CRYPTO -$40 BILLION- CRUSH : ESSAY SOUTH KOREA

 

Terraform Labs, Seoul, South Korea : Mr. Kwon, a 30-year-old graduate from Stanford University, founded Terraform 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 conduct complicated transactions without relying on banks or other middlemen.

Mr. Shin and Mr. Kwon began marketing Luna currency in 2018. In 2020, Terraform started offering TerraUSD, which is known as a stablecoin, a type of cryptocurrency designed to serve as a reliable means of exchange.

Stablecoins are typically pegged to a stable asset U.S. dollar and are not supposed to fluctuate in value like other cryptocurrencies. Traders often use stablecoins to buy and sell other riskier assets.

Do Kwon, a trash-talking entrepreneur from South Korea, called the cryptocurrency he created in 2018  ''my greatest invention.'' In tweets and interviews, he has trumpeted the world-changing potential of the currency, LUNA, rallying a band of investors and supporters he has referred to as '' Lunatics ''.

Mr. 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 with the currency, even as critics questioned its technological underpinnings.

Luna's value ballooned to more than $40 billion, creating a frenzy of excitement that swept up day traders and start-up founders, as well as wealthy investors.

''Mr. Kwon dismissed concerns with a taunt : ''I don't debate the poor.''

But recently, Luna and another currency that Mr. Kwon developed, TerraUSD, collapsed spectacularly. The meltdown produced a domino effect in the rest of the cryptocurrency market, which tanked the price of Bitcoin and accelerated the loss of $300 billion in value across the crypto economy.

This week, the price of Luna remained close to zero, while Tearra USD continued to slide.

The downfall of Luna and TerraUSD provides a case study in crypto hype and who is left holding the bag when it all comes crashing down.

Mr. Kwon's rise was enabled by respected financiers who were willing to back highly speculative financial products. Some of those investors sold their  Luna and TerraUSD coins early, repeating substantial profits, whereas retail traders are now grappling with devastating losses.

Pantera Capital, a hedge fund that invested in Mr. Kwon's efforts, made a profit about 100 times its initial investment, after selling roughly 80 percent of its holdings of Luna over the last year., said Paul Verradittakit, an investor at the firm.

Panterna turned $1.7 million into around $170 million, The recent crash was ''unfortunate,'' Mr. Veradittakit said. ''A lot of retail investors have lost money, Im sure a lot of institutional investors have, too.''

Kathleen Breitman, founder of the crypto platform Tezos, said the rise and fall of Luna and Terra USD resulted from the irresponsible behaviour of the institutions that backed Mr. Kwon.

''You've seen a bunch of people trying to trade in their reputation to make quick bucks,'' she said. Now, she said, ''they're trying to console people  who are seeing their life savings slip out from underneath them. There's no defense for that.''

But TerraUSD was risky even by the standards of experimental crypto technology. Unlike the popular stablecoin Tether, it was not backed by cash, treasuries or other traditional assets.

Instead, it derived its supposed stability from algorithms that linked its value to Luna. Mr. Kwon used the two related coins as the basis for more elaborate borrowing and lending projects in the murky world of decentralized finance, or DeFi.

The Publishing continues. The World Students Society thanks authors David Yaffe-Bellany and Erin Griffith.