by Kevin T Dugan at NY Mag’s Intellegencer
Last fall, when crypto founder Do Kwon threw a big bash in New York to celebrate and showcase the potential of his own work, he was a rising celebrity in the insular world of digital currencies. He had created two of the fastest-growing projects in the space: TerraUSD and Luna. At the time, the two interrelated cryptocurrencies were worth about $15 billion, on their way to more than quadrupling in just a few months.
Before the event kicked off, the 30-year-old did a preshow interview that was livestreamed on YouTube. He sat before a microphone, wearing a bulky blue jacket with a pair of Ray-Bans tucked into the breast pocket, and placed a nearly full beer on the table. Kwon’s shtick — the hyperconfident smirk in service of vague promises of transforming the world and building a global community of users — is familiar stuff to anyone who has paid attention to Silicon Valley over the past 20 years. What was new was that, instead of an app or a mobile device, Kwon wanted to dominate by upending the way everyone spends money, an ambition so huge he might as well have wanted to replace the air we breathe or the water we drink. In his vision, his decentralized currencies would become so ubiquitous and trusted that he could eventually step back from promoting and running them. “Anything that stands the test of time, it’s a cycle of life,” he said. “You begin from nothing and go back to nothing. That’s exactly where I want to be.” But he also acknowledged the possibility of failure, admitting there was a “kill switch” that would end the whole project if it spun out of control.
When he took the stage a half-hour or so later, though — before the 300-capacity crowd in front of a backdrop of the Manhattan skyline — any hint of caution was gone. “What we need to remember always is our true North Star of why we started this in the first place, and that is to make sure that our money is the most decentralized and the most useful on the face of this fucking planet!” Kwon shouted to huge applause.
Not even eight months would go by before Kwon’s whole project collapsed — about $60 billion was gone in a few days. The trillion-dollar global crypto market was thrown into chaos as prices plunged and panicked sellers began to doubt whether there was any really value in the entire sector. If this high-profile project could collapse in few days, could all the others? In Washington, regulators took notice and promised action. The scale of the disaster matched the scale of Kwon’s ambitions. To get to a $60 billion valuation, Kwon had sold legions of investors around the world — ranging from retail noobs to sophisticated Wall Street veterans and seasoned VCs — on his vision of himself as the next coming of Satoshi Nakamoto. In the aftermath, he’s trying to dig his way out of a failure that is garnering comparisons to the collapse of Enron. “He was definitely trying to build a Musk-style cult of personality on Twitter,” one Terra developer, who asked to go by Norman, told me. “He will unfortunately have to live with this shame forever and will be the new Ken Lay type.”
Kwon was born in South Korea in 1991. Details about his early life are unclear, but in 2010 he enrolled at Stanford University, where, according to officials there, he received a degree in computer science in 2016. He appears to have kept a deliberately low profile during his college years, though a public page he created says he worked for short stints at a “Microsoft business partner” and Apple. (A representative for Microsoft said they have “nothing to share” about Kwon, and Apple didn’t return an email seeking clarification.) After college, he was secretly behind a notoriously failed crypto project called Basis Cash, which bore some strong similarities to his work at Terra Labs. The project was billed as an outgrowth of another project called Basis, which had been shut down by the Securities and Exchange Commission in 2018. (That project was backed by Nader Al-Naji, a Princeton alum around Kwon’s age, who was also involved in the celebrity crypto-reputation market BitClout.)
Terraform Labs came into being in the wake of Basis’s failure. The idea behind this new venture was to create two interrelated digital currencies that had vastly different purposes but were designed to balance each other out. One was TerraUSD, called UST in shorthand. This was a so-called stablecoin, made to stay pegged at a value of $1. Stablecoins, which date back to 2014, are used by investors to buy into and cash out of cryptocurrency markets. Most stablecoins are backed by real assets that sit in actual bank accounts. UST, however, didn’t rely on any real-world financial holdings to underpin its value. Instead, as an “algorithmic stablecoin,” it was created to be in a constant, dynamic relationship with another digital token, Luna, whose value would rise and fall with the markets. The trick that Kwon used to keep the coins in balance — and to keep UST at a dollar — was the ability to exchange one for the other at fixed values, even if the price of UST wobbled. So if Luna was trading at $100, and the price of UST fell slightly below $1, an investor could exchange the latter for the former and make a little bit of profit on that small difference in price. That trade would also destroy that quantity of UST, lessening the supply, and causing the price to rise back to equilibrium. At least that was the theory. Making it work was a key step on the path of Kwon’s ultimate ambition to create the equivalent of a crypto central bank for the entire world — his “North Star,” as he put it in September. If it worked, it could potentially displace official national currencies as well as other stablecoins.
But for a long time,…
Continue Reading