Doh! Kwon admits Terra/Luna was not self healing

The founder of the algorithmic stablecoin project Terra (UST), Do Kwon, has pled guilty to fraud charges in New York after a lengthy battle which saw the United States and South Korea seeking his extradition from Montenegro after being arrested and detained on charges of carrying a false passport.

Kwon rose to fame during the 2020/2021 crypto bull run as the Terra project launched the UST stablecoin. This was an 'algorithmic stablecoin' which used the LUNA cryptocurrency as a form of counterweight, with promises that the balance would keep UST always be redeemable for US $1 worth of Luna. The plan worked so long as Luna was considered to have value, but in May 2022, the LUNA token price crashed causing UST to depeg from the US dollar, from which it never recovered.

The signs of UST’s passing were already rising following an earlier depeg in 2021 and the launch of the Luna Foundation Guard, a bitcoin stockpile, intended to collateralize and defend the UST peg if necessary. During the 2022 collapse, Kwon famously tweeted the following, which quickly became a meme:

As well as T-shirts and hoodies:

However, the non-meme creation efforts to defend the peg were ineffective, and could not halt Luna’s fall wiping out billions in UST and Luna value and leaving a trail of financial and personal destruction from those those who had committed to the crypto, including Mike Novogratz, who promised to get a Luna Tatoo if the price hit US $100, and followed through, to much ridicule after the collapse.

The 2021 depeg event was ultimately Kwan’s comeuppance with Terraform Labs and the founder's claim that the token’s re-peg proved its resilience, particularly that the mechanism was “automatically self heal[ing]”. In fact, Kwon had procured a crypto brokerage, Jump Trading to aggressively defend the peg. The brokerage itself has faced SEC charges over the incident and ultimately settled paying a $123 million fine.

Meanwhile, Kwon, who was based in Singapore departed the jurisdiction and was later arrested in Montenegro after being caught attempting to fly to Costa Rica on a false passport. He famously appeared on Laura Shin’s, Unchained Podcast, where he defended his involvement in Terra’s collapse, demonstrating his commitment to his original view, and detachment from the consequences of the collapse.

South Korea and the United States pursued indictments against Kwon. The administrators of the token’s issuer, Terraform Labs, and Kwon subsequently entered into a US $4 billion settlement with the US SEC over the collapse which saw Kwon forfeit US $200 million in proceeds. He now faces a jail sentence but with a guilty plea has secured prosecutor's recommendation that his sentence not exceed 12 years. With FTX founder Sam Bankman Fried receiving a 25 year sentence, presently under appeal.

More broadly, the Luna collapse was a key factor in the onset of the "crypto winter" cycle of 2022 to 2024 and prompted regulatory efforts to restrict or ban algorithmic stablecoins, and prioritise cash and asset backed stablecoins, including efforts such as the Genius Act. Meanwhile, fiat and asset backed stablecoins continue to take market share as crypto payments increasingly enter the mainstream. In this context, the Luna collapse stands as stark reminder of entrepreneurial hubris and the time old adage, that if it looks too good to be true, it probably is.

First published at www.bitsofblocks.io and reproduced with permission.