The Do Kwon Story: From Visionary to Fugitive

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By A D

The cryptocurrency world witnessed a seismic event in 2022 when Do Kwon’s TerraUSD stablecoin (UST) collapsed, sending shockwaves throughout the ecosystem. Kwon, once regarded as a cryptocurrency visionary, found himself facing lawsuits from the U.S. Securities and Exchange Commission (SEC) for allegedly misleading investors after $40 billion was wiped off the market.

The Rise Of Do Kwon

Do Kwon’s journey began with Terraform Labs, a company he co-founded in 2018. Terra aimed to create a blockchain ecosystem with its native token, LUNA, at its core. Kwon’s background as a Stanford University graduate with expertise in computer science and programming languages set the stage for his involvement in blockchain projects. He was associated with initiatives like Anchor and Mirror protocols.

Do Kwon introduced terra as an ecosystem of stablecoins and defi applications

In 2022, Terra and TerraUSD were poised for success. The company launched the Luna Foundation Guard, a nonprofit organization, with the aim of stabilizing the value of LUNA by backing it with TerraUSD. However, May 2022 marked a turning point as the mechanism designed to maintain UST’s $1 peg to LUNA faltered.

A massive sell-off of UST tokens triggered a chain reaction, causing the value of both UST and LUNA to plummet, resulting in significant losses for investors. By May 2022, the token’s valuation deteriorated due to substantial withdrawals by Anchor Protocol. Kwon’s attempt to salvage it by using a $3 billion reserve fund proved futile, as the value disintegrated to just a few cents.

The Fall Of Do Kwon

Kwon’s descent from a revered crypto pioneer to an international fugitive reached its climax in March. South Korean authorities issued an arrest warrant for Do Kwon in September 2022. He had been on the run, with suspicions that he was hiding in Serbia. He was eventually apprehended at the airport in Montenegro while traveling under a false identity with fake documents.

do kwon arrested in montenegro in september,2022
Do Kwon arrested and detained in Montenegro.

The U.S. Securities and Exchange Commission (SEC) has charged him with defrauding investors. The U.S. Justice Department unsealed an indictment, charging him with eight counts of fraud. Do Kwon has been under investigation by various government agencies for the past 11 months. South Korean prosecutors have hinted that if convicted in their country, Kwon could face the most extended jail term for a financial crime in their history.

Further complicating the situation, political turmoil in Montenegro emerged. A letter from Kwon to Dritan Abazovic alluded to connections with Milojko Spajic, a politician and Luna investor, sparking accusations of liaisons with the crypto fugitive.

The United States and South Korea are now pushing for Kwon’s extradition from Montenegro, although Montenegrin officials have indicated that they may only consider this after local legal proceedings conclude.

The Latest Jump Trading Twist

New documents in the case shed light on Jump Trading’s involvement in the tumultuous events. It is revealed that Jump Trading purportedly made an astonishing $1.28 billion in profits as the ecosystem crumbled. This financial windfall came at a time when the stablecoin lost its peg to the U.S. dollar.

Jump Trading’s involvement is significant due to a prior incident in which UST temporarily lost its peg to the dollar. While Kwon maintained that the coin retained its $1 value thanks to its automated algorithm, SEC experts counter that Jump Trading’s intervention in the market played a pivotal role.

the jump trading office
Jump Trading is the latest addition to this mess of Terra fiasco. Image Source: Glassdoor

In response to these allegations, Do Kwon’s team vehemently denies any wrongdoing and disputes the idea that Jump Trading was responsible for restoring the peg in May 2021. According to Kwon’s defense, the depegging in May 2022 was the result of a deliberate effort by third parties to “short” UST, causing it to lose its price peg. This intervention, they argue, was a direct and public act to counteract the shorting of UST.

The legal case surrounding Do Kwon’s actions has taken on added layers of complexity. His defense team has raised questions about the SEC’s jurisdiction in the matter. They argue that the assets involved in the case are currencies, not securities, underscoring a legal gray area that has also been at the center of the regulator’s cases against major cryptocurrency exchanges like Binance and Coinbase.

Read: Binance vs. SEC: The Lawsuit and its Ripple Effects on the Crypto Industry

Terra Luna’s Roller Coaster Ride

A project that once held the promise of revolutionizing the world of finance found itself teetering on the edge of oblivion in a matter of weeks.

Terra Luna was the brainchild of Daniel Shin and Do Kwon, the founders of Terraform Labs, a South Korean startup. Their grand vision was to build a new financial system through stablecoins and decentralized finance (DeFi) applications. Terra’s first stablecoin, Terra KRW (KRW), was pegged to the South Korean won. This, however, was just the beginning.

terra.money website interface
Daniel Shin and Do Kwon started Terraform Labs with a vision to build a new financial system. Image Source: Terraform Labs

Unlike traditional fiat-backed stablecoins, algorithmic stablecoins like UST rely on intricate incentive mechanisms to maintain their peg at $1. When UST falls below $1, traders can redeem it for $1 worth of Luna, effectively reducing the supply of UST and supporting its price. Conversely, if UST trades above $1, users can swap $1 of Luna for newly minted UST, increasing the supply and lowering the price.

However, there’s a catch – this delicate balance relies on Luna’s price staying sufficiently high. The tumultuous crypto market conditions of 2022 would put this equilibrium to the test.

The Growth

Terra’s ecosystem grew to encompass various fiat-pegged coins, but its cornerstone was the algorithmic stablecoin, TerraUSD (UST), which made its debut in 2020. Luna played a crucial role as the native governance and utility token backing Terra’s stablecoins.

In 2021, Luna’s value surged, driven by speculation that Terra’s DeFi ecosystem could challenge traditional financial systems. Major venture capital firms bet big on Terraform Labs’ vision. By January 2022, UST had achieved a remarkable $10 billion market cap, ranking as the third-largest stablecoin. At the same time, Luna reached an all-time high of $116.

The Terra team also made strategic sponsorships and advertising deals, fostering a dedicated and passionate community.

terra's all time high of $116 and consequent fall
LUNA saw a high of about $120, then fell to cents.

The Decline

May 2022 witnessed the unthinkable as UST lost its peg, leading to a panic-induced sell-off. Billions of dollars’ worth of UST were swapped for Luna within days, rapidly expanding Luna’s circulating supply.

In response, Luna’s price plummeted over 99%, decimating its collateral value. With no reserves to support UST’s peg, it descended into a catastrophic death spiral of relentless selling.

Both Luna and UST crashed almost to zero, obliterating an astonishing $40 billion in market capitalization in just one week. This market crash left Terra’s loyal community members grappling with substantial financial losses.

the fall in ust market cap
UST crashed, wiping $40 billion off its market cap. Image Source: CMC

Desperate to salvage their project, developers proposed radical solutions, including a hard fork to rewind the blockchain. Unfortunately, these efforts sputtered, adding further confusion. Luna Classic (LUNC) tokens from the original chain remained, while a new chain was initiated for Luna v2 tokens.

Read: LUNC developer unveils “Block Entropy”

But by this point, the damage was done.

When speculation divorces asset values from their utility, stability can disappear overnight. The story of Terra Luna’s boom and bust will continue to be a cautionary tale in the world of digital assets.

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