(Bloomberg) — Back in 2016, when Do Kwon was just a little-known startup founder with big ambitions to provide free internet to everyone, he noticed that his research on distributed networks kept bringing things up to Bitcoin and Ethereum.
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The next thing he knew, was that he had fallen “into a crypto rabbit hole.”
Fast forward to the present day, and this relative newcomer is now one of the most influential – and controversial – figures in that rabbit hole.
On one side are the legions of big-pocketed cryptocurrency fans and backers called “Lunatics,” who have transformed Kwon’s vision of engineering a stable digital currency that is easy to spend in real life and free from the claws of Wall Street and government regulators into one of the largest blockchain projects to date – where Tens of billions of dollars in cryptocurrency have been tied to the ecosystem. (Lunatics, for starters, is a reference to the Luna token, which was designed through some computational manipulation to keep the Terra coin stable, commonly referred to as UST.
On the other hand, there are critics, including within the cryptocurrency itself, who say that Cowon is doomed. Some liken the seemingly too-good-to-believable 20% interest on the Terra blockchain lending and borrowing program to a big Ponzi scheme that will eventually collapse under its weight. Others warn – albeit without much evidence – that this risks bringing down the entire digital asset world.
At the heart of it all is Kwon, the 30-year-old “King of the Crazy”. This year, a group led by Kwon wowed the Laser-eye crowd with the purchase of more than $1.5 billion in Bitcoin to help support Terra, with plans to buy up to $10 billion in the token. This made it not only one of the original cryptocurrency’s biggest whales, but also a flash point for promoters and opponents alike. Believers see the purchases as a bold move to bring Kwon’s vision closer to reality. Skeptics say it’s a desperate ploy to divert attention from a project that’s bound to run out of money.
“Right now, my role in the crypto industry is a bit polarized,” Kwon, co-founder of Terraform Labs, said in an interview with Bloomberg. “Because, you know, we’ve made a lot of big moves. And that rattles some feathers.”
Kwon seems to enjoy making trouble, and his online personality is based on combative and at times childish tweets. In fact, he first jumped into the collective consciousness of cryptocurrencies after he raised his metaphorical middle finger at the US Securities and Exchange Commission, suing the agency for its scrutiny of software developed by Terraform that allowed people to create and speculate on synthetic token stocks and ETFs without Owning the actual thing.
So perhaps it’s no surprise that Kwon shirks from Tira’s accusations that it’s a Ponzi scheme heading toward disaster. And he’s putting his money where it’s at: In March, he placed a $11 million bet — on the blockchain, of course — with two of his social media detractors to prove them wrong.
Many in the crypto world are also betting on a Stanford graduate and former Apple and Microsoft engineer.
Besides over 360,000 followers on Twitter, some of the most influential names in the industry are Lunatics who hold the cards. Terraform Labs is backed by companies such as Coinbase Ventures, Galaxy Digital, Pantera Capital, and a host of other crypto players. The Luna Foundation Guard, the organization that buys Bitcoin for Terra, raised $1 billion in February through a private sale of Luna tokens, with buyers including Jump Crypto, Three Arrows Capital and others.
Michael Novogratz, the brilliant crypto billionaire who leads Galaxy Digital, has Kwon and Terra on his sleeve. Literally.
Referring to the howling of a wolf on the moon’s surface covering most of its left arm, Novogratz said at the Bitcoin 2022 conference in Miami on April 6.
The reason for all this vitriolic excitement, and the big reason Terra has quickly become the second largest blockchain used in decentralized finance, appears at first somewhat banal: the promise of engineering a cryptocurrency worth a profit. Exact buck, to be exact: $1. No more, no less. In the volatile world of crypto, this is not as easy to achieve as it seems – especially when you try to avoid interaction with the traditional financial system altogether.
The $1 stablecoin is critical to Terra’s ultimate goal of creating a peer-to-peer digital money that can bypass banks, governments, and all their fees and regulations.
At the moment, speculators are still mostly using stablecoins, and it is often a place to park their money to avoid extreme volatility in the cryptocurrency markets instead of the regular old US dollar. Traditional dollars usually get in and out of the crypto world only via exchange platforms like Coinbase and FTX, which follow the same KYC rules as banks and brokerages. Stablecoins are free to roam where traditional dollars can’t: in and out of the various DeFi platforms that provide users with anonymity, not to mention all kinds of sophisticated – and risky – ways to speculate on more cryptocurrencies.
Issuers of the largest stablecoins, Tether and USDC, are attempting to achieve this dollar peg by holding real-world dollar-denominated reserve assets such as Treasuries or commercial paper. However, this always requires the involvement of a bank or other central company, which DeFi advocates like Kwon say goes against their overarching mission to free humanity from financial and regulatory “censorship.” For example, some regulators can shut down the entire project and seize the assets.
This is where the floor tanks come in. Known as an algorithmic stablecoin, it aims to eliminate this risk by completely avoiding crypto reserves. Instead, it is trying to maintain its peg to the dollar through a relationship with a volatile cryptocurrency, in this case Luna. To oversimplify, for every terrestrial reservoirs created, the same amount of value in Luna tokens is destroyed by the built-in algorithmic tokens, thus keeping the terrestrial lockers at $1. The higher yields on earth treasury deposits are intended to attract capital, which can then be loaned out to generate income to pay depositors.
However, the track record of algo stablecoins is littered with failures. Neutrino, IRON, and Basis, to name a few, have all lost their dollar pegs, some in spectacular fashion, after prices plummeted in their stability tokens. This has led some to suggest that these types of protocols are nothing more than trust games. As long as you can convince enough users that the price will continue to go up, all is well.
If anything, the risks of terrestrial treasuries not being pegged to the dollar have simply increased due to the explosive growth of DeFi projects on the Terra blockchain, says Kwon. She is a victim of her own success, so to speak.
To avoid this, Kwon retracts one of the most frequently repeated mantras in all cryptocurrencies: Bitcoin fixes this.
Luna Foundation Guard – which abbreviates to LFG, matching another common cipher phrase referring to “Let’s f—ing go!” – Plans to continue buying bitcoin as a form of support to help support terrestrial treasuries. LFG will also receive $100 million in Avalanche tokens for the same purpose. As more floor cabinets are released, a portion of the fees collected will be used to purchase the guarantee. In theory, this will allow Terra to achieve the goal of providing a truly decentralized stablecoin.
Kevin Chu, founder of crypto hedge fund Galois Capital, is dubious. Zhou has established himself as perhaps the most outspoken opponent of Kwon and the Terra community. On Galois’ Twitter account, the former head of trading at US crypto exchange Kraken portrays his company as Ancient Rome and Terra as Carthage. For those rusty in their history: Roman soldiers ended up deposing Carthage and slaughtering many of its citizens in the Punic Wars.
Like many crypto feuds, Twitter serves as a major battleground.
On an almost daily basis, Galois sends out tweet storms criticizing Terra, detailing how a potential supply and demand mismatch between Luna and UST could lead to the failure of the mechanism that keeps the stablecoin at $1. Purchasing Bitcoin as a reserve asset, according to Galois, is a sign of Kwon’s concern about an ugly relaxation.
Galois points to Terra’s annual percentage return (APY) on deposits, which is currently around 19.5%, because the reason a deluge of supply from underground reservoirs has not reached the market and has threatened its one-dollar peg — until now. Galois is convinced that those same high returns, governed by Terra’s Anchor’s lending protocol, will eventually drain the reserves that support the project. Simply put, more money is spent than you put in. For Galois, the math doesn’t work.
“Every day that passes, Anchor’s reserve bleeds several millions away, counting down like a doomsday clock,” the company said in a tweet on April 7.
In fact, in the past 30 days alone, the protocol has depleted more than $100 million of its reserves, leaving it with about $280 million, according to the DeFi Mirror Tracker data aggregator.
Galois insists he only wants the terrestrial vaults to fail, and to fail soon, to prevent Terra from getting big enough to take down the crypto world with it. The company did not respond to requests for expansion. A recent tweet suggests why: “And did you know, did the big traditional media companies reach out to me to comment on LUNA after seeing my tweets? I rejected them because I didn’t want to be a pawn in their anti-crypto malicious narrative.”
Others, including an anonymous Twitter user known as @AlgodTrading who made one of the high-stakes bets with Kwon about Luna’s price, have compared the project to a Ponzi scheme because it requires the demand for the tokens to keep growing.
Of course, accusations of Ponzi schemes are so common in crypto that there is usually no real cash flow or assets to back up the numbers on screen. Bitcoin has been accused of being a Ponzi largely since its birth. Thirteen years and about $800 billion in market capitalization later, Bitcoin is still going strong.
Kwon says the demand for underground tanks will also continue to grow. While the largest application of the Terra blockchain remains by far the Anchor protocol, it cites all the other applications that are being created, including Prism, which it calls “a truly innovative and new interest rate swap protocol,” as well as gaming and cultural projects. The high interest rates on the underground reservoirs do not pose a risk to the project because they will decrease as the project matures, he says. He compares these huge returns with the decades of the 1990s, when commercial bank rates were high in many Asian countries. In the end, they fell as economies matured.
“Look, basically where I come from I have a very strong belief in decentralized ecosystem and decentralized money,” said Kwon, a South Korean who mostly splits time between his home country and Singapore. “I have great confidence that Terra will be the largest stablecoin in the next couple of years.”
According to Kuhn, the work necessary to get there means that the lifestyle of the King of the Lunatics is not at all comical. When he’s not working, he says he usually only spends time with his wife, who recently gave birth to her first child — a daughter, aptly named Luna. If you’d like to meet him in Singapore, he’d rather you join him for a walk at MacRitchie Reservoir so he can get some exercise.
Kwon also doesn’t have as much time as he once did to play StarCraft, a futuristic outer space video game that has inspired a lot of terminology for the blockchain project – and inspired many of Kwon’s interactions with both fans and trolls. In the game, Terrans are humans exiled from Earth who “experience at adapting to any situation,” as Wikipedia says.
So Kwon and his project Tera are also adapting. He doesn’t ignore the Romans’ progress and the various bits of analysis that they hurl at him like boulders from a stone: “It’s like a million data points that come in from all kinds of different places. And you sort of synthesize, and then you try, you know, to give your best.”
Back in Miami, Novogratz has sized the Kwon hub for bitcoin as a reserve asset to support terrestrial treasuries.
“Not without risks, is it?” He told the audience in his keynote address at the conference. “It’s in this shift now. The plan is to buy 10 billion dollars worth of bitcoin. As this ecosystem grows, that number will increase. All good as long as there is no bank rundown.”
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