. “They started preparing reserves, buying $3.5 billion worth of Bitcoin, but it was too late.”
Individual investors had been attracted to a system in which customers could lend their land for a 20% return. But hundreds of millions of dollars of investment in Terraform Labs came from venture capital firms, including Galaxy Digital, whose chief executive Mike Novogratz would later acquire a luna tattoo on his left shoulder.
“The commitments of some of the most respected funds are a testament to the shared vision to bring decentralized finance to the masses,” Kwon said in July last year.
Do Kwon’s close colleague at Terraform Labs had another explanation: Many investors had been “hypnotized by his genius.”
“Do was able to attract many famous investors because many people in the crypto market agreed with his philosophy and slogans on the need for decentralized finance and DeFi tokens,” the former colleague said. “They found the algorithm model fresh and appealing because there was a growing need for stablecoins and the coins were in no way tied to the real economy, only backed by each other and Bitcoin.”
Kwon’s high-profile backers, global marketing strategy and killer social media persona have all helped attract attention and retail investors, some of whom have formed into an army of online supporters dubbed the Lunatics.
The skeptics were overlooked. “I don’t debate poor people on Twitter, and sorry I don’t have a change for her at the moment,” Kwon wrote last year after a British economist raised doubts about the algorithmic stablecoin model.
“Crazy people believed that his lack of manners was a way to protect their wealth,” Donghwan Kim said, “so his arrogance received a lot of support from the community and it quickly became his trademark.”
Kwon’s former colleague from Terraform Labs identified the decision to offer investors a 20% annual return as when terra/luna began to “grow too fast.”
“About Won14tn-15tn ($11-12 billion) was deposited in just one year after it started offering the 20% yield,” he said. “Retail investors were attracted by the high yield, while venture capital was attracted by the rapid growth of the coins. The speed of growth was unsustainable.
Another former colleague, ex-Terraform Labs engineer Kang Hyung-suk said, “The engineers inside knew all the risk of the 20% return. They all thought it wouldn’t be sustainable because we didn’t have enough funds to support it. But no one voiced their concern to Do, who often ignored opinions that contradicted him.
Kim Hyoung-joong, director of the Center for Cryptocurrency Research at Korea University, said, “Kwon was calling for decentralized finance, but he was making all the decisions alone. It’s ironic that corporate decision-making is so centralized.
The death spiral has claimed high-profile victims.
“Still poor,” Changpeng Zhao, founder of crypto exchange Binance, tweeted in response to a news report about the value of his investment in Luna falling from $1.6 billion to less than $2,500.
Hashed, a Seoul-based venture capital firm that was a major backer and promoter of Do Kwon and Terraform Labs, is estimated by crypto site CoinDesk to have lost more than $3.5 billion from the crash.
But the most devastating losses were borne by ordinary retail investors.
Ji-hye, a South Korean office worker and mother of three children under the age of five, said she invested all of her savings in cryptocurrency after reading about the 20% return and seeing that Daniel Shin was involved in the project.
“I did my best to accumulate savings, but the bank rate seemed far too low during this period of high inflation. I was desperate for ways to save more for my three children,” said Ji-hye, whose name has been changed to protect her identity.
“I saw my savings increase day by day with the 20% interest rate, so I borrowed more money from the bank and put more on the land. It’s my fault for not having deepened before investing, but I despair without my savings.
Kwon, who did not respond to a Financial Times request for comment, wrote on Twitter following the collapse that “I am heartbroken at the pain my invention has inflicted on you all.”
But still defiant, he also tried to garner developer support for a second chance. Terra’s failure, he argued in an online manifesto published last week, was “a chance to rise from the ashes”.
Additional reporting by Scott Chipolina in London