Do Kwon

Do Kwon is a South Korean cryptocurrency developer, best known as the co-founder and CEO of Singapore-based Terraform Labs. His company was the driving force behind the Terra blockchain ecosystem, which featured the native token Luna and an algorithmic stablecoin called TerraUSD (UST). The grand experiment was to create a decentralized currency pegged to the U.S. dollar, not by holding actual dollars in reserve, but through a complex algorithmic relationship with Luna. For a time, it was a sensation, attracting tens of billions of dollars from investors drawn to its novel technology and, most notably, the high yields offered through associated protocols. However, in May 2022, this intricate system suffered a catastrophic failure. UST lost its dollar peg, triggering a “death spiral” that vaporized the value of both UST and Luna, wiping out an estimated $40 billion in investor capital in a matter of days. The collapse sent shockwaves through the entire crypto market, and Do Kwon, once hailed as a visionary, became an international fugitive facing fraud charges in multiple countries, including South Korea and the United States.

Do Kwon, a Stanford University computer science graduate, presented a compelling vision: a truly decentralized financial system built on an algorithmic stablecoin. This stood in contrast to other major stablecoins like Tether (USDT) or USD Coin (USDC), which are backed by reserves of real-world assets like cash and bonds. The Terra ecosystem's growth was supercharged by the Anchor Protocol, a lending and borrowing platform that offered an almost unbelievable ~20% APY (Annual Percentage Yield) on UST deposits. This sky-high, seemingly stable return acted as a massive vacuum, sucking in capital from investors worldwide and creating immense demand for UST. Kwon cultivated a brash and confident public persona, often taking to Twitter to taunt critics and dismiss warnings about the project's sustainability. He famously made multi-million dollar bets that the price of Luna would not fall below certain levels, reinforcing a cult of personality around himself and his creation. To skeptics, however, the 20% yield on Anchor was a giant red flag, a classic “too good to be true” scenario that seemed to depend not on genuine economic activity, but on a constant inflow of new money to pay the old investors—a hallmark of a Ponzi scheme. The system's fragility was exposed in May 2022. The core mechanism relied on arbitrage: if UST fell below $1, traders could burn UST to mint $1 worth of Luna, profiting and restoring the peg. But when large-scale withdrawals from Anchor and massive sell-offs of UST began, panic set in. As more people rushed to exit UST, an astronomical amount of new Luna was minted, causing its supply to hyper-inflate and its price to plummet towards zero. The Luna Foundation Guard (LFG), an organization set up to defend the peg with a reserve of Bitcoin and other assets, failed to stop the hemorrhaging. The entire ecosystem imploded in one of the most spectacular crashes in financial history.

The story of Do Kwon and Terra/Luna serves as a powerful cautionary tale, reinforcing several core principles of value investing.

• Complexity Is the Enemy: The legendary investor Benjamin Graham warned against investing in anything you cannot understand. The Terra/Luna algorithm was a “black box” for all but a handful of developers. Value investors seek simple, understandable businesses, not fragile, opaque mechanisms. If you can't explain the investment to a teenager in two minutes, you should probably avoid it.
• Distrust Unsustainable Yields: A 20% yield in a world of near-zero interest rates should set off alarm bells. True investment returns come from the productive capacity of an underlying asset—a company's profits, a property's rent. Yields that seem to materialize from thin air, sustained only by hype and new inflows, are the domain of speculators, not investors.
• Character and Management Matter: As Warren Buffett has long taught, it's vital to invest with people you trust. Do Kwon's arrogance, public hubris, and dismissal of legitimate concerns were significant behavioral red flags. An investment thesis should never be based on faith in a charismatic founder, especially one who encourages a cult-like following.
• Speculation vs. Investment: The frenzy around Terra/Luna was pure speculation. Investors were not buying a stake in a productive enterprise but were betting on price appreciation fueled by a flawed and risky mechanism. There was no margin of safety—a key value investing concept—to protect against error or misfortune. The collapse is a brutal reminder of the difference between price and value, and the catastrophic risk of confusing the two.