Terraform Labs CEO Do Kwon Arrested

Terraform Labs CEO and co-founder Do Kwon has been arrested in Montenegro. He oversaw the multi-billion dollar collapse of the TerraUSD-LUNA ecosystem and has been charged with fraud by US prosecutors.

Do Kwon arrested: Series of events

In early 2023, Do Kwon and Terraform Labs were accused of "orchestrating a multi-billion dollar crypto asset securities fraud", with eight charges announced against him by US prosecutors.

He was arrested on 23 March in Montenegro, travelling under a false name and in possession of fake documents. South Korean authorities released a separate arrest warrant for him in September 2022. They were at the scene to confirm his identity through official fingerprint records.

Do Kwon arrested: Why did the TerraUSD-LUNA ecosystem collapse?

The Terra ecosystem was created in 2018 by Terraform Labs and is largely known for its decentralised algorithmic stablecoin, TerraUSD (UST), and reserve asset cryptocurrency, Luna (LUNA). The (now defunct) algorithmic stablecoin system is simple to understand:

• 1 UST = $1 LUNA.

• If UST<$1, burn UST and mint LUNA. Burning will raise UST's price.

• If UST>$1, burn LUNA and mint UST. Minting will decrease UST's price.

What made this system a Ponzi scheme was the unsustainable interest rate of nearly 20% offered upon staking UST on the Anchor Protocol.

The system was built to fail.

Upon shifting from a fixed interest model to a dynamic one, UST began its downfall on 7 May, 2022, when a UST whale sold an enormous amount of the stablecoin.

To compensate for the de-pegging of UST, mass burning of the stablecoin began, leading to a surplus of LUNA on the open market. Both cryptocurrencies collapsed and more than $40B in UST-LUNA market value was wiped out. Even a $3.5B Bitcoin reserve fund failed to control the downslide of the value of both crypto tokens.

In a nutshell, the model was based on minting an endless supply of LUNA to maintain UST at $1 and keep investors happy with an unsustainable interest rate model.

It should be noted that Do Kwon and the algorithmic stablecoin system were called out by a renowned economist Frances Coppola well before all this unravelled. Do Kwon mocked her publicly.

Source: Twitter (@stablekwon)

I hope that Do Kwon’s arrest is one step towards a safer and better crypto space for all.