Crypto Collapse Turns South Korea Against ‘Mad’ Leader

“Do Kwon was like a successful cult leader,” said Donghwan Kim of Blitz Labs, a Seoul-based crypto consultancy. But now he is the most hated man
in Korea.”

Kwon attended an elite foreign language high school in Seoul and studied computer science at Stanford University. In 2018 he co-founded Terraform
Labs in Singapore with Daniel Shin, the prominent founder of South Korean e-commerce unicorn Ticket Monster.

Descending to zero

The pair launched the terraUSD stablecoin in 2020. Terra should have a stable value of $1. The dollar peg was maintained by an algorithmic relationship with the luna cryptocurrency. To buy terra, users need luna, and vice versa.

This seesaw dynamic is intended to keep the price of terra stable, but a run occurred early this month. When the luna stock was sold, the cryptocurrency’s value plummeted to zero, undermining the delicate algorithmic balance of the ecosystem and breaking terra’s peg to the dollar.

The Luna Foundation Guard, a nonprofit that supports the Terra ecosystem, failed to mobilize enough bitcoin reserves to ensure the stability of Terra, and confidence in the model evaporated.

“The currency’s market capitalization grew too large too quickly when their reserves or resources…
defending their value were not ready yet,” said a close former colleague of Kwon.

“They started building reserves and bought $3.5 billion worth of bitcoin, but it was too late.”

Individual investors were attracted by an arrangement where clients could: lend their terra for a yield of 20 percent. But hundreds of millions of dollars in investment in Terraform Labs came from venture capital firms, including Galaxy Digital, whose CEO Mike Novogratz would later acquire a luna tattoo on his left shoulder.

“Commitments from some of the most respected funds are a testament to the shared vision to bring decentralized finance to the masses,” Kwon said in July last year.

Online army of ‘crazy’

His closest colleague at Terraform Labs had a different explanation: Many investors were “measured by his brilliance.”

“Do was able to attract a lot of famous investors because there were a lot of people in the crypto market who agreed with his philosophy and slogans about the need for decentralized funding and DeFi tokens,” said the former colleague.

“They found the algorithm model fresh and appealing because there was a growing need for stablecoins and the coins were in no way linked to the real economy, only supported by each other and by bitcoin.”

Kwon’s high profile backers, global marketing strategy and hurtful social media personas helped attract attention and private investors, some of whom formed an online army of supporters dubbed the “crazy”.

Skeptics got short shrift. “I don’t discuss the poor on Twitter, and I’m sorry I don’t have change for her at the moment,” Kwon wrote last year after a British economist expressed doubts about the algorithmic stablecoin model.

“Mads believed his lack of manners was a way of protecting their wealth,” said Kim of Blitz Labs, “so his arrogance gained a lot of community support and it quickly became his trademark.”

Kwon’s former colleague at Terraform Labs identified the decision to offer investors a 20 percent annual return as when terra/luna “started growing too fast.”

“About 14 trillion won to 15 trillion won was deposited in just a year after they started offering the 20 percent yield,” he said. “Retail investors were lured by the high returns, while venture capital was attracted by the rapid growth of the coins. The growth rate was unsustainable.”

Kwon made all decisions alone

Another former colleague, ex-Terraform Labs engineer Kang Hyung-suk, said: “Engineers inside all knew the risks of the 20 percent yield. They all thought it wouldn’t be sustainable because we didn’t have enough money to do it.” But no one expressed concern with Do, who often ignored opinions that contradicted him.”

Kim Hyoung-joong, head of the Cryptocurrency Research Center at Korea University, said: “Kwon called for decentralized funding, but he made all the decisions alone. It’s ironic that the company’s decision-making was so centralized.”

The death spiral has claimed some high-profile victims.

“Bad again,” Changpeng Zhao, founder of crypto exchange Binance, wrote on Twitter in response to a news report that the value of his investment in luna fell from $1.6 billion to less than $2,500.

Hashed, a Seoul-based venture capital firm that was a prominent financier and promoter of Kwon and Terraform Labs, has lost more than $3.5 billion in the crash, according to crypto site Coindesk.

But the most devastating losses were borne by ordinary retail investors.

Ji-hye, a South Korean office worker and mother of three children under the age of five, said she invested all her savings in the cryptocurrency after reading and seeing the 20 percent return (founder of payment technology company Chai) Daniel Shin was involved in the project.

“I did my best to build up savings, but bank interest rates seemed far too low during this period of high inflation. I was desperate for ways to save more for my three children,” said Ji-hye, whose name has been changed to protect her identity.

“I saw my savings grow day by day at the 20 percent interest rate, so I borrowed more money from the bank and put more on terra. It’s all my fault for not getting into it before investing, but I’m desperate without my savings.”

Kwon, who did not respond to a request for comment, wrote on Twitter in the wake of the collapse: “I am heartbroken at the pain my invention has brought to all of you.”

But always challenging, he has also tried to get developer support for a second chance. Terra’s failure, he argued in an online manifesto published last week, was “an opportunity to rise again from the ashes.”

Additional coverage: Scott Chipolina in London

Financial times

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