ColdFusion - How This Man Just Caused a $45 BILLION Crash [Terra Luna]

Starting point is 00:00:00 Two and five Canadians will hear the words, you have cancer. That's why every step and dollar raised matters. On September 19th, join thousands in Toronto for the Princess Margaret Cancer Foundation Walk. Challenge yourself, friends, and family to walk 21 kilometers in support of life-saving research. Together, we can carry the fire and help create a world free from the fear of cancer. Register today at pmcfwalk.ca.ca. Leading insurers know that fragmented operations don't cut it anymore. Policyholders expect more, and modern insurers meet those expectations with Adion.

Starting point is 00:00:39 From effortless premium collections to instant claims payouts, Adion's single platform automates the entire policy lifecycle. One platform to manage how money moves, control claims fraud, and automate operations. Adion, fintech built for your next move. Hi, welcome to another episode of Coldfusion. This is financial freedom. You have been dreaming of it ever since you started your working career almost 10 years ago now. One day, your friend introduces you to an interesting website from a company called Terraform Labs.

Starting point is 00:01:15 It's low-risk investment where you can earn 20% a year on your deposits. If you just put in $500 from every paycheck, you'll make some decent returns. But you're skeptical and you dismiss it. But later, when you think about the money that's less, sitting in your savings account getting eaten away by inflation you think to yourself maybe this is worth a shot the website states that it's using a technology called stable coins you don't really know what that is but your friend says it's pretty much risk-free but little did you know that in just two years you would lose half your savings this is a story

Starting point is 00:01:51 that's painfully familiar to millions of others around the world in total 45 billion dollars worth of everyday people's money was lost in less than a week Around the internet, people are calling this the 2008 crisis of crypto, and now you're right in the middle of it. How could this have happened to you? This is a horror story that many are living right now. You are watching Tull Fusion TV. This is Doe Kwan. He's the one in charge of the company that caused your financial demise.

Starting point is 00:02:30 Born in South Korea in 1991, Do Kwan was a bright kid and went on to study computer science at Stanford, graduating in 2015. He briefly worked for Apple and Microsoft, reportedly, only for a few months each. He would return back to South Korea in 2015. It would seem that working for big tech wasn't enough for Kwan. He wanted to be big tech itself, but in the crypto space. Not long after this, he would hear of a stablecoin project called Basis. He looked into the idea of stable coins and saw them as the next big thing in finance. The idea is that these tokens would maintain a one US dollar value.

Starting point is 00:03:08 This is called a peg. Essentially, the tokens would act like a digital dollar. Staplecoins are for people that still want to enjoy the benefit of crypto, but without all the wild swings and price. An interest rate system also makes sure that depositors get rewarded for keeping their money in the system. To get his idea off the ground, it wasn't going to be easy for Kwan. He needed a lot of funding to get started. Staplecoin tokens are usually backed by securities like treasuries and cash reserves,

Starting point is 00:03:38 or with some combination of other crypto, people really want to have confidence in knowing that a stable coin is worth what it says it is. Instead of a traditional backing with something like cash, Terra used an experimental algorithm to help back the system, but more on that shortly. After a failed startup, Two and five Canadians will hear the words,

Starting point is 00:04:00 you have cancer. That's why every step and dollar raised matters. On September 19th, joined thousands in Toronto for the Princess Margaret Cancer Foundation Challenge yourself, friends, and family to walk 21 kilometers in support of life-saving research. Together, we can carry the fire and help create a world free from the fear of cancer. Register today at pmcfwalk.ca.ca. Insurance is entering a new era.

Starting point is 00:04:30 Policyholders expect a fast and flexible experience from the insurers they trust. That's why modern insurers run on Adion, from effortless premium collections to Instant claims payouts. Adion's single platform automates your entire policy life cycle. A single platform to reduce churn and claims fraud. Drive revenue. Stay in control of how your money moves. Adion, FinTech built for your next move. In January of 2018, Doe Kwan and co-founder, Daniel Sim, came up with the idea for Terraform Labs. Eventually, Terra managed to get off the ground with the support of 15 e-commerce companies in Asia. Here is Doe Kwan. talking about his ties with the e-commerce platform, Chai, in 2019.

Starting point is 00:05:14 But in the back end is where the real magic starts to happen. And I contend that Terra solves two of the biggest roadblocks to the adoption of digital payments in Asia and the rest of the world. Up to today, we've had 430,000 shoppers over the Chai Payment Gateway, most of them coming in the last month. And we've processed nearly 2 million transactions up to date. In terms of daily active users, Terra and Chai has already surpassed some of the most popular tokens. In 2019, Kwan was named in Asia's Forbes 30 Under 30.

Starting point is 00:05:51 But all was not as it seemed on the surface. According to some staff that I talked to within Terra Labs, Doe Kwan was narcissistic, but charismatic. He would micromanage and sometimes verbally abuse Terrellab's staff. Within one to two years, virtually all the core people left, most with legal disputes. As this happened, Terror Labs increasingly became a one-man show, with Doe Kwan making all the decisions.

Starting point is 00:06:16 Kwan's decisions would eventually lead to the collapse, and a loss of billions. Time and time again, low-risk, so-called algorithmic stable coins, have been tried with catastrophic results. Take Mark Cuban, for example. He lost money on the now-dead Titan-iron stable coin, so Doe Kwan had a lot of work to do to get people trusting and using terror.

Starting point is 00:06:40 Critics of stable coins have called them quote, modern day pyramid schemes, with people like Senator Elizabeth Warren calling for regulation. This next section may seem a little bit in the weeds, but bear with me because it's integral to understanding what later went wrong. The main focus of the Terra Labs blockchain was their token, TerraUSD or UST, which would stay stable at one US dollar's worth of value. The Terra system used two tokens to function. UST was to remain stable, while the other token called Luna was meant to absorb volatility.

Starting point is 00:07:16 One can buy UST on market exchanges or through exchanging lunar within the system. At all costs, the system tries to keep everything in equilibrium. There were also financial incentives for people to trade and swap Lunar and UST in whichever direction helps the system stay in equilibrium. An algorithm is in charge of managing all of this and making sure that it all works. There's a major problem though. The system is designed to do this, no matter what happens to UST's market price on other exchanges. If the peg begins to slip, risk begins to pile up.

Starting point is 00:07:50 People may jump out of the UST token into other stable coins, which causes the lunar token to fall. The algorithm... Two and five Canadians will hear the words, you have cancer. That's why every step and dollar raised matters. On September 19th, joined thousands in Toronto for the Princess Margaret Canceles. Foundation Walk. Challenge yourself, friends, and family to walk 21 kilometers in support of life-saving research. Together, we can carry the fire and help create a world free from the fear of

Starting point is 00:08:22 cancer. Register today at pmcfwalk.ca.ca.a. Leading insurers know that fragmented operations don't cut it anymore. Policyholders expect more, and modern insurers meet those expectations with Adion. From effortless premium collections to instant claims payout. Adion's single platform automates the entire policy lifecycle. One platform to manage how money moves, control claims fraud, and automate operations. Adion, fintech built for your next move. ...rhythm then prints more lunar in order to keep the peg, so the price drops even more. This is okay for small dips, but if the selling pressure is too much,

Starting point is 00:09:01 then there can be a feedback loop of people selling and the system printing ever more lunar to try and keep the balance. This is called a death spiral. But this wasn't all, there was yet another issue with the system. It had grown too fast. Investors who deposited UST into the Terra system were receiving roughly 20% yield. This high return was what attracted many people to the service in the first place, and Terra grew rapidly because of it. But perhaps too rapidly.

Starting point is 00:09:29 Instead of the market deciding interest rates, Doe Kuan wanted this rate fixed. To achieve this, it was partly subsidised by the company. However, as demand grew, more and more money needed to be paid out. Around $7 million was paid out in interest every day. Doe Kwan also made a fatal mistake of letting people take out their deposits at any time. Perhaps what he didn't foresee is that the rapid growth meant that the system was extra vulnerable to mass withdrawals all at once. Unknowingly, he had just caused both major elements that would contribute to the disaster.

Starting point is 00:10:05 the rapid and massive growth, thanks to the attractive fixed 20% return, and the risk of mass withdrawals. Many sceptics criticised terror, stating that it was unsustainable, but devout supporters, or lunatics, as they called themselves, would dismiss the criticism. Doe Kwan was now the leader of a devout group. He had made people a lot of money, and it seemed like his reinvention of finance was on its way to changing the world. It was a safe crypto bank with a high interest rate and large adoption. In 2021, as the wider crypto market began to turn south, the yields and other stable coins and tokens began to fall, but Doe Kwan's fixed 20% yield on UST became increasingly attractive and more people piled in. By April of 2022, the Lunar

Starting point is 00:10:58 coin was trading at over $100 US a token, and the whole system was valued at $45 billion. dollars. The Terra Luna system was being used in hundreds of decentralized apps and millions of payments around the world. With Terra, it finally looked like decentralized finance had finally gone mainstream. It should be noted that although the terror system was marketed as decentralized and coin holders did have voting rights, in reality it was the opposite. According to insiders, Doe Kwan was a dictator and made all the final decisions and influenced the direction of the company. effectively it couldn't be more centralized. To fortify confidence in the system, Terra Labs built up resistance to unexpected shocks.

Starting point is 00:11:39 They dedicated a reserve of $450 million and $1 billion worth of Bitcoin to defending the peg. At this point, Terra had the fourth largest market cap in the whole of crypto. They looked unstoppable. Two and five Canadians will hear the words, you have cancer. That's why every step and dollar raised matters. September 19th, join thousands in Toronto for the Princess Margaret Cancer Foundation Walk. Challenge yourself, friends, and family to walk 21 kilometers in support of life-saving research. Together, we can carry the fire and help create a world free from the fear of cancer.

Starting point is 00:12:19 Register today at pmcfwalk.ca.ca. Insurance is entering a new era. Policyholders expect a fast and flexible experience from the insurers they trust. That's why modern insurers run on Adion. From effortless premium collections to instant claims payouts, Adion's single platform automates your entire policy lifecycle. A single platform to reduce churn and claims fraud. Drive revenue.

Starting point is 00:12:46 Stay in control of how your money moves. Adion, fintech built for your next move. As the use of terror expanded and institutional investment arrived, Kwan got more cocky. I wonder how many of these companies you think are entering the space just because it's hot and there's a lot of funding versus the ones that it will still be here, you know, like two to five years later. Oh, 95% we're going to die.

Starting point is 00:13:10 Yeah. 95% are going to die. But, yeah, there's also entertainment in watching companies that too. There's entertainment. Oh, man, that's so evil. At least you get to learn from it, right? On Twitter, he was also showing his confidence. The Twitter user Algod bet $1 million that in one year from now, Terra Luna would essentially

Starting point is 00:13:31 collapse. The stakes got raised to $10 million and put on the blockchain for everyone to see. But behind the scenes, things were already going awry. According to documents filed by Kwan at the Supreme Court of South Korea's registry office, Kwan filed to dissolve the Korean company's entity on the 30th of April 2022, and was granted approval on the 4th of May 2020, just days before the crash. For those that had put their hard-earned money into the system, this should have been a concern, but they either weren't paying attention or the pool of 4,000.

Starting point is 00:14:01 financial freedom and peace of mind was too strong. This event should have been the final red flag. Beginning on the 9th of May 2022, people began to notice something strange. The $1 peg, promised by Luna on their UST token, began to come undone. Headlines were made when UST began to break from its secure peg of one US dollar. The disaster began to kick off with a series of major withdrawals from the interest-yielding UST system. According to CoinDesk, the amount was around $4 billion. A single wallet also dumped $84 million worth of UST on the Ethereum blockchain and $108 million on the Binance crypto exchange. These led calls from within the community that the DPEG was a coordinated attack, but people couldn't worry about that now, as things went from

Starting point is 00:14:51 bad to worse. UST starts trading at 90 cents, then 85 cents. The peg was really failing. Over the coming hours, panic sets in, and some users pull their money out. The conspiracy theories begin to take root online. What exactly is happening here? Then even more users try to pull out their funds. This time, all at once, the network becomes congested. The Lunar Foundation Guard, an organization that's supposed to support the Terra ecosystem, announces a $1.5 billion emergency loan to restore the peg to the US dollar.

Starting point is 00:15:24 But it doesn't work. UST falls to 50 cents, then 20 cents, a far cry from its stable $1 promise. Luna is also crashing. It's $70, then $20, then $10. The hyperinflation of Luna was happening right before everyone's eyes. Luna collapsed further to $0.5. Now, virtually zero. Unbelievable.

Starting point is 00:15:48 UST now sits at a measly 10 cents. The collapse wiped out almost... Two and five Canadians will hear the words, you have cancer. That's why every step and dollar raised matters. On September 19th, join thousands in Toronto for the Princess Margaret Cancer Foundation Walk. Challenge yourself, friends, and family to walk 21 kilometers in support of life-saving research. Together, we can carry the fire and help create a world free from the fear of cancer. Register today at pmcfwalk.ca.ca.

Starting point is 00:16:23 Insurance operations today are fragmented, and policyholders expect more. That's why leading insurers run on Addie. From premium collection to claims payout, Adion supports the entire insurance value chain, giving insurers full control over how money moves, a single platform to reduce fragmentation, complexity, and risk. Drive revenue, control claims cost, and power your next move with Adion. Learn more at adion.com. It's $45 billion of market capitalization. Lunar went down from an all-time high of $119 to virtually zero. The US government gets involved.

Starting point is 00:17:03 Immediately after the crash, Treasury Secretary Yellen points to the UST disaster and demands legislation by the end of the year. On the 13th of May, Terraform Labs halts the Terra blockchain, the company's attempts to stabilize the system also fail. Kwan takes to Twitter saying his heartbroken by the events. Nobody has ever seen anything like this before. A top five crypto project going to zero so quickly. It was a true Lehman Brothers moment for the crypto community.

Starting point is 00:17:35 So who did it? According to some insiders I've talked to, those within Terra Labs believed that this was a coordinated large-scale attack, which is viewable on the blockchain. From on-chain data, one or two actors bought a massive amount of UST with Bitcoin and then dumped that UST on the market. These actors did so even at a loss just to bring the system down. Lucas Altumero, head of research at Into the Block, told Fortune, quote, the large withdrawals appeared to be timed precisely at the moment when Luna was most vulnerable,

Starting point is 00:18:07 end quote. He checked the data himself and said that it all lines up. And, quote, it is certainly suspicious. I think we are beyond the point that this idea of an attack is just speculation. Unfortunately for those involved, the pieces were in place and the dominoes were set up to fall. Once the price began to drop, people panic sold and the algorithm tried to print more lunar reducing the price even further in a runaway death spiral. Many suspect that the perpetrator was a large hedge fund, but solid evidence is yet to be found. This may change as the investigation continues.

Starting point is 00:18:41 There may be some factors that we don't know about that may come to light. Did the market collude to make this crash happen? This appears to be a hedge fund. We don't know, well people are naming the hedge fund but I won't. The trade was instigated by one person and then we don't know if the momentum was created by collusion. Conspiracy theories would say yes because it's a massive trade. There was over a billion dollars in capital and then the market is saying that then they ended up going short UST so that they took a massive risk to achieve what they did. I mean

Starting point is 00:19:17 people are saying they made 950 million dollars. When all was said and done, one million dollars invested in terror just a week before the crash is now worth a measly three dollars. Lives were ruined, and dreams crushed. All over the internet, there were devastating stories of lunar holders. YouTuber KSI lost $2.8 million. Another YouTuber, Carl Runefeldt, lost $1.4 million, but everyday people were also harmed in this. Reddit became populated with tragic stories.

Starting point is 00:19:50 One user writes, I lost over 450,000. Real Canadian Superstore has everything you need this back-to-school season. Save on lunchbox savers like Ziggy's sliced delimed meat products for always 375. And get life brand pure Vita chef. and Pruat conditioner for $8 each. At Real Canadian Superstore, when you're ready, we're ready, with a whole world and more. New US dollars.

Starting point is 00:20:08 I cannot pay the bank, I will lose my home soon, I'll become homeless, suicide is the only way out for me. It is truly sad to consider those who have been affected. Due to the magnitude of the disaster, Doe Kwan has been likened by journalists to Elizabeth Holmes of Theranos, especially in his native country of South Korea. But in a twist, things may be a bit more nuanced. It is true that the success got to doquan's head. He thought he was better than everyone else and took decisions solo.

Starting point is 00:20:37 But according to insiders, his decisions were risky and ultimately hurt people, but he didn't want to defraud anyone. He loved control and power, but he had a reputation to keep and cheating people would destroy that. Ryan Silkus, founder and CEO of Mesari, states, quote, what happened to Terra wasn't fraud. It was overconfidence in the investors of last resort who had already backed the project, and reckless growth at a time when the market was slowing down." So people may have that sentiment, but ultimately, I think the blame cannot land on anyone

Starting point is 00:21:09 else but Doe Kwan. Kevin Zau of Galios Capital on Twitter predicted the exact crash, but Doe Kwan dismissed him, a perfect example of his careless attitude. Others also predicted the crash. Here's an eerily accurate prediction made in December of 2019 at a blockchain conference. I think that the biggest risk, the thing that could go really massively arrive with stable coins that could be terrible for the crypto world overall, is if there's an algorithmic staple coin that has no backing,

Starting point is 00:21:37 that it just has a sort of algorithmic mechanism. But there's a category called algorithmic stable coins. I would put Terra and Selo in this category. There are a number of others. Basis was like this and they never launched. The thing that could happen is one of those could launch and be marketed very effectively and be significantly adopted. It could even happen in a market where people really, really need a stable currency and don't have one,

Starting point is 00:21:59 and that's why it gets massively adopted. People who are not crypto speculators, people who just want to preserve their savings. If that protocol then blows up economically and falls apart, and the price of that goes down half or close to zero, regulatory backlash. Imagine if we were sitting here today talking about how great our stable coins were,

Starting point is 00:22:15 where it had already been the case that like a billion dollar stable coin had collapsed and lots of innocent people had lost their money, you know, it would be a very different situation. And that really could happen. There are economic experiments being run with some stable coins that I believe personally could go that direction. And so I think the worst thing, that could happen is if one of those gets really big before it fails.

Starting point is 00:22:32 Yeah. Why people will use that? Terror will tell you that like hundreds of thousands of people in Korea are using it. It's also possible that the whole crash could have been avoided if those 20% yielding deposits in UST had a withdrawal waiting time, maybe seven days or a month, so that panics like this wouldn't be possible. As for the future of stable coins, trust is broken. Even other projects that are more responsible than Doe Kwan's was are going to take the heat,

Starting point is 00:22:57 and it's going to take a lot of faith for people to trust them again. The saddest thing in all of this is that stable coins were seen as safe. People were using them as a bank account to store their savings and earn interest when a regular bank wouldn't provide that much. These people were actively trying to avoid the crazy speculation of the crypto market. Instead, they found themselves in the biggest crypto disaster of all. To anyone watching who was affected, I hope you do find some solace somehow.

Starting point is 00:23:25 For everyone else watching from the sidelines, may this be a lesson. In every investment, no matter how safe it seems, if there's a counterparty risk, you should follow the number one rule of investing. Only put in what you're prepared to lose. So what happens to Doe Kwan? Well, investors are very angry and they're going to be wanting some answers. Perhaps there will be a class action lawsuit, but for now, we just don't know. Just as I was finishing up this episode, Doe Kwan announced Terra 2.0.

Starting point is 00:23:55 but the reaction was overwhelmingly negative. So I'd like to hear from you guys. Did any of you lose any money? Would you ever trust stable coins again? Let me know your thoughts in the comment section below. So if you did like this episode, instead of subscribing, search or scroll through the Cold Fusion channel

Starting point is 00:24:14 and take a look and see if there's another topic that you'll be interested in. There's plenty of stuff on here. All right, so thanks. My name is DeGogo and you've been watching Cold Fusion. And I'll catch you again soon for the next episode. Cheers guys. Have a good one.

Starting point is 00:24:50 It's me thinking. Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siaiaa and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today, I'm still figuring it out. Somehow things usually get worse before they get better.

Starting point is 00:25:12 Apparently, that's how I roll. So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem.

ColdFusion - How This Man Just Caused a $45 BILLION Crash [Terra Luna]

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