"Your greatness is no greatness."
LUNA, the token that was supposed to algorithmically balance the TerraUSD "stablecoin," is trading for about $1.92 as I write this - down 94% since yesterday, down to 70 cents. TerraUSD (UST) is currently trading at about 67 cents.
This means that the Terra/Luna "experiment" is almost certainly over. The chances of the system stabilizing again and TerraUSD regaining its peg naturally are close to zero, as the entire structure was based on external subsidies and those backers may have finally come to their senses. Do Kwon is unlikely to receive another bailout.
It is impossible not to think about what is going through Kwon's mind as he contemplates the wreckage of what just a few days ago had the outlines of a soaring empire. In the history of business, or even public life in general, there have been few crashes so sudden and humiliating.
But one fall that came close was that of Elizabeth Holmes.
Self-deception is the most effective wayOnce she wasacover subject for glossy business magazines that hailed her as a revolutionary. Now the founder and CEO of Theranos is a 38-year-old pariah doomed to spend the rest of her life synonymous with fraud and moral weakness, like Jeffrey Skilling and Ken Lay of Enron.
Skilling, Holmes and Kwon also have deeper similarities. Crypto long-timers are well acquainted with the main line of financial scams in this field, mostly short scams like rug pulls and lazy lies about non-existent partnerships. One learns to recognize the energy of such cynical operators, the glint in their eyes that reveals their whole card.
Kwon stands out in that this twinkle was never so obvious - as with Skilling and Holmes, it seems plausible that he actually believed in his own come-on. Despite numerous critical assessments of Luna's basic structure, Kwon has not only stayed the course, but has spent the last 24 hours scrambling to find more capital to plug the holes in his sinking flagship. He is far from admitting that he caused the holes while building the ship. At least he gives the impression of a man who really believes in what he is selling.
This is significant because there will inevitably be major lawsuits and even prosecutions related to Luna's collapse. The defense in these cases will almost certainly try to convince judges and juries (the majority) that Kwon truly believed in the project and that its failure was an honest failure, not a protracted and complex fraud.
The same argument was at the heart of the criminal trial of Elizabeth Holmes, which concluded in January. Holmes founded her company at age 19 with the idea that blood tests could be miniaturized. However, she had no real technological insight into how to accomplish this, and what followed was a multi-year series of failures, prevarications and deceptions. Holmes' lawyers tried to argue that she had acted ineptly but honestly, but a jury found her guilty of fraud.
Do Kwon was not 19 when he founded TerraUSD, but in his late twenties. Yet he promised investors something extremely cool and useful - a decentralized stablecoin - without a novel or even sophisticated approach to actually creating one. In fact, it basically copied tokenomics from projects that had already failed and that close observers had warned for months would fail again under the Luna name. Then it actually failed - in May 2021, when TerraUSD's market cap was just $2 billion.
Kwon essentially dismissed this first, minor failure as an irrelevant glitch and made no real changes. Holmes followed a similarly motivated line of reasoning, falsifying early test demonstrations on the grounds that she was so sure her technology would eventually work that overplaying the current failure was not really a lie. Kwon defended his supposed innovation with such passion and vehemence that people gave him tens of billions of dollars, raising LUNA's paper value to $40 billion and TerraUSD's market capitalization to more than $18 billion.
What happened next was seemingly inevitable. But did Do Kwon himself understand this?
Primitive MindFreudianPsychology
is crucial to understanding this combination of conviction and fragility. The basic insight of Freudian psychology is that we cannot really control our behavior completely, that our conscious mind often just rationalizes behaviors that are actually controlled by our unconscious desires. This is a general way to understand the tendency of people to repeat things that are obviously not true: Impulsive and passionate people cannot easily change their behavior to match even the most obvious reason.
Even when they "know" at some level that they have failed or made a mistake, these people often just yell louder instead - what Freud would have called reaction formation. In this way of thinking, a threatening or dangerous thought is displaced by loudly and publicly proclaiming its exact opposite. When Elizabeth Holmes cheered her entire staff by shouting "F**k you, Carreyrou" after the first revelation of the fraudulent company by a Wall Street Journal reporter, she not only gave a public performance but also suppressed her own secret suspicions that she was a fraud.
Do Kwon showed exactly the same kind of reaction formation in the year before this week's collapse. After losing the May 2021 election, he referred to his critics as "cockroaches." In November, he called a detailed hypothetical description of the attack that occurred this week "the most moronic thread I've read this decade." When two threads in January attempted to explain Luna's weakness, Kwon personally referred to analysts as "idiots," "fools," and "dumbasses."
For those familiar with human perversity, such name-calling is a great warning signal, a sign to be very careful. But anger is an amazingly good marketing tactic when it comes to the less reflective masses. Anger gets attention - that's why social media sites have been caught promoting anger to increase user engagement. Supporters or even mere bystanders may see such outbursts as the understandable frustration of a victim who has been shortchanged.
But anger can distort our thinking, and some research has found that by boosting self-esteem, it increases the tendency to make confirmation biases. In other words: When you're angry-even when someone tells you to be angry-you're more likely to believe you're right and less likely to ask difficult questions.
Empires can be built on this kind of unconditional belief. But they will always be beset by their blindness at the edges - and as we've seen this week, that's where the death blow usually comes from.
The Power and the FameKwonist
Holmes was similar in at least one other respect: he knew, whether out of Machiavellian insight or base cunning, that big-name involvement in his project would legitimize it in the eyes of other speculators. Elizabeth Holmes courted big-name board members such as Henry Kissinger, George Schultz, and James Mattis-people with great public credibility but very little knowledge of bioscience. These supporters were key to putting her in the spotlight and keeping the Theranos scam going.
Investigations in recent days have shown how much big name support Kwon and Terra had. Where a low-grade exit scam might have hired a few prominent shills, Kwon has attracted reputable names to his capital table and investments from companies like Coinbase Ventures, Pantera Capital, and perhaps most importantly Jump Trading, a longtime traditional stock trading firm that has recently jumped into the crypto space.
All of these companies should take time in the coming days to comment on their involvement in the project, whose fundamentals were so questionable that it could become a black eye not only for its founder, but also for the crypto industry. Some supported Terraform Labs - the development team that created Terra-based tools and applications such as the Mirror and Anchor protocols - rather than Luna/UST specifically, which they should make clear defensively in this case.
Occam's razor suggests that some notable investors were not necessarily driven by Terra's fundamentals. As we know, discounts for early backers and short lock-up periods can mean venture capitalists make a lot of money even if a crypto project fails. And even if those funds did believe in the project to some extent, that belief may have been based more on Kwon's rumbling, made-for-2022 persona than Terra's technological potential.
This raises a final possible parallel with Holmes: Some have made the argument that she was, to some degree, a victim of the Silicon Valley funding machine herself. Some venture capitalists, the logic goes, saw the marketing potential of her story and image, but avoided questioning her skills and ideas. As dramatized in the Hulu series "The Dropout," Holmes thus became a tool for generating alpha that was cast aside when things went wrong. Do Kwon will certainly suffer greater damage than the big companies that gave him money.
Regardless of their motives, these investors likely helped fuel the sudden and enormous surge in retail investor participation in TerraUSD over the past year. This dynamic is unique to cryptocurrencies, as retail investors typically do not have access to equity in private companies funded by VCs in traditional markets. In some ways, this is a no-win situation: VCs are set up for frequent failure, so they can't be held particularly responsible if average Janes follow them into an ill-advised bet. Nonetheless, ethical crypto VCs might take a more responsible approach, as they can signal confidence without always disclosing the risks.
For professional investors who really fell for Do Kwon - his self-promotion, rage, and all - it may be time to think even more about themselves.