“And on the pedestal, these words appear:
My name is Ozymandias, King of Kings;
Look on my Works, ye Mighty, and despair!
Nothing beside remains. Round the decay
Of that colossal Wreck, boundless and bare
The lone and level sands stretch far away.”
-“Ozymandias,” Percy Bysshe Shelley, January 1818
“Your size is not size.”
-Do Kwon, March 2022
LUNA, the token that was meant to algorithmically balance the TerraUSD “stablecoin,” is trading as I write this at about $1.92 – down 94% since yesterday, and having dipped as low as 70 cents. TerraUSD (UST) is currently trading at about 67 cents.
This means the Terra/Luna “experiment” is almost certainly over. The chances that the system will restabilize, and TerraUSD will regain its peg naturally are near zero, since the entire structure was based on external subsidies, and those funders may have finally wised up. Do Kwon likely won’t get another bailout.
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It is impossible not to contemplate what is going through Kwon’s head as he surveys the wreckage of what just days ago had the outlines of a nascent empire. There have been few falls as sudden and humbling in business history, or even in public life more generally.
But one downfall that came close was Elizabeth Holmes’.
Once a cover subject for glossy business magazines who hailed her to the sky as a revolutionary, the founder and CEO of Theranos is now a 38-year-old pariah, doomed to spend the rest of her life as synonymous with deception and moral weakness as Enron’s Jeffrey Skilling and Ken Lay.
Skilling, Holmes and Kwon also have deeper commonalities. Crypto longtimers are well familiar with the main line of financial scams in the space, mostly short cons like rug pulls and lazy lies about nonexistent partnerships. You learn to recognize the energy of such cynical operators, the glint in their eye that reveals their hole card.
Kwon stands out because that glint was never so obvious – like Skilling and Holmes, it seems plausible he actually believed his own come-on. Despite reams of critical appraisals of the fundamental structure of Luna, Kwon not only stayed the course, but over the last 24 hours has angled to find more capital to flush through the holes in his sinking flagship. He’s nowhere near acknowledging that he put the holes there when he built it. At the very least, he’s doing a great impression of a man who really believes in what he’s selling.
This matters immensely because there will inevitably be major lawsuits and even criminal prosecutions around the collapse of Luna. The defense in those cases will almost certainly try and convince judges and juries (very much plural) that Kwon really believed in the project and that its failure was an honest shortfall, not a lengthy and complex deception.
The same argument was central to the Elizabeth Holmes criminal trial, which ended in January. Holmes founded her company at age 19 on the idea that blood testing could be miniaturized. But she had no real technological insights into how that might be accomplished, and what ensued was a multi-year series of compounding failures, evasions 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 launched TerraUSD, but in his late twenties. Nonetheless, he similarly promised investors something extremely cool and useful – a decentralized stablecoin – without a novel, or even sophisticated, approach to actually building one. In fact, he basically copy-pasted the tokenomics of projects that had already failed, and which close observers warned for months would fail again under the Luna brand. Then it did fail – in May of 2021, when TerraUSD’s market cap was just $2 billion.
Kwon essentially dismissed that first, smaller failure as an irrelevant glitch and made no real changes. Holmes, following similar motivated reasoning, faked early test demonstrations on the basis that she was so certain her technology would eventually work that papering over its present failure wasn’t actually lying. Kwon went on to defend his supposed innovation with such passion and vitriol that people gave him tens of billions of dollars, growing the paper value of LUNA to $40 billion and TerraUSD’s market cap to more than $18 billion.
What happened next was seemingly inevitable. But did Do Kwon himself understand that?
Freudian psychology is crucial to understanding this combination of conviction and fragility. The basic Freudian insight is that we do not really have full control of our behavior, that our conscious minds are often simply rationalizing behaviors that are actually guided by our unconscious desires. This is one general way to understand people’s tendency to double down on things that are obviously not true: Impulsive and impassioned people can’t easily modify their behavior to accord with even the most obvious reason.
So while they may on some level “know” that they’ve failed or made a mistake, these folks instead often just yell louder – what Freud might have called a reaction formation. In this habit of mind, a threatening or dangerous thought is pushed away by loudly, publicly declaring its exact opposite. When Elizabeth Holmes led her entire staff in a chant of “F**k you, Carreyrou!” after the Wall Street Journal reporter’s first expose on the fraudulent company, she was not just putting on a public performance – she was pushing away her own sneaking suspicion that she was a fraud.
Do Kwon showed exactly the same sort of reaction formation in the year leading up to this week’s meltdown. After the May 2021 depeg, he referred to his critics as “cockroaches.” In November, he referred to a detailed hypothetical description of the attack that occurred this week as “the most retarded thread I’ve read this decade.” When two threads in January sought to explain Luna’s fragility, Kwon personally called the analysts “idiot,” “stupid” and “dumbass.”
To those attuned to human perversity, such vitriol is a huge red flag, a sign to tread very cautiously. But anger is a confoundingly good marketing tactic when it comes to the less-reflective masses. Anger attracts attention – that’s why social media sites have been caught fostering anger to drive more user engagement. Supporters, or even mere onlookers, may see such outbursts as the understandable frustration of a victim getting a raw deal.
But anger can distort our reasoning, and some research has specifically found that it tends to increase confirmation bias by boosting self-confidence. In other words, when you’re angry – including when someone tells you to be angry – you’re more likely to think you’re right, and less likely to ask difficult questions.
Empires can be built on that kind of unquestioning conviction. But they will always be haunted by their blindness at the edges – and as we saw this week, that’s usually where the death blow comes from.
Kwon is similar to Holmes in at least one other way: He knew, whether out of Machiavellian insight or low animal cunning, that getting big names into his project would legitimize it in the eyes of other speculators. Elizabeth Holmes courted big-name board members like Henry Kissinger, George Schultz and James Mattis – notably, people with a lot of public credibility but very little knowledge of biosciences. Those backers were key to vaulting her into the limelight, and then keeping the Theranos fraud going.
Scrutiny over the last few days has highlighted just how much big-name support Kwon and Terra had. Where a low-rent exit scam might have hired a few celebrity shills, Kwon attracted reputable names to his cap table, garnering investments from the likes of Coinbase Ventures, Pantera Capital and perhaps most significantly Jump Trading, a longtime traditional equity trading firm that recently dove into crypto.
All of those entities should take time in the coming days to address their involvement in the project, whose fundamentals were so questionable it could become a black eye not only for its founder but the crypto industry. Some backed Terraform Labs – the development team that built Terra-based tools and applications like the Mirror and Anchor protocols – rather than Luna/UST specifically, and should defensively clarify that if so.
Occam’s razor suggests some big-name investors weren’t necessarily driven by Terra’s fundamentals. Notoriously, discounts for early backers and short lockup periods can mean venture capitalists make plenty of money even when a crypto project fails. And even if these funds did in some sense believe in the project, that faith might have been premised more on Kwon’s blustering, made-for-2022 persona than on Terra’s technological potential.
That raises a final possible parallel to Holmes: Some have made the argument that she was to a degree herself a victim of the Silicon Valley funding machine. Some venture capitalists, the logic goes, saw the marketing potential of her story and image, but avoided scrutinizing her abilities and ideas. As dramatized in the Hulu series “The Dropout,” this made Holmes little more than a tool for generating alpha, to be cast aside if and when anything went wrong. Do Kwon, certainly, will come out of this more grievously damaged than any of the big shops that gave him money.
Whatever their motives, these investors likely facilitated the sudden and huge runup in retail participation in TerraUSD over the past year. It’s a dynamic that’s unique to crypto, since retail investors can’t usually access equity in the private companies VCs fund in traditional markets. In some ways it’s a no-win situation: VCs are tuned for frequent failure, so they can’t be held particularly responsible when average Janes follow them into a wrongheaded bet. Nonetheless, ethical crypto VCs may want to take a more responsible approach, given their power to signal confidence without always disclosing risks.
For professional investors who were truly taken in by Do Kwon – his grandstanding, his anger and all the rest – it may be time for even more serious self-reflection.
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