“I felt like I was going to die.” At the beginning of May, a so-called “Chancers”, an investor in cryptocurrencies, helplessly watches the price of his tokens collapse. Among them, Luna and TerraUSD (UST), a stablecoin whose value is pegged to that of the dollar. The Luna, which was still trading at $86 a unit on May 5, plummeted below the dollar a week later. The TerraUSD meanwhile loses its parity with the US fiat currency in the same time frame. It is now only worth $0.03.
“Chancers” says it lost $2.4 million in this crypto crash. Exasperated, he goes on the evening of May 12 to the man who is responsible, according to him, for his bad fortune: Do Kwon, the father of the two cryptocurrencies and the Terra block chain on which they are based. “Chancers” is determined to get an explanation from the South Korean entrepreneur based in the capital, Seoul. But it is the latter’s wife who opens the door. She gets scared. In addition to being ruined, the intruder is finally arrested by the local police, reports the BBC.
Luckily for Do Kwon, not all unfortunate Luna and UST holders act as “Chancers”. But the story illustrates well the degree of dissatisfaction with the young thirty-year-old. “Scammer” at the head of a “Ponzi scheme”, compared to the fallen star of Silicon Valley Elizabeth Holmes … Criticism is raining on social networks against the former engineer who worked for Microsoft and Apple and graduated from computer science at Stanford (USA). A lawsuit has also been filed by South Korean investors. The cryptocurrencies acquired by Do Kwon together lost nearly $40 billion in value during the crypto crash. Disappointment actually lives up to expectations in the Terra ecosystem… and in Do Kwon.
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The beginnings are promising. The ex-engineer launched Terraform Labs in 2018 and with his block chain immediately attracted 40 million users. The following year, he was among the 30 profiles to follow in the world of finance, according to the reference economic media across the Atlantic, Forbes. Then he launched TerraUSD in September 2020 when two behemoths already dominate this market, Tether and USD Coin. A real bet. “Stability, an essential condition for the piece of money wins the trust of users and can be used as a means of payment, is not easy to reach”, comments Nathalie Janson, associate professor at Neoma Business School in Rouen. Tether – still the most valued today – is based on a simple but very profitable rule: each token issued must be covered by its equivalent in dollars, a guarantee in the event of a massive liquidation.
Do Kwon innovates by launching the TerraUSD on an algorithmic model. “The idea is to have a self-regulating mechanism that allows the stabilization of the currency around a dollar. And this, by using the other cryptocurrency, the Luna, as collateral instead of the dollar itself”, continues Nathalie. Janson. Convinced, Coinbase Venture or Galaxy Capital financially financed the Do Kwon project. The crypto world too. The “Lunatics”, the community around Luna and Terra, strongly believe in the durability of this system. This is also explained by its philosophy. “The crypto movement is a counter-movement to abrogate itself from the banking system. stablecoin has the merit of no longer depending on a fiduciary currency”, adds Nathalie Janson. At the time, Do Kwon impresses.
Crook or not?
But what especially pleases, at Terra, comes from Anchor, a decentralized finance (DeFi) protocol. Do Kwon assures that by paying his TerraUSD there, used for loans, it is possible to obtain returns of up to 20%. Unheard of in the world of stablecoins. “This product has greatly facilitated the incredible growth of TerraUSD and therefore Luna, which have become among the most valuable assets in the ecosystem,” notes cryptocurrency specialist Philippe Herlin. The other side of the coin: veteran economist Frances Coppola notably points out to Do Kwon, on Twitter, that the risks associated with DeFi are high, and that the slightest jolt in the market could cause massive withdrawals, which his algorithm would have well hard to contain. The Korean replies that he does not debate with the “poor”.
“His unfailing optimism and his personality have also won by bringing people into his system”, according to Philippe Herlin. Protrusions of this type accumulate. Eight days before the crash, and when the market is already bearish, he confides in an interview that it is fun to watch the weakest companies crumble. Implied: everything will be fine for Terra and Luna. Cynic destined: So Do Kwon’s arrogance backfired. “The TerraUSD and the Luna took a dive. Both the algorithm and the security mechanism put in place – the Terra foundation held bitcoins, in case the Luna was insufficient as collateral – failed. In the crypto community there was debate on the form of stablecoin which would be the most promising. There, of course, the algorithmic models smoke a blow”, deciphers Nathalie Janson.
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To his one million Twitter followers, Do Kwon still presents himself as the Stablecoin Master (stable master of tokens). On Wednesday, May 25, its community voted for a relaunch of the Terra blockchain around a new token. Another Luna, but without stablecoin associated algorithm, this time. A fresh start with new rules. The Binance or Crypto.com platforms have already been planned to list it. All former UST and Luna holders will get some for free. What to restart the machine? “It will be complicated, its creation has been heavily attached”, notes Philippe Herlin. Regardless of the nature of this new token and its ambition, the still young and unstable cryptocurrency market relies heavily on trust. “Now, who can trust Do Kwon now?” asks the economist. Certainly not “Chancers”.
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