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 investment firms resembling Lightspeed Venture Partners and Galaxy Digital to fund crypto tasks constructed with the forex, at the same time as critics questioned its technological underpinnings. Luna’s complete 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 issues 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 gives a case examine 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 had been prepared to again extremely speculative monetary merchandise. Some of these traders bought 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 occasions its preliminary funding, after promoting roughly 80 % of its holdings of Luna over the past yr, mentioned Paul Veradittakit, an investor on the agency.
Pantera turned $1.7 million into round $170 million. The latest crash was “unfortunate,” Mr. Veradittakit mentioned. “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, mentioned the rise and fall of Luna and TerraUSD had 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 mentioned. Now, she mentioned, “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 associate, Daniel Shin, who later left the corporate.) His firm claimed it was creating a “modern financial system” during which customers might conduct sophisticated 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 started offering TerraUSD, which is named a stablecoin, a sort of cryptocurrency designed to function a dependable technique of trade. Stablecoins are usually pegged to a secure asset just like the U.S. greenback and aren’t speculated to fluctuate in worth like different cryptocurrencies. Traders usually use stablecoins to purchase and promote different riskier belongings.
But TerraUSD was dangerous even by the requirements of experimental crypto know-how. 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 idea for more elaborate borrowing and lending projects within the murky world of decentralized finance, or DeFi.
Read More on the World of Cryptocurrencies
From the start, crypto consultants had been skeptical that an algorithm would hold Mr. Kwon’s twin cryptocurrencies secure. 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 notice to his boss, explaining that the challenge might enter a “death spiral” during which a crash in Luna’s worth would carry the stablecoin down with it.
“I was like, ‘This is crazy,’” he mentioned 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, cast doubt on Luna’s underlying know-how in an interview final yr. (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 tasks constructed on Luna’s underlying know-how, like companies for individuals to trade cryptocurrencies or borrow and lend TerraUSD. Investors together with Arrington Capital and Coinbase Ventures shoveled in additional than $200 million between 2018 and 2021, in keeping with PitchBook, which tracks funding.
In April, Luna’s worth rose to a peak of $116 from lower than $1 in early 2021, minting a generation 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,” mentioned Brad Nickel, who hosts the cryptocurrency podcast “Mission: DeFi.”
Earlier this yr, a nonprofit that Mr. Kwon additionally runs sold $1 billion of Luna to investors, utilizing the proceeds to purchase a stockpile of Bitcoin — a reserve designed to maintain the worth of TerraUSD secure if the markets ever dipped.
Around the identical time, a few of the enterprise capital companies that had backed Mr. Kwon began to have issues. Hack VC, a enterprise agency centered on crypto, bought its Luna tokens in December, partly as a result of “we felt the market was due for a broader pullback,” mentioned Ed Roman, a managing director on the agency.
Martin Baumann, a founding father of the Hong Kong-based enterprise agency CMCC Global, mentioned his firm bought its holdings in March, at about $100 per coin. “We had gotten increasing concerns,” he mentioned in an electronic 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 would possibly in the end go beneath. He mentioned he discovered it “entertaining” to observe 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 basically 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 trade 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 bought its tokens. Its Luna holdings are at the moment price lower than $3,000.
That loss remains 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.
Expand Your Cryptocurrency Vocabulary
“Most of the V.C.s have the analysts they need to assess these things,” Mr. Nickel mentioned. “They may have figured they could cash out on the backs of retail.”
Much of the ache of the collapse has as a substitute been felt by common merchants. On a Reddit forum 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 had 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 project that linked 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 tasks constructed on Mr. Kwon’s know-how. 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 mentioned, and had 40 clients excited in regards to the thought.
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 mentioned, 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 methods to salvage tasks 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 mentioned.
On Thursday, he plans to pitch his now-obsolete know-how on the hacker home’s demo day. Most different teams have left this system, he mentioned, so he expects much less competitors for a $50,000 first-place prize.
“It’s in U.S. dollars,” he mentioned. “I asked.”
Kirsten Noyes contributed analysis.