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

Do Kwon, a trash-talking entrepreneur from South Korea, referred to as the cryptocurrency he created in 2018 “my greatest invention.” In numerous tweets and interviews, he trumpeted the world-changing potential of the forex, Luna, rallying a band of traders and supporters he proudly known as “Lunatics.”

Mr. Kwon’s firm, Terraform Labs, raised greater than $200 million from funding corporations comparable to Lightspeed Venture Partners and Galaxy Digital to fund crypto initiatives constructed with the forex, at the same time as critics questioned its technological underpinnings. Luna’s whole worth ballooned to greater than $40 billion, creating a frenzy of pleasure that swept up day merchants and start-up founders, in addition to rich traders.

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

But final week, Luna and one other forex that Mr. Kwon developed, TerraUSD, suffered a spectacular collapse. Their meltdowns had a domino impact on the remainder of the cryptocurrency market, tanking the worth of Bitcoin and accelerating the lack of $300 billion in worth throughout the crypto financial system. This week, the worth of Luna remained near zero, whereas TerraUSD continued to slip.

The downfall of Luna and TerraUSD affords a case research in crypto hype and who’s left holding the bag when all of it comes crashing down. Mr. Kwon’s rise was enabled by revered financiers who have been prepared to again extremely speculative monetary merchandise. Some of these traders offered their Luna and TerraUSD cash early, reaping substantial earnings, whereas retail merchants now grapple with devastating losses.

Pantera Capital, a hedge fund that invested in Mr. Kwon’s efforts, made a revenue of about 100 instances its preliminary funding, after promoting roughly 80 % of its holdings of Luna over the past 12 months, stated Paul Veradittakit, an investor on the agency.

Pantera turned $1.7 million into round $170 million. The latest crash was “unfortunate,” Mr. Veradittakit stated. “A lot of retail investors have lost money. I’m sure a lot of institutional investors have, too.”

Mr. Kwon didn’t reply to messages. Most of his different traders declined to remark.

Kathleen Breitman, a founding father of the crypto platform Tezos, stated the rise and fall of Luna and TerraUSD have been pushed by the irresponsible habits of the establishments backing Mr. Kwon. “You’ve seen a bunch of people trying to trade in their reputations to make quick bucks,” she stated. Now, she stated, “they’re trying to console people who are 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, based Terraform Labs in 2018 after stints as a software program engineer at Microsoft and Apple. (He had a companion, Daniel Shin, who later left the corporate.) His firm claimed it was creating a “modern financial system” during which customers might conduct difficult transactions with out counting on banks or different middlemen.

Mr. Shin and Mr. Kwon started advertising and marketing the Luna forex in 2018. In 2020, Terraform began providing TerraUSD, which is called a stablecoin, a kind of cryptocurrency designed to function a dependable technique of change. Stablecoins are usually pegged to a steady asset just like the U.S. greenback and are usually not purported to fluctuate in worth like different cryptocurrencies. Traders typically use stablecoins to purchase and promote different riskier belongings.

But TerraUSD was dangerous even by the requirements of experimental crypto expertise. Unlike the favored stablecoin Tether, it was not backed by money, treasuries or different conventional belongings. Instead, it derived its supposed stability from algorithms that linked its worth to Luna. Mr. Kwon used the 2 associated cash as the premise for extra elaborate borrowing and lending initiatives within the murky world of decentralized finance, or DeFi.

From the start, crypto specialists have been skeptical that an algorithm would preserve Mr. Kwon’s twin cryptocurrencies steady. In 2018, a white paper outlining the stablecoin proposal reached the desk of Cyrus Younessi, an analyst for the crypto funding agency Scalar Capital. Mr. Younessi despatched a word to his boss, explaining that the challenge might enter a “death spiral” during which a crash in Luna’s worth would deliver the stablecoin down with it.

“I was like, ‘This is crazy,’” he stated 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 firm that provides a competing stablecoin, forged doubt on Luna’s underlying expertise in an interview final 12 months. (Mr. Kwon responded by taunting him on Twitter: “Wtf is Paxos.”) Kevin Zhou, a hedge fund supervisor, repeatedly predicted that the 2 currencies would crash.

But enterprise funding got here pouring in anyway to fund initiatives constructed on Luna’s underlying expertise, like companies for individuals to change cryptocurrencies or borrow and lend TerraUSD. Investors together with Arrington Capital and Coinbase Ventures shoveled in additional than $200 million between 2018 and 2021, based on PitchBook, which tracks funding.

In April, Luna’s worth rose to a peak of $116 from lower than $1 in early 2021, minting a era of crypto millionaires. A group of retail merchants shaped across the coin, hailing Mr. Kwon as a cult hero. Mike Novogratz, chief govt of Galaxy Digital, which invested in Terraform Labs, introduced his assist by getting a Luna-themed tattoo.

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

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

Earlier this 12 months, a nonprofit that Mr. Kwon additionally runs offered $1 billion of Luna to traders, utilizing the proceeds to purchase a stockpile of Bitcoin — a reserve designed to maintain the worth of TerraUSD steady if the markets ever dipped.

Around the identical time, among the enterprise capital corporations that had backed Mr. Kwon began to have considerations. Hack VC, a enterprise agency targeted on crypto, offered its Luna tokens in December, partly as a result of “we felt the market was due for a broader pullback,” stated Ed Roman, a managing director on the agency.

Martin Baumann, a founding father of the Hong Kong-based enterprise agency CMCC Global, stated his firm offered its holdings in March, at about $100 per coin. “We had gotten increasing concerns,” he stated in an e-mail, “both from tech side as well as regulatory side.” (CMCC and Hack VC declined to touch upon their earnings.)

Even Mr. Kwon alluded to the potential of a crypto collapse, publicly joking that some crypto ventures may in the end go beneath. He stated he discovered it “entertaining” to look at firms crumble.

Last week, falling crypto costs and difficult financial developments mixed to create a panic within the markets. The worth of Luna fell to just about 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 constructed was primarily nugatory.

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

Some of Mr. Kwon’s main traders have misplaced cash. Changpeng Zhao, chief govt of the crypto change Binance, which invested in Terraform Labs, said his agency had purchased $3 million of Luna, which grew to a peak worth of $1.6 billion. But Binance by no means offered its tokens. Its Luna holdings are presently value lower than $3,000.

That loss continues to be solely a drop within the bucket for a firm as giant as Binance, whose U.S. arm is valued at $4.5 billion.

“Most of the V.C.s have the analysts they need to assess these things,” Mr. Nickel stated. “They may have figured they could cash out on the backs of retail.”

Much of the ache of the collapse has as an alternative been felt by common merchants. On a Reddit discussion board for Luna evangelists, customers shared lists of suicide hotlines, as individuals who had poured their financial savings into Luna or TerraUSD expressed despair.

The crash has additionally devastated the fanatics who have been constructing start-ups that used the crypto infrastructure developed by Mr. Kwon.

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

In April, Mr. Somani joined Terra Hacker House, a monthlong program in a Chicago workplace sponsored by Terraform Labs and its traders, designed to incubate initiatives constructed on Mr. Kwon’s expertise. Within a few weeks, Mr. Somani lined up $10 million in commitments for enterprise funding that valued his challenge, Terranova, at $65 million. He was near hiring three staff, he stated, and had 40 clients excited in regards to the concept.

After Luna and TerraUSD tumbled, Mr. Somani and his fellow hackers initially thought Mr. Kwon and his companions might flip issues round. But by final Tuesday, Mr. Somani realized it was over, and felt relieved he hadn’t but accepted the funding. He misplaced round $20,000 of Luna, he stated, which didn’t hassle him since he has made cash on different dangerous inventory and crypto bets.

Over the final week, the desks on the hacker home have emptied. A Telegram group referred to as Rebuilding Terra, with almost 200 members, has been actively discussing how one can salvage initiatives and funds.

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

On Thursday, he plans to pitch his now-obsolete expertise on the hacker home’s demo day. Most different teams have left this system, he stated, so he expects much less competitors for a $50,000 first-place prize.

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

Kirsten Noyes contributed analysis.