Do Kwon Humbled as LUNA Spirals and UST Suffers 'Lehman Moment'
Terra Struggling to Stabilize Crisis as Investors Flee
By: Jason Levin • Loading...Dive
“I understand the last 72 hours have been extremely tough on all of you,” Do Kwon tweeted Wednesday morning.
“Extremely tough” will be an understatement for users who trusted their savings on a stablecoin – emphasis on the word “stable” – to now own only a small fraction of their initial holdings. Rarely has such a high-flying crypto project fallen so far, so fast, even in this volatile asset class.
Slipped its Peg
Investors woke Wednesday morning to see that Terra’s native token, LUNA, is trading at $1.55. That’s down 97.5% from its all-time high of $119.18. Moreover, UST, Terra’s flagship stablecoin, which slipped its peg on Monday, has continued its slide after briefly rebounding Tuesday, to touch as low as $0.29 in early trading New York time on Wednesday.
LUNA, which stormed out of nowhere last year to notch a $41B market value and foment an entire crypto ecosystem, is now worth $1.8B, according to CoinMarketCap.
Even worse, Terra’s meltdown may have repercussions outside of its ecosystem, impacting the entire blockchain industry. UST’s faceplant has triggered a regulatory crackdown in Washington, and delivered a heavy blow to the credibility of algorithmic stablecoins. While Do Kwon and his team are scrambling to shore up their stricken tokens, investors are bailing en masse. It’s hard to see how Terra and its system can recover.
Not that Kwon and his team are waving the white flag. For the last three days, they have been scrambling like mad to stabilize their wayward stablecoin and rekindle confidence in LUNA and UST. First off, they sold $750M in Bitcoin reserves to defend UST’s peg. Alas, it didn’t work for long.
At the same time, the Luna Foundation Guard, a Singapore-based non-profit that supports Terra, loaned Terra $1.5B in Bitcoin on Monday to stop the bleeding. That didn’t work either. Now the foundation is turning to top crypto investors to raise $1B to backstop UST, according to a report in The Block.
Then early Wednesday morning, Kwon endorsed a Terra community proposal to increase LUNA’s basepool to 100M special drawing rights from 50M, a move that will increase minting capacity from $293M to $1.2B, he said. That’s designed to help shore up UST.
Crypto wags quickly dubbed the bailout “Kwontitaive easing”, a riff on how central banks print money and flood economies with stimulus during crises like the Covid-19 pandemic.
“I am resolved to work with every one of you to weather this crisis, and we will build our way out of this. Together,” Kwon vowed in a tweet.
“This is crypto’s Bear Sterns/Lehman Brother’s moment, but here there are no [government] bailouts.”
The fall of Terra is making an immediate impact on a market that was already reeling from rising interest rates, inflation, and Russia’s war on Ukraine. An index of the top 100 DeFi coins has lost a third of its value in the last seven days, according to CoinGecko.
The episode is also punctuating the sense that crypto, after a spectacular two-year bull run that saw it peak at $3T last November, is truly entering a bear market. As one of the high-flying stars of decentralized finance, Terra’s crisis is casting a pall across a sector that’s been lauded for its innovative energy and received billions of dollars in capital investment in just the last year.
“My question now is where will contagion show up from the UST meltdown?,” asked Will Clemente, an analyst at Bitcoin hardware company Blockware Solutions. “This is crypto’s Bear Sterns/Lehman Brother’s moment, but here there are no [government] bailouts.”
It’s also quite the reckoning for Kwon, a South Korean native who studied computer science at Stanford University and co-founded Terraform Labs in 2018 in Singapore. A dynamic and outspoken entrepreneur, Kwon quickly established himself as one of the most ambitious builders in DeFi.
Do Kwon founded Terra in 2018.
Not content with one platform, he assembled a constellation of interlocking projects such as LUNA, Terra’s native token, the Luna Foundation, and Anchor, a savings and lending platform that offered 20% fixed interest to investors.
And of course there was UST, a stablecoin that was backed by an algorithmic formula to control supply and demand, rather than fiat currency such as U.S. dollars. By pledging to redeem 1 UST for $1 worth of LUNA, the stablecoin was supposed to be more censorship resistant than counterparts such as USDC, which rely on holding U.S. dollars in a bank.
It was just the type of edgy innovation that crypto investors loved. As Terra’s value multiplied by tens of billions of dollars in 2021, Kwon developed a taste for braggadocio. He dubbed himself the “Master of Stablecoin.” He was so confident in his handiwork that in March he accepted a $10M bet that Luna would be higher in 12 months.
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In April, Kwon vowed to poleax DAI, the algorithmic stablecoin supported by DeFi stalwart MakerDAO. He introduced a “4pool,” an amalgam of four stablecoins on Curve Finance to take on his rival.
“By my hand $DAI will die,” Kwon tweeted.
Humility and Industry
Even as Kwon was struggling to save his own projects from an untimely demise, MakerDAO inked a groundbreaking deal this week to use DAI to finance a shipment of Australian beef to Hong Kong. It’s the kind of project that demonstrates the real world utility of DeFi. Do Kwon has not responded for comment in time of publication.
Now Kwon is setting out to rescue with the humility and industry of a man who is watching his dream, and billions of dollars in value, evaporate. He has communicated clearly with the Terra community on Twitter, as has the Terra Daily feed. Kwon has walked followers through the process of stablecoin pegs.
“Before anything else, the only path forward is to absorb the stablecoin supply that wants to exit before $UST can repeg,” he said.
And he and Terra Daily are inviting members to join forums and volunteer ideas for stabilizing the crisis. Kwon urged his followers to accept that Terra is built for the long term. “Short term stumbles do not define what you can accomplish,” he said.
The problem is that Terra’s collapse has all the hallmarks of something far more devastating than a stumble. At this point, as the effort to salvage the project continues, there may be only one certainty.
“This is a painful lesson for a lot of new market entrants for sure,” said Adam Cochrane, a partner at Cinneamhaine Ventures.
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