(Bloomberg) — Back in 2016, when Do Kwon was just a little-known startup founder with grand ambitions of bringing free internet to all, he noticed his research on distributed networks kept bringing up stuff on Bitcoin and Ethereum.
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Next thing he knew, he’d fallen “down the crypto rabbit hole.”
Fast forward to today, and this relative newcomer is now one of the most influential — and controversial — figures in that rabbit hole.
On one side are the legions of fans and deep-pocketed crypto backers called “Lunatics,” who have turned Kwon’s vision of engineering a stable, digital currency that’s both easy to spend in real life and free from the tentacles of Wall Street and government regulators into one of the biggest blockchain projects to date — with tens of billions of dollars’ worth of crypto tied to the ecosystem. (“Lunatics,” for the uninitiated, is a nod to the Luna token, which through some algorithmic wizardry, is designed to keep the Terra stablecoin, commonly referred to as UST, stable. More on that later.)
On the other are the critics, including within crypto itself, who say Kwon is doomed to fail. Some liken the seemingly too-good-to-be-true 20% interest on the Terra blockchain’s lending-and-borrowing program to one big Ponzi scheme that will ultimately collapse under its own weight. Others warn — albeit without much evidence — that it risks bringing down the entire world of digital assets.
At the center of it all is Kwon, the 30-year-old “King of the Lunatics.” This year, a group led by Kwon wowed the laser-eye crowd by buying more than $1.5 billion in Bitcoin to help prop up Terra, with plans to purchase as much as $10 billion worth of the token. That’s made it not only one of the original cryptocurrency’s biggest whales, but also a flash point for boosters and naysayers alike. Believers see the purchases as a bold move to bring Kwon’s vision a step closer to reality. Skeptics say it’s a desperate ploy to divert attention away from a project that’s bound to run out of money.
“Right now, my role in the crypto industry is a little polarizing,” Kwon, co-founder of Terraform Labs, said in an interview with Bloomberg. “Because, you know, we’ve been making a lot of big moves. And that ruffles some feathers.”
Kwon seems to relish stirring up trouble, and his online persona is built on confidently combative and at times puerile tweets. In fact, he first vaulted into the collective crypto consciousness after raising his figurative middle finger at the U.S. Securities and Exchange Commission, suing the agency over its scrutiny of software developed by Terraform that allowed people to create, and speculate on, tokenized, synthetic stocks and ETFs without ever owning the actual thing.
So it’s perhaps no surprise that Kwon waves away the accusations of Terra being a Ponzi scheme careening toward disaster. And he’s putting his money where his mouth is: In March, he placed an $11 million wager — on the blockchain of course — with two of his social-media critics to prove them wrong.
Plenty in the crypto world are also betting on the Stanford grad and former Apple and Microsoft engineer.
Besides his more than 360,000 followers on Twitter, some of the most influential names in the industry are card-carrying Lunatics. Terraform Labs is backed by firms such as Coinbase Ventures, Galaxy Digital, Pantera Capital and a host of other players in crypto. The Luna Foundation Guard, the organization buying Bitcoin for Terra, also raised $1 billion in February through a private sale of Luna tokens, with buyers including Jump Crypto, Three Arrows Capital and others.
Michael Novogratz, the billionaire crypto luminary who leads Galaxy Digital, wears his respect for Kwon and Terra on his sleeve. Literally.
“I’m probably the only guy in the world that's got both a Bitcoin tattoo and a Luna tattoo,” Novogratz told the Bitcoin 2022 conference in Miami on April 6, referring to the wolf howling at the moon that covers most his upper left arm.
The reason for all this breathless excitement, and a big reason why Terra has quickly become the second-largest blockchain used in decentralized finance, sounds at first rather mundane: the promise of engineering a cryptocurrency that’s worth a buck. Exactly a buck, to be precise: $1. No more, no less. In the volatile world of crypto, though, that’s not as easy to accomplish as it sounds — particularly when you’re trying to avoid interacting with the traditional financial system altogether.
A stablecoin that’s reliably worth $1 is crucial to Terra’s ultimate goal of creating peer-to-peer digital cash that can bypass banks, governments and all their fees and regulations.
For now, stablecoins are still mostly used by speculators, often as a place to park their money to avoid wild swings in crypto markets in lieu of regular old U.S. dollars. Traditional bucks typically only enter and exit the crypto universe via exchanges such as Coinbase and FTX, which follow the same “know-your-customer” rules as banks and brokerages. Stablecoins are free to roam where traditional dollars cannot: in and out of various DeFi platforms that offer users anonymity, not to mention all sorts of cutting-edge — and risky — ways to speculate on more crypto.
Issuers of the biggest stablecoins, Tether and USDC, attempt to accomplish that one-to-one dollar peg by holding real-world, dollar-denominated reserve assets such as T-bills or commercial paper. Yet that invariably requires a bank or some other centralized firm to be involved, which DeFi evangelists such as Kwon say flies in the face of their overarching mission to liberate humanity from financial and regulatory “censorship.” For example, some regulator could shut the whole project down and seize the assets.
That’s where UST comes in. It’s known as an algorithmic stablecoin, which aims to eliminate those risks by avoiding non-crypto reserves altogether. Instead, it attempts to maintain its dollar peg through a relationship with a fluctuating cryptocurrency, in this case Luna. To oversimplify, for every UST created, the same amount of value in Luna tokens is destroyed through embedded algorithmic codes, thus keeping UST at $1. High yields on UST deposits are meant to attract capital, which can then be lent out to generate income to pay depositors.
The track record of algo stablecoins, however, is littered with failure. Neutrino, IRON and Basis, to name a few, have all lost their dollar pegs, some in spectacular fashion, after price declines in the stabilizing tokens. That’s led some to suggest these types of protocols are little more than confidence games. As long as you can convince enough users the price will keep going up, everything’s OK.
Kwon says if anything, the risks that UST become unpegged to the dollar have increased simply because of the explosive growth of DeFi projects on the Terra blockchain. It’s a victim of its own success, so to speak.
To head those off, Kwon is falling back on one of the most oft-repeated mantras in all of crypto: Bitcoin fixes this.
The Luna Foundation Guard — which abbreviates to LFG, identical to another common crypto catchphrase that stands for “let’s f—ing go!” — plans to keep buying Bitcoin as a sort of backstop to help underpin UST. The LFG also will acquire $100 million of Avalanche tokens for the same purpose. As more UST is issued, part of the fees collected will be used to buy the collateral. In theory, this will allow Terra to fulfill the goal of providing a truly decentralized stablecoin.
Kevin Zhou, founder of crypto-quant hedge fund Galois Capital, is doubtful. Zhou has positioned itself as perhaps the most outspoken antagonist toward Kwon and the Terra community. On Galois’s Twitter account, the former head of trading at U.S. crypto exchange Kraken portrays his firm as ancient Rome and Terra as Carthage. For those rusty on their history: Roman soldiers ended up sacking Carthage and slaughtering many of its citizens in the Punic Wars.
Like many crypto feuds, Twitter serves as the main battlefield.
On almost a daily basis, Galois sends out tweet storms criticizing Terra, detailing how a potential mismatch in supply and demand between Luna and UST could result in the failure of the mechanism keeping the stablecoin at $1. Buying Bitcoin as a reserve asset, according to Galois, is a sign Kwon is worried about an ugly unwind.
Galois points to Terra’s annual percentage yield (APY) on deposits, currently about 19.5%, as the reason a deluge of UST supply hasn’t hit the market and threatened its $1 peg — yet. Galois is convinced those same high yields, governed by Terra’s Anchor lending protocol, will eventually drain the reserves that back the project. Simply put, more money is going out than coming in. To Galois, the math doesn’t work.
“Every day that ticks by, Anchor reserve bleeds several millions away, counting down like a doomsday clock,” the firm tweeted on April 7.
Indeed, in the past 30 days alone, the protocol has burned through more than $100 million of its reserves, leaving it with roughly $280 million, according to the DeFi data compiler Mirror Tracker.
Galois insists it only wants UST to fail, and fail soon, to prevent Terra from getting big enough to take down the crypto universe with it. The firm didn’t respond to requests to elaborate. A recent tweet suggests why: “And did you know, Do, that large traditional media companies reached out to me for comments on LUNA after seeing my tweets? I turned them down because I don't want to be a pawn in their pernicious anti-crypto narrative.”
Others, including an anonymous Twitter user known as @AlgodTrading, who made one of the high-stakes bets with Kwon about the price of Luna, have compared the project to a Ponzi scheme because it requires demand for the tokens to keep growing.
Of course, accusations of Ponzi schemes are pretty common in crypto, where there is typically no real-world cash flow or assets to back up the numbers on the screen. Bitcoin has been accused of being a Ponzi pretty much since its birth. Thirteen years and some $800 billion in market value later, Bitcoin is still going strong.
Kwon says demand for UST will also keep growing. While the Terra blockchain’s biggest app by far remains the Anchor protocol, he cites all the other apps being built, including Prism, which he calls “a really novel and innovative interest-rate swap protocol,” as well as gaming and cultural projects. The high interest rates on UST aren’t a risk to the project because they’ll come down as the project matures, he says. He compares those juicy yields to the 1990s, when commercial-banking rates were high in many Asian countries. Eventually, they fell as the economies matured.
“Look, so essentially where I’m coming from is I have a very strong belief in a decentralized ecosystem, decentralized money,” said Kwon, a native of South Korea who mostly splits time between his home country and Singapore. “I have pretty high confidence that Terra will be the largest stablecoin in the next two years.”
The work necessary to get there means the lifestyle of the king of the Lunatics isn't very looney at all, according to Kwon. When he's not working, he says he's usually just spending some time with his wife, who recently gave birth to their first child — a daughter aptly named Luna. If you want a meeting with him in Singapore, he'd prefer you join him for a hike in MacRitchie Reservoir so he can get some exercise.
Kwon also doesn’t have as much time as he once did to play StarCraft, the futuristic outer-space video game that inspired much of the terminology of his blockchain project — and inspires many of the interactions Kwon has with both fans and trolls. In the game, the Terrans are humans exiled from Earth who “excel at adapting to any situation,” as Wikipedia puts it.
So Kwon and his Terra project are adapting, too. He doesn’t ignore the advancing Romans and the various pieces of analysis they catapult at him like boulders from an onager: “It’s like a million data points that are coming in from all sorts of different places. And you sort of synthesize, then you try to, you know, put your best forward.”
Back in Miami, Novogratz sized up Kwon’s pivot to Bitcoin as a reserve asset to back up UST.
“It’s not without risk, right?” he told the audience in his keynote address at the conference. “He’s in this transition right now. The plan is to buy $10 billion worth of Bitcoin. And as that ecosystem grows, that number will grow. That’s all good as long as there’s not a run on the bank.”
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