Do Kwon, Founder of Cryptocurrency Coin TerraUSD and Token Luna, Loses Billions in Market Crash After Calling Critics ‘Bad’
Do Kwon, founder of the cryptocurrency coin TerraUSD and token Luna, and known for his unsavory branding of his critics as “poor,” is getting a taste of his own medicine after crushing billions of dollars of his wealth.
Just as cryptocurrencies are about to be integrated into economies and regulators are figuring out what to do with them, their value has been destroyed.
Watch the video above to see Do Kwon laugh at failing companies
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People are massively withdrawing from risky crypto assets amid mounting pressure on the currency after inflation and interest rate hikes.
Within the often baffling world of cryptocurrencies, a small but growing subspecies known as “algorithmic stablecoins” are ringing alarm bells for some investors and regulators.
This week, a popular so-called algo coin crashed into its crater, wiping out billions of value in just a few days.
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The coin, called TerraUSD, is designed to keep its value at $1 forever and ever. Amen.
Instead, it fell as low as $0.23 on Wednesday before gaining some ground again. It hovered around $0.60 early Thursday.
That caused sister cryptocurrency Luna to drop from about $80 to below $0.05 in days.
Terraform Labs CEO Kwon tweeted Wednesday that recovery efforts were underway, encouraging investors to “stay strong” amid the big plunge.
On Thursday, backers struggled to win investor support for the recovery plan, Bloomberg reported.
For critics of the controversial crypto product, it’s an “emperor has no clothes” moment. Or, more pessimistically, a Lehman Brothers moment.
But to understand what’s going on in this corner of the crypto market and why Kown is eating his words now, it’s important to understand what these newfangled investment products are and how they work.
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What is a stablecoin?
Cryptocurrencies like Bitcoin and Ether are known for their wild fluctuations in value that make investors nervous.
Stablecoins, as their name implies, are designed to remain stable.
Most stablecoins are tightly pegged to a traditional fiat currency, such as the US dollar, or a commodity, like gold.
Investors buy them to store funds and facilitate deals within the cryptocurrency infrastructure.
They are also used for other types of financial exchanges, such as borrowing, lending, or sending payments abroad with less friction than through a traditional bank.
Their claimed stability has turned these once obscure tokens into the foundation of the crypto ecosystem.
According to the Federal Reserve, the collective market value of all stablecoins has grown to $180 billion in March this year.
But don’t let the name fool you: not all stablecoins are stable per se.
Some stablecoins have a 1-to-1 connection to real assets, such as US Treasury bills. Some are linked to bonds, which can fluctuate in value.
But stablecoin’s quirky cousin, the “algorithmic stablecoin,” sparked panic among investors this week.
And while they sound the same, the algorithmic variety is functionally a very different beast.
The unstable currency?
Most stablecoins are backed by real collateral such as dollars or cash equivalents.
But algorithmic stablecoins are not necessarily backed by any real external assets and rely on complex financial engineering to keep their value stable.
And when they fall, they tend to fall hard — industry watchers call this a “death spiral.”
Algorithmic coins are “just a fancy way of saying, ‘We’re going to say this is worth a dollar because it’s backed by another asset that we’re also creating from scratch,'” said Charles Cascarilla, the chief executive and co-founder—Founder of Paxos, a blockchain infrastructure company.
In the case of TerraUSD, that other “out of the blue” asset is the cryptocurrency Luna.
This is how it works:
An investor can theoretically exchange one Terra for one dollar worth of Luna, its sister token whose price is not fixed. Traders who participate in a process called arbitrage can make quick profits by taking advantage of fluctuations in both assets – providing an incentive to keep Terra’s value stable at $1. For example, if Terra drops below a dollar, arbitrage traders dive in to buy Terra cheaply and exchange it for $1 worth of Luna. This eventually creates an ecosystem where traders trade Lunas and Terras to keep Terra’s value at $1.
The problem is that the entire ecosystem relies on traders who believe Luna has value. Once investors lose faith in the system, all bets are off.
“Every morning people can wake up and say, ‘Wait a minute, you made this all up, it’s worthless,’ and decide to ditch their Lunas and Terrace,” wrote Bloomberg columnist Matt Levine.
That seems to have happened this week. The wheels started coming loose over the weekend as investors pulled out of Terra and Luna.
“This is exactly the ‘death spiral’ that many people predicted,” said Henry Elder, head of decentralized assets at Wave Financial, a digital asset manager.
Many of those critical of Do Kwon’s stable currency model was berated online with insults about being “poor” by the founder of TerraUSD and Luna.
And Twitter stores receipts.
Seasoned economist Frances Coppola once said that the currency itself would fail when panicked investors leave en masse.
In typical Do Kwon style, he had beaten her back and called the economist “poor.”
“I don’t discuss the poor on Twitter, and I’m sorry I don’t have change for her at the moment,” he said.
Does Kwon tweet an insulting reply to Frances Coppola? Credit: Twitter
It wasn’t the first time Kwon had tweeted the slander.
One of Do Kwon’s many tweets uses “bad” as an insult. Credit: Twitter
Following Kwon’s recent lack of luck, Coppola retweeted an old post that is now more relevant than ever.
Ever since the fall of its stablecoins, Twitter users have been proving they’ve kept receipts — ripping out old founder swipes.
‘Would you like to argue with Frances Coppola now? You might get some small change as a charity,” one user wrote.
Another user wrote: “Ever heard that saying ‘be nice to people on the way up because you will probably meet them on the way down’? You are no longer on your way up.”
“I’ve never seen a market humiliate a person so much,” wrote another user.
So, what happens next?
Stablecoin advocates warn that this is not the time to throw the baby out with the bathwater, noting that currency-backed stablecoins such as Tether and USDCoin remained stable during Terra’s collapse this week.
But on Thursday, mounting pressure shook Tether, the world’s largest stablecoin with a market cap of $80 billion.
According to CoinMarketCap, Tether fell to $0.96 early Thursday. The second largest stablecoin, USDCoin, remained stable at $US1.
Tether’s chief technology officer tried to reassure investors on Thursday by tweeting that the coin’s parent company is still honoring redemptions at the $US1 level “without a drop of sweat.”
Investors and regulators on edge
Bitcoin, the world’s largest cryptocurrency, has also suffered from the sour mood in crypto.
Early Thursday, the crypto traded around $28,000, down more than 12 percent in 24 hours. (Bitcoin, like other cryptocurrencies, trades 24 hours a day, seven days a week.)
Crypto assets are still a small part of the wider financial system. But powerful people like Treasury Secretary Janet Yellen are watching, fearing the situation could cause nasty and unpredictable aftershocks for investors of all levels.
Yellen, who testified before the Senate earlier this week, commented on Terra’s decline, saying it “simply illustrates that this is a fast-growing product and there are risks to financial stability.”
Also this week, Yellen warned that stablecoins “remain vulnerable to runs” as some are backed by assets that can lose value or become illiquid in times of stress.
Crypto evangelists tend to view meltdowns like Terra’s as an unfortunate loss but one that ultimately helps bolster the credibility of the underlying blockchain technology.
“The winnowing process of good and questionable ideas ultimately then the ecosystems Paxos’ Cascarilla. “The economy is completely shifting to the speed of the internet, but the financial system is still operating at the speed of the post office… Unfortunately, there are moments of creative destruction that end up being one of the best ways to narrow things down to what people want. can stand.”
– With CNN
