A South Korean entrepreneur, Do Kwon, called the cryptocurrency he created “my greatest invention” in 2018. In endless tweets and interviews, Kwon heralded the potential of the currency, Luna, to change the world and amassed a band of investors and supporters he proudly referred to as “lunatics.”
Kwon’s company, Terraform Labs, raised more than $200 million from investment firms such as Lightspeed Venture Partners and Galaxy Digital to fund crypto projects built on the currency, even as critics questioned its technological underpinnings. Luna’s total value rose to more than $40 billion and created a stir that impressed day traders and startup founders and wealthy investors.
Kwon dismissed the concerns with a sneer: “I don’t debate with the poor.”
Last week, Luna and another currency developed by Kwon, TerraUSD, suffered a spectacular collapse. Their failures had an effect with the rest of the cryptocurrency market that plunged the price of bitcoin and accelerated a $300 billion loss in value across the entire cryptocurrency economy.
The fall of Luna and TerraUSD offers a case study in the euphoria surrounding cryptocurrencies and who is to blame when it all comes crashing down. Kwon’s rise was made possible by respected financiers who were willing to back highly speculative financial products. Some of those investors long ago sold their Luna and TerraUSD coins and reaped huge profits, while smaller traders are now struggling with heartbreaking losses.
Kathleen Breitman, founder of the Tezos crypto platform, commented that the rise and fall of Luna and TerraUSD was due to the irresponsible behavior of the institutions backing Kwon. “There were a lot of people who wanted to trade their reputations to make a quick buck,” he said. Now, Breitman added, “they are trying to comfort the people who are seeing their funds disappear in the light of their eyes. There is no protection for it.”
Kwon, 30, a Stanford University graduate, founded Terraforma Labs in 2018 after stints as a software engineer at Microsoft and Apple (he had a partner, Daniel Shin, who later left the company). His company claimed it was creating a “modern financial system” in which users could carry out complicated transactions without relying on banks and other intermediaries.
Shin and Kwon began promoting the Luna currency in 2018. In 2020, Terraforma began offering TerraUSD, a currency known as a stablecoin, a type of cryptocurrency designed to serve as a reliable medium of exchange. Stablecoins are typically pegged to a stable asset like the US dollar and are not supposed to fluctuate in value like other cryptocurrencies. Traders often use stablecoins to buy and sell other riskier assets.
However, TerraUSD was risky even by the standards of experimental crypto. Unlike the popular Tether stablecoin, TerraUSD was not backed by cash, debt securities, or other traditional assets. Instead, its supposed stability came from algorithms that linked its value to Luna. Kwon used the two related coins as the foundation for more elaborate lending and credit projects in the murky world of decentralized finance (DeFi).
From the beginning, crypto experts were skeptical that an algorithm could keep Kwon’s twin cryptocurrencies stable. In 2018, an official report outlining the stablecoin proposal landed on the desk of Cyrus Younessi, an analyst at crypto investment firm Scalar Capital. Younessi sent a note to his boss explaining that the project could enter a “death spiral” in which a collapse in Luna’s price would sink the stablecoin as well.
“I thought, ‘This is crazy,’” Younessi said in an interview. “Surely this doesn’t work.”
When Luna became fashionable, her detractors became louder. Charles Cascarilla, a co-founder of Paxos, a blockchain company offering a rival stablecoin, questioned Luna’s underlying technology in an interview last year (Kwon responded by mocking him on Twitter: “What the heck is Paxos? ”). Kevin Zhou, a hedge fund manager, repeatedly predicted that the two currencies would crash.
Still, however, venture investments poured in to fund projects based on Luna’s underlying technology, such as services for people to trade cryptocurrencies or take and extend loans in TerraUSD. Investors, including Arrington Capital and Coinbase Ventures, poured in more than $200 million between 2018 and 2021, according to PitchBook, a firm that tracks funding.
In April, Luna’s price rose to a high of $116 compared to its price of less than $1 at the start of 2021, creating an entire generation of crypto millionaires. A community of retail investors organized around the coin, praising Kwon as a cult hero. Mike Novogratz, CEO of Galaxy Digital, a company that invested in Terraforma Labs, announced his support by getting a Luna-related tattoo.
Kwon, who operates from South Korea and Singapore, gloated on social media. In April, Kwon announced with a tweet that he had named his newborn Luna, “My most precious creation is named after my greatest invention.”
“It’s the cult of personality—Do Kwon’s bombastic, arrogant attitude—that sucks people’s attention,” opined Brad Nickel, host of the cryptocurrency podcast “Mission: DeFi.”
Martin Baumann, co-founder of CMCC Global, a Hong Kong-based venture capital firm, said his company sold its holdings in March, at around $100 per coin. “We were getting more and more concerned, both on the technological side and the regulatory side,” Baumann said in an email. (CMCC and Hack VC declined to comment on their earnings.)
Even Kwon hinted at the possibility of a crash, publicly teasing that some of the crypto startups could go under at some point. Kwon said he found it “entertaining” to watch companies collapse.
Last week, the decline in cryptocurrency prices combined with complex economic trends to create panic in the markets. Luna’s price fell almost to zero. As its critics had predicted, the price of TerraUSD collapsed at the same time and fell from its $1 peg to as low as 11 cents this week. In a matter of days, the crypto ecosystem that Kwon had built essentially lost all its value.
“I am heartbroken at the pain my invention has caused everyone,” Kwon tweeted last week.
Some of Kwon’s major investors have lost money. Changpeng Zhao, CEO of crypto exchange Binance, which invested in Terraform Labs, said his firm had bought $3 million worth of Luna, an amount that peaked at $1.6 billion. However, Binance never sold its coins. Currently, his Luna holdings are worth less than $3,000.
That loss is still just a drop in the bucket for a company as big as Binance, whose US division is valued at $4.5 billion.
“Most venture capital firms have the necessary analysts to assess these issues,” Nickel said. “They must have assumed that they could collect at the expense of minor investors.”
Instead, common traders have felt much of the woe of the collapse. In a Reddit forum for Luna evangelists, users shared lists of suicide prevention hotlines, with people who invested their savings in Luna or TerraUSD saying they had given up hope.
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