Episode 0

Inside Crypto’s Largest Collapse with Terra's Do Kwon

Six Days in May: The Unmaking of a Crypto King

By Zack Guzman & Zack Abrams

August 15, 2022


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Three months ago, Do Kwon was a multi-billionaire on paper. He had a million followers on Twitter. And he commanded a sprawling crypto empire nearing $100 billion in value, which had seemed to explode from obscurity to ubiquity overnight.

If there were a Mt. Rushmore of crypto, Kwon’s face would have been half-chiseled into stone by May of this year. And one of those faces would have been an anonymous slab in a hoodie, so that’s saying something. His algorithmic stablecoin “UST,” created by his company Terraform Labs (TFL), had crypto’s most coveted investors lining up to give him their money. 

The Terra ecosystem’s astronomical growth was unprecedented. If it survived the crucible of early adoption, it was poised to become the backbone of the entire decentralized economy — “crypto’s reserve currency,” as the pitch tended to go. UST would do this by performing one deceptively simple job: always be worth one dollar, and in doing so, give crypto a less volatile medium of exchange than standard bearers like bitcoin. 

To keep UST’s price steady, Kwon designed a companion coin, LUNA, which he programmed to have a balancing effect on UST’s price. If demand for UST went up or down, then Kwon’s algorithm would adjust the supply of LUNA accordingly, until market forces drove UST back to $1. Zoom all the way out, and if UST maintained that dollar peg long enough, then Kwon would become the man at the center of the coin at the center of a multi-trillion dollar industry.

And he wasn’t shy about his breakneck success. He might have been a versatile engineer, but shame was not in his repertoire. Some of his tweets could make Elon Musk blush: He referred to his critics as “poors.” He mocked journalists and taunted regulators. And he danced on the graves of his competitors with palpable delight. 

He made a show of walking the walk, too — his wardrobe of a half-dozen faded t-shirts made Zuck look like a fashionista, and his upright, 6’2” frame exuded the confidence of a fox in a henhouse. At the age of 30, he played the part of wunderkind visionary with more panache than a hype man at a Cupertino keynote.

Do Kwon, founder of Terraform Labs, sits down for an exclusive interview with Coinage at his company's office in Singapore.
Do Kwon, founder of Terraform Labs, sits down for an exclusive interview with Coinage at his company's office in Singapore.

From the outside, success at such a dizzying scale always has a way of feeling like it happens overnight. One day, you’ve never heard of the smirking Stanford grad from South Korea; the next, he’s everywhere — a force that must be reckoned with anywhere that crypto must be reckoned with. But behind the scenes, Kwon had been quietly laying the groundwork for his meteoric rise for nearly five years. From the comfort of his keyboard, he’d created a new blockchain, invented a new currency, and raised a small and fiercely loyal army of developers (you can’t launch a financial revolution without revolutionaries, of course). In crypto these days, that means shooting the shit under pseudonyms on Discord, parlaying with hackers on Telegram, and reeling in institutional investors one by one, until blue-chip billionaires start getting FOMO and maneuver to dive in headfirst.

Skeptics could always nitpick, but from afar, everything in Kwon’s playbook didn’t just look like it was going to plan — at every turn, he seemed to exceed expectations. He also made a habit of putting his money where his mouth was, and his family’s legacy too: when he and his wife welcomed their first child in April, they christened her Luna. “My dearest creation named after my greatest invention,” he announced on Twitter. To say he was all in was an understatement. He actively positioned himself to either go down as a genius or an egomaniac. Or just as likely, both. 

But that was Kwon’s great appeal as a salesman: Bold, brash, and brilliant, a man who was untouchable in all the most entertaining ways. His legion of followers called themselves LUNAtics. Analysts called him the most important man in crypto. At least one of those billionaire backers went so far as to get a regrettable LUNA tattoo. His cockiness? All in good fun, and proven out by the numbers. His caginess? A great man need not suffer fools nor haters — in online discourse, there’s no such thing as too clever by half. 

So it was little surprise his investors hailed from all over the world, united by the Big Idea at the heart of Terra’s triumph: “A decentralized economy needs decentralized money.” Or put another way, for those who haven’t been crypto-pilled: For crypto to work, UST-LUNA has to work. And it will only work if enough of us trust that it will.

But then one day, it didn’t. 

With breathtaking speed, Terra’s fairytale rise would prove too good to be true — and would only be outdone by the nightmarish theatrics of its fall. Over one week in May, the market’s trust in Do Kwon went to zero, and UST cratered with it as LUNA crashed back to Earth. By month’s end, over $45 billion had evaporated from Terra’s ecosystem, and more than $80 billion from all crypto markets in the fallout. Just like that, Kwon’s empire had crumbled to dust. 

In the hazy aftermath, investors who watched their life savings disappear have been left with more questions than answers. Lives have been ruined, fortunes lost, and there have been reports of suicides. Meanwhile, Kwon and his company are now the subjects of multiple class-action lawsuits, and some in the press have dubbed him “crypto’s Elizabeth Holmes.” Last month, investigators in Korea raided the home of his co-founder Daniel Shin. And as authorities build a possible case against Terraform Labs in Kwon’s home country, his employees attached to the project have been put on Korea’s no-fly list.

But Kwon hasn’t been in Korea for months — he’s in Singapore, still trying to process exactly how everything went so bad, so fast. He meets me in a casual hot pot joint near his office, wearing shorts and knockoff Birkenstocks to survive the unyielding heat of a Singapore summer. Everywhere I look, something’s reaching a boiling point.

I’d been chasing this interview for three months now, since the week of Terra’s collapse. So had others, Kwon tells me. The New York Times, The Wall Street Journal, even a couple Netflix documentaries. When Kwon finally agreed to go on the record, I took the first flight out from New York I could get. 

As a reporter, there is little more terrifying than the sense you may be too close to a story; this one requires more disclosures than any I’ve reported in my life. When Kwon was at the pinnacle of his powers last year, Terraform Labs became an investor in Coinage’s parent company. Meanwhile, I had previously bought UST and LUNA tokens, and held both all the way through the crash. Which is to say: I lost almost everything that week as well. On several occasions over those fateful few days, I’d even passed up the chance to hedge my bets, because, like hundreds of thousands of others, I believed in what Terra was building, and believed Kwon when he said it would work.

 To be sure, I had only myself to blame for my investment choices — indeed, I knew Terra’s risks better than most. Or at least, I liked to think I did. It’s one thing to buy the dream, another to live the reality. And somewhere in the shuffle, I’d lost a small fortune literally buying what Kwon had been selling. 

That’s why I don’t see it coming when Kwon throws back the last of his drink, as exhausted as I’ve ever seen him, and hits me with a question before he’ll start leaking answers: “What would you have done differently?”

Well, if we’re going there — where to begin?

  

Day 1: 99 Cents

The trade was perfectly timed. An anonymous actor, or possibly two, knew exactly how and when to strike against Kwon’s miracle machine. To many, its algorithm appeared invincible — it had just catapulted Terra from far-flung message boards to one of crypto’s top 10 projects by market cap, after all. But behind the curtain, if you knew where to look, there lurked a glaring flaw.

Unlike other stablecoins, which are designed to be backed by cold hard cash, UST was “algorithmic,” which meant that it had no such real backstop in the physical world. This approach was riskier, sure. But it also meant that if Terra was successful, crypto would finally have a reliable currency that was truly and completely independent of the old financial system. 

So instead, UST kept its $1 peg through its algorithm, allowing users to freely trade between UST and LUNA. In effect, buying LUNA was a pure bet on the adoption of UST: The more people bought UST, the more LUNA the algorithm would burn to keep UST at $1. And that would in turn drive up the price of LUNA. In a market as complex as crypto’s, Kwon’s masterstroke was a tantalizingly simple investment thesis — if you thought UST’s use would continue to grow, then you bought LUNA. So, I bought LUNA. 

As recently as 2021, LUNA was trading for as low as 63 cents. At its peak in April of this year, it was going for $119. The day before everything went to hell, it was still sitting comfortably near $80.

And just as designed, as LUNA soared, UST stayed stable. Until it didn’t. 

Do Kwon working from Terraform Labs's office in Singapore.
Do Kwon working from Terraform Labs's office in Singapore.

On the night of May 7, 2022, Terraform labs executed an unannounced transfer of funds between trading pools. Thirteen minutes later, the untraceable traders pounced on this brief window of vulnerability, selling off nearly $200 million worth of UST at the exact same time. 

“I was in Singapore,” Kwon recounts from his noticeably sparse downtown office. “I woke up in the morning and the Curve pool was imbalanced because somebody had done a very large trade … Twitter was alight with speculation about UST. And my first reaction is, you know, this has happened before … I talked to a few people on Twitter, I got back to a few Telegram messages and, you know, didn't take too much action at that point.” 

As more and more UST was swapped out for other currencies, the trading pool became unbalanced, which caused the value of UST to wobble from $1 to 99 cents. Which might not sound like a lot, on its face. But again, UST only had that one job: always be worth one dollar. No more, no less. 

The wobble quickly caught the attention of traders. “The sentiment on Twitter started to get worse,” Kwon recalls, putting it lightly. “And then there started to be more people that were trading against the Curve pools.” In an attempt to allay fears, Kwon brusquely took to Twitter, where he goes by @stablekwon: “Anon, you could listen to [Crypto Twitter] influensooors about UST depegging for the 69th time. Or you could remember they’re all now poor, and go for a run instead.”

But behind the scenes, the situation was more complicated than he was letting on. His executive team was out of commission at the time of the attack — they were all up in the air, en route to Singapore for a quarterly summit at Terraform’s headquarters. Looking back, Kwon believes that this confluence of events feels like too much of a coincidence. The timing of the decisive fund transfer and the movements of his advisors were both inside information. In his view, there must have been a leak in his office.  

“The only people that knew that were TFL employees,” Kwon admits when I press him on whether the timing seems more than mere happenstance. His manner of speech is littered with cliffhanger pauses, like he’s stress-testing tomorrow’s news in his head. “So if you're asking me whether there was a mole at Terraform Labs, that's probably 'yes'.”

But as he takes care to repeatedly reiterate, this was not the first time that UST had wobbled — it had dipped to 99 cents a few times before, even once briefly dropping below 90 cents the year prior, before quickly regaining its dollar peg. To an “algo stable” veteran, this was just the system working as designed. 

But this time was different because the stakes for Terra were different. And now that its peg was suddenly in question, long-simmering concerns about its viability erupted to the fore. 

In the blood rush of a bull market, it could be easy to forget that UST’s success was always going to be an uphill battle: Every large algorithmic stablecoin that had ever been sold on the open market had eventually crashed to pennies on the dollar. Some were poorly designed, others ineffectively managed. But across the board, all had failed to achieve what lasting success would inevitably require — a real economy of users making purchases with the stablecoin, and the size and scale to justify having one. 

Simply put, for Terra to stand the test of time, yes, UST had to be worth $1. But the real question was, if you had a dollar, why would you want to hold it in UST? To survive in the long run, Terra had to convince us that UST was the best currency on offer — that it was even a better bet than those greenbacks stuffed under our mattresses. So Kwon sought to make his stablecoin attractive not only to crypto insiders already deep in the burgeoning ecosystem of decentralized finance (more commonly known as DeFi), but also to everyday consumers who had no interest in toppling the global economy’s status quo, and just wanted money that was easy to spend. 

On this count, Kwon and his co-founder Shin had an ace up their sleeve: they’d already founded Chai, a digital payments startup that was doing big business in Korea. Chai let people use UST to make purchases without even realizing they were trafficking in crypto — seamless, convenient, and straightforward, not unlike PayPal in the States. The idea that a cryptocurrency was being used in the real world to buy everyday goods was a breakthrough selling point for Terra — it’s what first caught my eye about the project, and what made it stand out from countless rivals. When push comes to shove, the most powerful currencies in crypto have always been legitimacy and trust. And as Chai took off in Korea, Terra had an undeniable competitive advantage. 

But even so, in 2019, growth across the industry slowed to a crawl, and Kwon struggled to hook deep-pocketed investors. "We tried to do another fundraise for Terra in the middle of 2019,” he tells me, arms crossed as he looks out over the Singapore skyline — a grayscale view, perpetually under construction. “And the market was really bad. We actually managed to raise $0.” It was around this time that Kwon bought out Shin’s ownership stake in Terra, leaving Shin free to work on developing Chai on his own. 

"In retrospect, if you were to ask me whether the manner in which some of these comments were conveyed was cringe, yes."
"In retrospect, if you were to ask me whether the manner in which some of these comments were conveyed was cringe, yes."

In the meantime, Kwon had to look elsewhere to jumpstart his nascent economy. His big break would come in March 2021, with the launch of Anchor Savings Protocol — effectively, an automated bank built on Terra’s blockchain. The sales pitch was simple: Deposit your UST stablecoins in Anchor, and it would automatically give you a fixed annual interest rate of nearly 20%. 

As DeFi users flocked to Anchor’s sweetheart rate in droves, LUNAtics began forming communities around the ecosystem. At its peak, over $17 billion was locked in the Anchor protocol, which represented over 70% of UST in circulation. In the process, Anchor rocketed Terra toward the size it would need to become too big to fail — but at the same time, it would also require Kwon to perform the high-wire act of keeping money flowing into the system. The catch was that the 20% yield was not sustainable on its own. (There’s a reason most traditional banks only offer around 1 or 2% interest, and even other stablecoins were dangling rates only half as high). 

But Kwon doesn’t cede an inch on his decision-making here, arguing that he was in fact extremely conservative in his posturing. “The internal consensus of what people wanted to do with the interest rate was several thousand percent APR with Anchor in the beginning,” he counters when I suggest he was asking for trouble. “This was still when DeFi yields were in full bloom, and there were tons of DeFi launches that were targeting stablecoin deposits, offering several hundred percent APRs, several thousand percent APRs.” 

Whatever the points of comparison, the simple fact remains: Anchor wasn’t profitable enough to sustain its 20% yield on its own. As a result, the protocol was reliant on regular cash injections from Terraform Labs to keep the payments flowing. When the anonymous traders struck on May 7, Anchor’s runway was down to only 45 days before it would need another injection of cash. And because this was all playing out on a transparent blockchain, anyone could see the end of the road looming there on the horizon. When a Terra community member proposed a $1 billion top-up in April, Kwon coyly replied: “Sounds low.” 

That’s what made this depegging unique in Terra’s short but stalwart history — by the time UST dipped to 99 cents at center stage, there were already whispers in the rafters, and depositors on Anchor were starting to eye the exits, ready to jump at any sign the protocol might be headed for insolvency. Should that exodus grow from a trickle to a flood, it would risk a death spiral for the currency — akin to a modern-day digital bank run. The May 7 price wobble was precisely the sort of event that makes trigger-happy investors question their assumptions. Meanwhile, Kwon’s critics had been warning of just such a scenario for months. 

But Kwon was prepared for a situation like this — or so he thought. “I’m up  —  amusing morning,” began that same tweet that stuck it to the haters and poors. 

By his own accounting, he would not sleep again for eight days. 

 

Day 2: $1

Kwon’s strategy to prevent a death spiral boiled down to the Luna Foundation Guard, a non-profit entity Terra launched in early 2022. Its initials, LFG, double as shorthand for the millennial rallying cry “Let’s Fucking Go.” 

Through LFG, which was staffed with friendly faces from the Terra community, Kwon bought billions of dollars of other cryptocurrencies, mostly Bitcoin, to help prop up UST’s peg during times of turmoil. At its peak, LFG had over $4 billion in reserves, and Kwon had ambitions to grow that number to $10 billion — by some estimates, enough to make LFG the second largest holder of Bitcoin behind its anonymous creator. 

To investors, Kwon billed the creation of LFG as a diplomatic move, meant to build bridges between Terra and other heavyweight blockchains across crypto. “We felt that by adding multiple different types of collaterals, starting with Bitcoin, UST had a real chance to become the decentralized money for all of crypto,” Kwon argues. “Because as UST grows, it’s backed by the economy of all the different chains on which it’s powering apps.”

Or as he put it more bluntly a few months earlier, before the bottom fell out: With crypto’s other powerhouses bought into Terra’s success, the failure of UST would be “equivalent to the failure of crypto itself.” If Kwon went down, then the whole space would go down with him. The very definition of too big to fail. 

“You cannot be emotional about markets, right? Markets are dispassionate, and they move the way that they will."
“You cannot be emotional about markets, right? Markets are dispassionate, and they move the way that they will."

And so, just before midnight on Sunday, May 8, as sell pressure on UST was mounting, Kwon set Plan A into motion: He began deploying $1.5 billion worth of LFG’s funds to stave off UST’s wobble. From his team’s war room in his Singapore office, Kwon once again flaunted on Twitter just how unfazed he was: “Those of you waiting for the earth to become unstable - I'm afraid you will be waiting until the age of men expires.”

At least publicly, then, Kwon was his usual confident self. But he also had to be — any sign of weakness would suggest there was good cause to panic. So he tweeted “pegging” jokes, traded barbs with his critics, and generally acted how an overconfident founder would. When I ask him about his use of Twitter throughout Terra’s run, Kwon sits with the question before answering. “I think I developed an entertaining alter ego to match the community that I was engaging with. In retrospect, if you were to ask me whether the manner in which some of these comments were conveyed was cringe, yes.”

 

Day 3: 69 cents

On May 9, UST lost its peg for the second time. Almost immediately, Kwon’s reserves gambit — dipping into Bitcoin to cover his own currency’s slide — spectacularly backfired. 

Instead of breathing a collective sigh of relief at UST’s return to $1, the market panicked at how it had gotten there: The whole point of UST-LUNA’s system was that it was supposed to be self-sufficient. The idea that it needed to tap into reserves of outside currencies seemed to undercut that foundational premise. And once again, those reserves were transparently finite — if they were necessary in times of crisis, then what happened if they ran out, too? If you have to ask the question in the stablecoin world, then you already have your answer. The market’s fears of a second depegging became a self-fulfilling prophecy. Not trusting the price to hold, investors rushed to get out while they could — and all those deployed Bitcoin reserves became their exit liquidity.   

As Kwon dumped his rainy day fund on crypto exchanges, hoping to beat back the wave of sellers who were driving down UST’s price, he couldn’t bail himself out fast enough. With the loss of confidence in UST, the price of LUNA began to plummet too, falling from $61 to $27 by day’s end. And the lower the price dipped, the bolder short sellers became, driving down the price further yet — a vicious cycle that Kwon was all but helpless to reverse. Investors couldn’t refresh their screens fast enough; many were unable to cash out as they watched their savings evaporate. Billions were now exiting Anchor by the hour. The death spiral had begun in earnest. 

Naturally, all eyes turned to @stablekwon for answers. But Kwon, who’d been tweeting memes, challenging critics, and declaring “I love chaos” over the past two days, had grown curiously — worryingly — silent. When UST’s price landed at 69 cents, not even Kwon was laughing.

A full twelve hours after he’d tweeted about LFG’s decision to deploy the $1.5 billion in capital  —  an eye-popping number that would rise to $2.5 billion by day’s end  —  he finally resurfaced with five words that would change countless lives, my own included: 

“Deploying more capital - steady lads.”

 

Day 4: 72 cents

I was a lad. I held steady. I would swiftly pay the price.

Since it was my job to report on markets, I first came to crypto by way of traditional finance: What would this new technology disrupt, and what actually needed disrupting? Like any inventive frontier, the space had no shortage of provocative ideas in its early years. But time and again, their execution left much to be desired. Scams and frauds aside (of which, yes, there are still all too many), the industry had a preternatural talent for building the very traps it claimed it was here to escape. Like centralized economies, for one: The point of DeFi was to cut out traditional middlemen. But DeFi needed stablecoins to keep the wheels greased, and all those stablecoins were centralized. 

If we’re being ungenerous, we’d call this hypocrisy. But more often, it was just a case of brass-tacks reality catching up to those airy ideals. Because yes, for digital economies to flourish, you needed digital reserve currencies. And for digital reserve currencies to flourish, you needed people to believe they were stable. And what did people believe was stable? The U.S. dollar. And so you’d end up right back where you started. 

But then came Terra: Actually decentralized. Actually used in the real world on Chai. The spitting image of what a functional decentralized currency was actually supposed to look like. I reached out to Kwon for the first time in the spring of 2021. When I interviewed him for the first time, there was at least one question I felt still needed clearing up: How is this not a Ponzi scheme? 

Yet, Kwon’s argument convinced me: A decentralized bank can make money all the ways that a “real” bank can, as long its currencies hold real value. And Terra’s did. Amidst the pomp of a bull market, precious few were raising concerns about Anchor’s high-yield runway. Every day, the ecosystem kept ballooning, proving Kwon’s adage that stablecoins have always been the crypto product with the best market fit. And a decentralized, algorithmic stablecoin? That wasn’t just market fit. It was the ground floor of an economic revolution: The fulfillment of crypto’s foundational mission. 

All through that year and into the next, the market proved Kwon’s thesis right. So by the middle of that week in May, it wasn’t just my investment on the line. It was my conviction that decentralized economies were inevitable, and that Kwon knew how to build one better than anyone on Earth. Logic should have compelled me to hedge my bets to cover potential losses. Had I shorted when I had the chance, I’d have turned a ten-fold profit at the click of a button. But that would have been a bet against Kwon and everything Terra stood for. Markets might not be emotional, but one more disclosure: Sometimes, I am. So when Kwon told us to hold steady, assuring us he had the situation under control, that’s exactly what hundreds of thousands of us did. But UST did not. 

“I just haven't found the words to describe what that feels like."
“I just haven't found the words to describe what that feels like."

It was now Day Four of Kwon’s suddenly inescapable nightmare, and he was facing an immense amount of sell pressure from LUNA and UST holders looking to leave the ecosystem, and he was all too aware that LFG’s reserves were nearly depleted. He needed a Plan B, and fast. 

“We decided that putting together additional capital so we’d have resources to be able to fight further would be the smart thing to do,” Kwon tells me, hands clasped on the table like a fallen saint come to repent. “So we started to put together a $2 billion round in the middle of the night. We called our existing investors in LFG. We called a lot of the friends that we had in the industry across multiple desks and large funds. And then, I think we were close to completing the book for that $2 billion round overnight.”

When I ask if he really pulled eight straight all-nighters, he cocks his head to think it over. 

“So, seven nights. And then, I think I had one burrito.”

“A burrito?”

“One burrito. Half a burrito.”

Such is life with the weight of Terra on your shoulders. But now, “next level euphoric” at their progress in the war room, he once again took to Twitter, declaring he was “close to announcing a recovery plan for $UST. Hang tight.” Then, yet again, radio silence. It was one thing to secure verbal commitments, another for the money to hit the bank. Eight hours later, he reiterated that the plan was still in the works, tweeting “Getting close ... stay strong, lunatics.” 

And then, the news leaked. The Block, an industry news site, reported that LFG was looking to raise fresh capital from large crypto investment firms in order to shore up UST. Kwon had planned to offer these investors a discount on LUNA, but the leak instantly obliterated the deal. “Once the news leaked, we started to see massive shorts pile up against LUNA,” he tells me with surprising equanimity. “So the value of the tokens that we were ready to sell just basically got decimated. It didn't make sense for people to participate in the round ... Good on [The Block], actually.”

“For ruining your round?” 

“I mean, it’s all business, so. All good.” 

This is a recurring theme in our conversations: “You cannot be emotional about markets, right? Markets are dispassionate, and they move the way that they will,” he muses. It’s not how I would react if I was sabotaged at the 11th hour on the most important day of my life, but what do I know? “There are probably not too many people that are alive with this type of experience,” Kwon reminds me. 

In the meantime, with LFG’s reserves depleted, and thousands of investors losing faith by the minute, all Kwon could do was watch as UST’s economy was wiped off the market. Even three months later, he’s still grasping to make sense of the moment he realized he’d lost control of the situation. “I just haven't found the words to describe what that feels like,” he tells me. “I just didn't think this would happen.”

Plan A had backfired. Plan B was up in smoke. And Plan C — convince the market to wait for a Plan C — was hurtling out of reach in live time. The mainstream media was starting to take notice as well; that very day, at a Senate Banking Committee hearing, U.S. Treasury Secretary Janet Yellen called out Terra’s unregulated bank run. (Though Kwon made a point of noting it wasn’t his “place to spell out conspiracy theories,” he couldn’t help but comment on the speed of Yellen’s remarks: “I’m surprised that they were able to put together material for her speech when the thing had started to happen just a few hours earlier.”)

 

Day 5: 30 cents

In the blink of an eye, UST’s peg now seemed a distant memory. LUNA, which had been trading at $80 just days ago, was now unthinkably hovering below $1. 

Stepping back, it was now painfully apparent that tens of billions of dollars had been lost in the Terra ecosystem alone. And its collapse was already having ripple effects across DeFi too. In short order, it would topple a who’s who of overzealous crypto hedge funds, while driving away investors from crypto in droves. Within two months, $800 billion would be wiped off the industry's total market cap. Against the backdrop of a wider downturn, it'd be unfair to say that Terra started the fire. But it certainly became the lighter fluid that ignited the blaze. 

As market prices plunged to crushing lows, talk of crypto as one big Ponzi scheme was suddenly hitting record highs in mainstream coverage. In one sense, Kwon’s master plan was working like a charm: now that he was going down, all of crypto was going down with him. As backward as it sounds, the scale of the disaster may be our best yardstick for measuring what had been the scale of Kwon’s success. 

Unsurprisingly, before UST was even dead and buried, some started calling Do Kwon the Elizabeth Holmes of Korea — a comparison he struggles with when I bring it up to him. In his view, Theranos lied about its blood testers, which never worked, whereas “[UST] was working beautifully throughout the entire history that it was, and the fact that it was working perfectly was visible in the order books, and was present in all the integrations in the open source and transparent manner of crypto. Until it stopped working.”

In other words, it worked until it didn’t. In crypto, an industry that is equal parts unregulated and unprecedented, it can be a slippery slope from failure to fraud. And while victims of the crash scavenged for answers as their savings vanished, only more questions emerged. 

By now, the press had had a field day with Kwon’s infamous shitposting. His hubris was the journalistic definition of low-hanging fruit. So when allegations broke of a trail of lies and deceit, the reputational damage was catastrophic. 

"I mean, this was essentially my life. And I put my actions where my beliefs are. I bet big, and I think I lost.”
"I mean, this was essentially my life. And I put my actions where my beliefs are. I bet big, and I think I lost.”

On May 11, with UST hanging on for dear digital life at 30 cents, CoinDesk reported that Kwon had been involved in a prior attempt to create an algorithmic stablecoin called Basis Cash — a failed project that Kwon himself had referenced as proof of why UST was better than anything else that had been on the market. The optics of him scrambling to salvage a failing stablecoin, while omitting his association with a failed stablecoin, would prove the nail in UST’s coffin. 

Three months later — and likely three months too late — Kwon confirms to me for the first time that he was indeed the pseudonymous “Rick Sanchez” of the Basis Cash project, but distances himself from the title of co-founder. 

In the cool reprieve of his unfurnished high-rise apartment, he’s teaching me the computer game StarCraft his go-to method for stress relief — when he denies that Basis Cash was his idea alone. According to Kwon, five developers he’d hired to work on Anchor had come up with their own idea for an algorithmic stablecoin, which would be run on the Ethereum blockchain. (Everyone on the team had an alias ripped from the cult favorite cartoon Rick and Morty; Kwon’s character, Rick Sanchez, is a mad scientist whose inventions have a knack for spiraling out of control.) 

“I helped them with the initial community building, talking on Telegram a little bit, talking in the voice of what Rick Sanchez would’ve sounded like,” he explains. “It started to do really well. I think the market cap far exceeded LUNA’s right after they launched. So they said, ‘All right, we're just going to run this.’ And they quit the company and then they started to run it solo.”

Naturally, critics and investors were quick to call out Kwon for not disclosing his part in the project. But he still sees it differently. “I think bringing the Basis mechanism to light and testing it, especially in a sandbox type of environment before DeFi became very large, was good. I think for a first effort, they did a lot of things right,” he tells me, before quickly adding that their efforts left much to be desired, and that he was critical of their choice to sell their tokens and abandon the project. 

But as it turned out, the Basis Cash debacle was just the beginning of Kwon’s trust troubles. 

 

Day 6: 15 Cents

When the system was working in normal times, UST could be freely swapped for LUNA and vice versa; that had always been how UST maintained its peg. But these were anything but normal times. The way the algorithm was designed, more LUNA would be printed to help reset the peg when it wobbled. Except now, the market dynamics were so out of balance that LUNA began printing at immeasurable rates. This led to extreme hyperinflation and the collapse in LUNA’s price. 

LUNA was now so cheap  —  trading for less than one cent  —  that the validators physically running Terra’s blockchain began calling for it to be halted, citing threats to the system’s security. UST was trading at 15 cents when Kwon was left with no choice but to shut it down to prevent a governance attack. The great game was over. His dream was dead.

But if it sounds like his algorithm broke down in the end, that’s not exactly true — what broke was the economy built atop it. Even to the bitter end, as it tried to print infinite LUNA, Kwon’s algorithm worked exactly as designed. 

The totality of the crash hit LUNAtics especially hard. Two of the top three posts on the /r/TerraLuna subreddit are still about suicide. In other posts, users grappled with the magnitude of the crash as it unfolded (a typical title: “My brain can’t process this is happening for real”). And thoughts on Kwon’s handling of the crash read like a communal diary of spiraling sentiment. One day, he’s a mastermind who knows exactly what he’s doing. The next, “Do Kwon's arrogance was Terra's downfall.” 

The blowback was sudden and unsettling. Kwon’s only two requests for our interview were that I avoid filming the faces of his employees or the location of his office, due to the flurry of death threats he’d received. By day six of the crash, a man had broken into his family’s apartment complex and rung their doorbell, forcing his wife to request emergency protection from Seoul police.

Kwon doesn’t deny that the collapse of Terra caused incalculable pain. “It was brutal,” he tells me. And he counts himself among the victims, claiming to have lost most of his net worth in the crash. “I don't want to seem like my losses are larger in terms of emotional impact compared to people that had less to go on and then put [in] their entire life savings and then the Terra system went down. But I just want to make it perfectly clear that the way that I thought about Terra and Luna was — I mean, this was essentially my life. And I put my actions where my beliefs are. I bet big, and I think I lost.”

He’s cagey about where his net worth now stands, a number that would be admittedly difficult to verify. Since crypto wallets start out anonymous, he could always ostensibly be hiding profits in wallets unknown to the public. “The reason why I didn’t want to advertise my wallet addresses is, number one, it's not going to work. People will just say I have more wallets, right?”

But he’s unflinching when he asserts he made nothing off UST’s collapse. “I’ve never shorted a cryptocurrency in my life, let alone UST.” And he says that his wife, who runs a Korean hot sauce company, held her own coins “all the way down.” How does she feel about these past few months? As Kwon quotes her telling him, “One of the best and worst things about you is that you go all in on everything.” 

Try as I might to get a number out of him, he declines to elaborate on how much “all in” means in financial terms. “One of the jokes that people tell each other when markets turn bad is [that they’re] ‘down bad’ or ‘down horrendous,’” he says with a wistful smile. “And the word that I use to describe what happened here is ‘down infinite.’”

So there was no getting around it now: Terra had failed, in plain sight and for all to see. The fatal flaws in Anchor and LFG’s reserves plan were now readily apparent. As it so often does, the market had eaten its own. But as crowdsourced autopsies of Terra’s ecosystem began in earnest, and Kwon’s legal team walked out, an alarming array of red flags seemed to pop up everywhere investors looked.   

 

Day 90: Down Infinite

In June, about a month after the collapse, the Wall Street Journal reported that Chai — the real-world use case that Kwon frequently touted as evidence of Terra’s mainstream adoption — had, in fact, ceased its use of UST by the end of 2021. Kwon was still listing the Chai relationship as a selling point as late as March 23, 2022, when he brought it up as a reason to be bullish about Terra on the Pomp Podcast, hosted by crypto investor Anthony Pompliano.

Kwon assures me he didn’t know that Chai’s usage had been discontinued when he made those claims. “We should have known better about how all of our different products were being used in different places like that,” he concedes. 

Which may well be true. But, put in context, it’s a revelation that seems interesting. Kwon helped found Chai with Daniel Shin. He had sat on Chai’s board. And what’s more — Shin was even the officiant at Kwon’s wedding. That Kwon would not have been aware of Chai’s decision requires a leap of faith.   

Yet, Kwon remains adamant when I press him: “By that point, other things in Terra were so large that I just wasn't paying attention to Chai very much. But that's definitely one of those things that we should have picked up on.”

What Kwon knew and when will be a central question of any investigation into Terra’s collapse. The legal definition of fraud is the deliberate misrepresentation of facts as they’re known at the time, with the intent of inciting people to actions they otherwise would not take and causing harm. Well, the Chai use case was what attracted me to the Terra ecosystem in the first place — had I known the deal was dead, would I have exited my investment before or during the crash? 

Kwon, for one, doesn’t think so. In his mind, Terra was already a sure thing by that juncture, with or without Chai. “I think just psychologically, I had moved on from Chai as a use case, because that business wasn't growing, whereas, you know, there were dozens of different things that were being built on top of Terra. Tons of integrations like Anchor and Mirror were increasing in usership and things like that." 

"I think what I spend time doing over the next 20 years is going to be more meaningful than what happened over the last six weeks."
"I think what I spend time doing over the next 20 years is going to be more meaningful than what happened over the last six weeks."

In case you didn’t think there were enough twists and turns in Kwon’s tale: Mirror was an unregulated copy of the stock market built atop Terra’s blockchain, which inevitably got Kwon subpoenaed by the U.S. Securities and Exchange Commission. In a cavalier Kwon comeback, he responded by suing the SEC for improperly issuing the subpoena. There’s poking the bear, and then there’s challenging the bear to a fistfight.

At this point, the SEC may be the least of Kwon’s problems. Among the various agencies around the world looking into all things Terra, Korean prosecutors have thus far been the most aggressive. But Kwon says he plans to cooperate when the time comes.

“In terms of dealing with due process, it's not a question of what you are prepared to face, it’s a question of how you are going to face them. So what we're going to do is we're just going to put out the facts as we know them,” he tells me with trademark confidence.  

When I ask him how he defines fraud, he pauses so long, I feel like I’m the one who might be in trouble. “Well,if you knew something that wasn't true, and then you argue that that was true for personal enrichment or whatever purpose that might be, then that's fraud, right?” Pretty spot on, off the cuff. “I think it boils down to a question of whether you wanted to do the right thing.”

But of course, many investors in Terra are no longer taking Kwon at his word. A number of former Terra users, including one of the loudest, have accused him of extracting $2.7 billion from Terra’s reserves, a claim Kwon flatly denies. “In terms of how much UST [exchanges] were able to buy back, it matches the amount of Bitcoin that we gave them,” he points out. The blockchain may be built for transparency, but that has rarely made the whole truth any easier to find. 

Other allegations, Kwon has little trouble swatting down. Some news organizations reported on the existence of Flexi Corp, a Korean shell company linked to Kwon. With a wave of his hand, he explains that Terraform Labs had three subsidiary corporations in Korea, including Flexi Corp, but when he moved operations to Singapore before the crash, he “wound that entity down.” Other questions have been raised about how much money Terraform Labs was spending on operations through an effort called Project Dawn; of the three million LUNA it let the company unlock per month, Kwon says the coins “were used to meet our obligations to investors and employee vesting. And once again, none of that went to me.” 

In the meantime  —  and as ever in crypto  —  those Ponzi claims continue to linger. In one sense, the argument that Terra was just one big elaborate Ponzi scheme is simple: Anchor promised fixed 20% returns for everyone who bought into the ecosystem. When that became unsustainable, everything crashed.

On the other hand, this kind of “Ponzi-nomics” has long been actively debated in the crypto sphere. Plenty of traditional businesses use VC cash to subsidize everything from free lunches and taxi rides to subscriptions and movie tickets in order to gain a loyal customer base, raising prices or reducing benefits once they’ve established themselves as an essential part of our lives. Terra was arguably doing the same by subsidizing Anchor, and it worked as intended for years. Until, of course, it didn’t. 

For what it’s worth, Kwon makes a point of accepting responsibility for the crash. “I, and I alone, am responsible for any weaknesses that could have been presented for a short seller to start to take profit. The blame is on the person that presented those vulnerabilities in the first place,” he said. “That’s me.”

Even so, that likely won’t satisfy the Korean justice system, which also appears intensely interested in making sense of Terra’s collapse. In between my two days of interviews with Kwon in Singapore, Korean authorities raided his cofounder Daniel Shin’s home, as well as Korean cryptocurrency exchanges that held UST-LUNA on the books. 

When I ask if he’s thinking about going back to Korea, he’s noncommittal. “It's kind of hard to make that decision, because we've never been in touch with the investigators. They've never charged us with anything. They haven't reached out to us at all.” 

Again, his casual calmness surprises me. When I float the prospect of jail time, he doesn’t miss a beat: “Life is long.”  

And his new lawyers? How do they feel about our conversation? Kwon all but laughs. “I mean, no lawyer is going to be happy.”

As investigators and armchair detectives circle the case, regulators around the world are also now taking a closer look at stablecoins in the wake of Terra’s collapse. Under new rules passed in the EU known as MiCA, stablecoins like Tether and USDC will have to maintain an ample reserve backing to ward off death spirals like Terra’s. And in the U.S., some lawmakers hope to have a new federal regulation passed by the end of the year.

 

Day 0

In the meantime, Do Kwon is already trying again. Shortly after the crash, he launched Terra 2.0 — his swift attempt to start rebuilding his crypto empire, though this time with no algorithmic stablecoin attached. The new coin launched on May 28, and traded as high as $11 in the days that followed, though its price currently sits around $2. Million of dollars of “LUNA Classic” still trades hands every day, and some loyal developers are still building on the platform. But activity on its official forum remains sparse. 

“In terms of the future of Terra 2.0, one of the things that I'm banking on is a lot of the core of the community that was built up during the crash. I think they are primed to launch interesting things on top of 2.0 independent of the things that we do,” Kwon tells me, as enthusiastic as I’ve seen him. “I'm always going to be doing things on Terra and for the Terra community. This is my home and this is where I feel like there's the brightest future.”

Some rival blockchains have attempted to hire away developers who worked on Terra, including Polygon and Kadena, which both announced millions in funding dedicated to poaching top talent. Kwon claims “most of Terraform Labs is still intact. We lost a lot of executives during the crash, but in terms of the overall headcount, we lost a total of two devs.”

Beyond the collapse of Terra itself, there’s no chart I can point to revealing what remains of the market’s trust in Do Kwon. Its implosion caused many of us to lose incredible sums of money — almost certainly driving some away from the Terra ecosystem forever, if not the rest of crypto, too. Yet Kwon’s new venture will have to rely almost entirely on trust — both in him and in the resuscitated Terra ecosystem — in order to successfully rebuild. When asked about upcoming projects launching on Terra 2.0, Kwon was optimistic but sparing with details. “I would rather just leave these [upcoming products] to be a surprise. I think one of the lessons that I learned is you should probably not oversell things that don't exist yet.”

What’s certain is that he doesn’t intend to be going anywhere. “I love crypto. I love Web3. I plan to be building here for a long time, and if my thesis is right that we are at the very early innings of what will turn out to be, in my hope, a world that runs on Web3, then I think what I spend time doing over the next 20 years is going to be more meaningful than what happened over the last six weeks.”

Do Kwon announced the birth of his daughter Luna to the world on Twitter, calling her "My dearest creation named after my greatest invention."
Do Kwon announced the birth of his daughter Luna to the world on Twitter, calling her "My dearest creation named after my greatest invention."

As for his daughter Luna, Kwon doesn’t plan on changing her name. “Let's just say that I have an incentive to make sure that her name isn't something that she can be ashamed of, but something that she can be proud of.” 

He could have named his new project literally anything else too — conventional wisdom would be to create as much distance as possible from memories of crypto’s largest-ever collapse. But this is Do Kwon we’re talking about. So LUNA 2.0 it is. 

As we spill out of hot pot heaven on my last night in Singapore, Kwon stops along the road and gazes up at the night sky. He confesses he thought about another name, but just couldn’t bring himself to do it. “It’s right there,” he says, like we’re standing in a dream. “I stare up and see the moon, and just feel so attached to it.” 

On that count, at least, I still envy him. For me, it remains out of reach.