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Hi, I'm PJ Vogt. This is the Crypto Island miniseries. In this episode, we document what, in retrospect, was the first domino to fall in the crypto crash of 2022. Although at the time, we didn't know it yet. That's after these ads. Search Engine is brought to you by Discover Doublenomics. We discuss all things finance and economics here, but have you heard about Doublenomics? It's okay if you haven't, because we like to keep you in the know, and it's extremely niche.
Here's an example of Doublenomics. Discover automatically doubles the cashback earned on your credit card at the end of your first year with cashback match. That means with Discover, you could turn $150 cashback to 300. It pays to Discover. See terms at discover.com/creditcard. So today I just want to tell you about what happened this week. The week that began Saturday, May 7th, 2022. It was a really bad week in crypto, an unprecedented bad one.
Every channel I follow, every tribe I usually eavesdrop on, they were all talking about the same thing, this apocalyptic event. This is a special episode from us because we are witnessing something historic right now in crypto. We are witnessing the largest event, I think, in crypto history. This is the collapse of an entire stablecoin. I just need to be clear that it's their music, not mine. Anyway, stablecoins in crypto are cryptocurrencies that are designed to hold their value.
Often one stablecoin is worth one US dollar. A lot of people who trade Bitcoin or ETH or anything, they store their money not in a checking account, but in stablecoins. And now one of the biggest stablecoins, Terra US dollar, instead of being worth a dollar like it was supposed to, it was wavering. And another huge cryptocurrency was threatening to go down with it. It all looks nice and rosy at the beginning and then suddenly, boom, it all comes crashing down.
If TerraUSD actually crashed, the first thing that would happen is $18 billion would evaporate. That'd be the first thing.
But everyone watching understood that this fire would quickly spread throughout crypto. The crypto markets are crashing and two of the world's largest cryptos, Luna and UST, face extinction from a multi-billion dollar bank run. That's billion with a B. As of recording, I still don't know if these coins are going to recover. And the big question on everyone's mind is how did this happen? How did this happen? I asked that question to a lot of people this week.
Everybody I spoke to honestly seemed pretty shell-shocked. But in these conversations, a story emerged. A story about the rise of a risky, confusing financial product that has destroyed tons of money, will certainly destroy tons more. And the story of the one man behind it all.
a fight-loving, Twitter-addicted founder with a loyal army of supporters. To help me tell the story, I called Coindesk reporter Danny Nelson. It was late at night on Wednesday. Oh, Danny, you've got like a full mic. Hold on, wait, I've set this up totally wrong. Danny had what I would describe as a 10 o'clock shadow. He looked a little worn out. He was talking to me from his bedroom. I might be picking up something in your background. Is there like a radio on? Yeah.
It's off now. What were you listening to? 90.1. Is that WXPN?
think so. W-H-Y-Y. It's W-H-Y-Y. Wait, are you from Philly? I'm from Haverford. You're from Haverford? Okay, I'm from Wynwood. Oh, shit. Wynwood Lanes. Yeah, Wynwood Lanes. That shithole's still right there. Next week, we'll run our expose on the bowling shoes at Wynwood Lanes. Harrowing stuff. But this week, Danny told me about his front seat to the apocalypse. Over the last weekend, Saturday and Sunday, he'd been watching when the stablecoin Terra first began to slip its peg. When
when a dollar slowly stopped being worth a dollar. It dumped down a little bit to 98.985. You know, that's not that far below a dollar. But if you are a stable coin whose only purpose in life is to be worth a dollar and no more, no less, then that's a big fucking deal. Every time the Terra price went down a penny, it'd be like if all the money in your checking account notched down 1%.
And if you're seeing that happen, you're watching it happen knowing it was never supposed to. That the whole promise had been that this would not be volatile. In that context, even a small deviation was pretty scary. These were not small deviations. On Monday, Terra dropped into the 80s, then the 60s. Tuesday morning, it popped back up. It was in the 90s.
danny was transfixed around maybe five o'clock on tuesday um it started deviating again and it started going down and down and down and that is when my my day turned into my night turned into my day as i watched this thing it was like it was like television it was i've never you know you look at a stablecoin price chart you're not supposed to be fascinated it's supposed to be a
fucking straight line going across. You're supposed to have a dead patient on your hands. You don't want anything else. But what I was seeing happening was
And it was like, I tweeted, it was like the mob showed up and tied cement shoes and threw them into the skookle. You were just sinking. These are some real Philadelphia references. So this John was just out of here, man. So you're just going down in the water and you don't know what's going on. But it just kept going and I couldn't go to bed.
It got down to 23 cents at its lows, maybe around four in the morning, three in the morning East Coast time. And it was just fascinating to me. As Danny watched Terra fail, he understood there would be huge repercussions for the entire crypto financial system, maybe even for the actual financial system. Some people on Twitter were already calling this crypto's Lehman Brothers moment. Crypto, the movement inspired by one financial crisis, had now created its own.
And the story of that crisis was familiar. A fancy new financial instrument was invented with the promise it would make people more money in new ways. Critics pointed out the risks inherent in the technology. They were mostly ignored because people couldn't hear them over the sound of money falling from the sky. And then one day the risks became real. The thing exploded and people got hurt. The day Danny and I were talking this Wednesday, $200 billion of wealth in the crypto market had been destroyed in 24 hours.
The entire crypto world was now hanging in the balance as the coin that was supposed to be worth a dollar was jittering about wildly. And so if things are getting shaky with it, that is going to be sending a signal. And indeed, that's what we saw on, again, days are weird. On Tuesday, Wednesday. On Tuesday, Wednesday, Janet Yellen had to talk about, Janet Yellen, the secretary of the treasury for the United States of America, had to talk about UST
at a Senate finance hearing. I actually watched the Senate hearing with Janet Yellen. Well, the Financial Stability Oversight Council is analyzing right now in response to the president's executive order potential financial stability risks from digital assets writ large. I sometimes wonder if treasury secretaries sound this boring because it's a way to calm everybody down.
I will say though, the part where Janet Yellen talks about Tara, it's a little unsettling to watch.
It feels like when your parents stutter out the name of some new designer drug they had to Google because somebody told them that you're addicted to it now. I would note that there was a report just this morning in the Wall Street Journal that a stable coin known as TerraUSD experienced a run and had declined in value.
Things have gotten so out of hand so quickly that Janet Yellen is having to talk about a kind of crypto that frankly, a lot of crypto people didn't even really know about a year ago.
This unfamiliarity with Tara, or at least Tara's finer points, kept coming up in my conversations this week, even with Danny. So what were the, when people would criticize Tara, what was the kind of line of attack? Again, I'm coming from a very recent standpoint where everything, you know, things fall apart, but
I will say this week, just so you know, as I've been like talking to different sources and talking to different reporters and just being like, hey, a very important thing just set on fire last
What was it? One of the things that I find striking as a relative newcomer outsider is how much people are like, I'm researching this too. Like this, there's just so much being built so fast, even though this was important. This particular building that fell down was not my lane of expertise. And so like, I'm just surprised at how much everyone is educating themselves on the part that failed after the part failed.
Yeah, it's true because there's so much in crypto. Like we're talking right now about algorithmic stable coins. That is one little, little, little corner. Then you've got NFTs. You've got fractionalized NFTs. You've got lending NFTs. That's just NFTs. Then you've got Facebook, now Instagram NFTs. Over here, we've got DeFi. We've got lending. We've got staking. Over there, you've got like blockchain analysis. You've got, you know, node validation analysis.
This is so complicated. You got CBDs, he's back in the corner. Nobody talks to them because they're weirdos. But it's just there's so much happening that it's really difficult to, as a reporter, know everything all at once. Understanding crypto in its totality, not possible. Because even right now, as I say these words, someone somewhere is inventing more complexity, painting a couple more staircases onto the Escher painting.
But if that gives you comprehension despair, don't fret. Because here is the saving grace of understanding crypto. When a mess is made, you can actually often find the person who made it. Sometimes they're pseudonym, sometimes they're actual real name. And in the case of Terra, it's super easy. Everything goes back to a man named Do Kwon. He's a constant presence on crypto Twitter. There's about a million videos of him on YouTube talking up his great idea.
And so this week, I found myself poring over these artifacts, trying to understand this person as the conflagration he'd started burned through the world. What I found after the break. Search Engine is brought to you by Greenlight. A new school year is starting soon. My partner has two young kids, both of whom use Greenlight. And honestly, it's been kind of great.
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Welcome back to the show. The earliest video of Do Kwon I could find online, it's actually pretty recent, April 2018. This is also not my music. The video opens with scenes from a crypto event in Seoul. Do is being interviewed.
The guy interviewing him, I think is from a crypto group in Taiwan called Mr. Block. He's making Doe awkwardly hold up a sign that says Mr. Block. It kind of makes Doe look like he's being interviewed while picking up someone from the airport. Ladies and gentlemen, today we're back at Hash event in Korea and we have Doe Kong, the co-founder and core engineer at Terra. How are you Doe Kong? It's a pleasure. Could you tell us a little bit about what is Terra?
Yeah, Terra is a price-stable cryptocurrency that is slated to be the next generation payment method in e-commerce companies in Asia. Doe is a young, handsome guy in a black zip-up sweater. Just three years out of Stanford, not yet a billionaire, gamely pitching his coin. So right now we have about $15 billion of GMB from our early partners, and we're expanding that to about, well, much more than that, hopefully, within the next few months. What would you say as a company
the core problem that Terra is trying to solve? Yeah, so we have a lot of decentralized crypto assets, but the problem here is that none of them are actually being used for real transactions.
So for you, as somebody who covers crypto, when did you first become aware of Do Kwon as a person? Well, so the first time I really remember him very concretely in my mind was at the Masari Mainnet Conference last year. I'm sure I had heard of him before that point because he is sort of the Vitalik Buterin of his chain, right? He is this figurehead. He is this
this doer, this mover, this shaker for the Terra ecosystem.
But I don't normally cover the terror ecosystem. So the first time I really thought about him was at this conference when the rumor was that the SEC had subpoenaed him coming up the escalator. And no one knew for sure. He went on someone's podcast, I think, and denied it outright. And only later, when he sued the SEC for serving him on an escalator, did it become clear that he in fact was subpoenaed.
you know, approached by regulators there. But that was the moment that he emerged in my mind. The SEC sued Do Kwon for a different crypto product he'd invented, not Terra, actually. Do Kwon responded in what was becoming his trademark fashion by counterpunching with a lawsuit of his own. He said the SEC had improperly served him his subpoena. Just to be clear, pretty unusual for anyone to countersue the SEC.
Within the space of three years, Do Kwon had gone from humbly pitching his token on YouTube to presenting at conferences in New York while brawling with regulators. But he was still kind of a fringe figure. When the SEC served him last September, the news stories in the crypto press still had to explain who Do Kwon even was and what it was he'd invented. Terra, Do Kwon's big invention, is actually just a new take on something other people in crypto have tried before. It tends to fail. The algorithmic stablecoin.
The idea of an algorithmic stablecoin is to solve this real problem presented by normal stablecoins. So normal stablecoins are backed by collateral, like actual US dollars. The dollars are held in an exchange, which opens up crypto users to all sorts of problems. Users need to trust that regulators won't seize those dollars. Users have to trust that the exchange that's holding the dollars as collateral is actually holding dollars. Sometimes those exchanges lie.
Traditional collateral to crypto people smells like something they hate. Centralization. And Do Kwon was telling people his algorithmic stablecoin solved for that. Terra would be backed not by tangible real world assets, but by another cryptocurrency that Do Kwon had invented, Luna. Here's Do Kwon this year in a more recent video.
Now, he's being interviewed by Coindesk. So what do you say to those who argue that algorithmic stablecoins are actually the most unstable type of stablecoins there is and that they shouldn't even be called stablecoins? You see Do Kwon sitting wearing a nice blue button-up shirt and a barely holstered smirk, waiting to answer. Have you allayed those kind of fears? Can you allay those kind of fears?
So I think that type of stereotype is a perfect recipe to get wrecked. And what I like to say is that silence is a perfectly good option if stupid. Silence is a perfectly good option if stupid, by this point was becoming Do Kwon's catchphrase. His way of saying, if you're this stupid, you can always just shut up. This Do Kwon, now a crypto mogul, he doesn't sound like a pitch man anymore.
He sounds like a defiant visionary explaining a future that's already arrived. So it stands to reason that you need a censorship resistance type of money that is unbiased, cannot be seized by regulators, cannot be manipulated with, cannot be tempered. And currently right now, the clear market leader for that is TerraUSD, the only decentralized stablecoin in the market.
Well, in all fairness, you can't seize assets that don't exist. So let's not, you know. But anyway, getting back to decentralization. That little interjection from the host, you can't seize assets that don't exist. I believe the heart of this whole catastrophe hides in that aside. There's no assets to seize from Do Kwon's company because there's fundamentally no real collateral behind his stablecoin.
Instead, this thing that's supposed to be worth a dollar is supported by Luna, another cryptocurrency, which also has no underlying value. This should not have worked at all. But crazy as it sounds, for a while, it did. Luna kept getting more and more valuable. Terra became more and more popular. People have issued lots of stablecoins. People have tried algorithmically backed stablecoins. Why did Terra and Luna take off? Why did they become six months ago...
such a big deal in crypto? You know, it's been building for a while. One of the big reasons why Terra really has taken off is this idea of yield generation. Now, in my bank account with TD Bank, I get what, like,
0.01 percent and a you know a slap in the face it's not i'm not getting any yields on on the the dollars that i'm just leaving there i'm getting destroyed by inflation whatever that's how you know that's how the banking works nowadays um with terra you had this opportunity to take your dollars
get it into Terra, and it's a complicated system, get it in, but move your money into Terra. And then you could take those tokens and you could go to...
what's called Anchor, which was a protocol built in the Terra ecosystem that yielded 20% annual returns. Now, it doesn't promise it like a bank might, but it did, you know, entice people with this idea of 20%. Now, 20%, that's a really good return. 20% returns is insane. Yeah.
I remember watching this before the crash and thinking like, oh, my understanding of this is that the way the stable coin is functioning, you know, right now, is it's almost like...
the crypto version of a checking account. You know, this is where you can keep your money. It won't go up and down, except unlike a real checking account, this checking account is giving you 20% of your money back over the course of the year, which means if that's how checking accounts worked, you would not put your money in the stock market anymore because you were getting way better returns from your checking account. Exactly. And I would say just, uh,
It is easy to think about it as a checking account, but it's important not to overthink of it as one because it doesn't have any of the protections that a checking account does. You don't have FDIC insurance with your Terra stablecoins.
In fact, you don't even have the assurance that your mass of tokens that have value that you think are worth, let's just say, $10,000, you don't have any assurance that those are worth $10,000. You just have the full faith and credit of everyone else who also believes that it has that much value. And if that starts to shake, you might run into a problem, which, you know,
When you're in the crypto economy, it's not too crazy to suspend belief in certain ways. And I would say that algorithmic stablecoins are a really cool concept and there are a lot of different flavors of them. But they require their users to believe in the code. And if the code doesn't work, then they might get in trouble because it's not backed by...
assets in the traditional sense, it's backed by belief. And so before this happened, I mean, did you think a lot of crypto involves belief, you know, faith? All of it does. So did this seem especially, I don't know what the negative word for faith is, credulous to you? Like, did you look at this and think like, I believe in this, but I don't believe in that? Like Santa Claus, yes, Tooth Fairy, no? You know,
I, I've played around a lot of different markets. I never put my money into Terra. So for you, you looked at and you were just like, the math of this doesn't make, the math of this is not sustainable. Um, I would, I would not ascribe such astute observations to myself. I wish I, I wish I, that'd be great. Yeah, for sure. But, um, I just kind of have this
Like we talked about earlier on, the first time that Doquan really lodged himself in my memory was getting subpoenaed on an escalator at a conference. I wasn't rushing to put my money into the box. Okay, so I'll tell you when I first noticed Doquan, which was...
Before, you know, I've been paying attention to crypto seriously for six months, which actually coincides with his rise. And for me, it was like, I remember people talking vaguely like, oh, there's this, you know, blockchain from South Korea that's kind of becoming a thing. The economics of it might be like more Ponzi than others. But the main thing I saw was that on crypto Twitter, Do Kwon was a very, I would say, you know, somewhere...
Somewhere in the like Elon Musk, Donald Trump gradient. That's a good way of describing it. He's an audacious character that you don't really see with other key figures in chains. A very audacious character, which was a necessity. For Luna to work, it had to inspire confidence. And Do Kwon's audacious showmanship was a tool to goose that confidence.
When Luna was ascendant, there was a long viral thread on crypto Twitter that noted that Luna was really stabilized by two elements, smart contracts and quote, the gigantic gravity well created by the size of Do Kwon's nuts. This man was ready seemingly at any time of day to get onto Twitter and argue about the strength of his coin. His loyal followers, they're called lunatics, Luna, would be there to cheer him on. Do Kwon could be rude. He could be off-putting.
when he was telling his critics that they were stupid or his preferred term, retarded, when he was telling people to have fun staying poor. But there were also times when I found myself in awe of what was either a supremely confident person or a person who was by necessity putting on an international 24-7 show of confidence. Do Kwon named his daughter Luna. And then there was the day of the bet. That story after the break.
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My favorite Do Kwon moment, the moment where I was like, OK, I will pay attention to this person was in March. There was, to my mind, just like a random crypto trader who sort of stepped to him on Twitter and was like, hey, I think by this time next year, Luna is not going to be particularly valuable. And I think they named a price and he was arguing with them. And somebody said, how about we settle this with a bet?
And they made a million dollar bet on Twitter on the price of his thing. And then a bunch of other people jumped in and made side bets. So by the end of like a very interesting, I think, morning, he bet, I think, $11 million. And the way they settled it was they just decided that they trusted Kobe, Kurt Duggan. And he just sent the money to his wallet. It's the escrow, the Kobe escrow. Yeah, that was my favorite Dough moment.
Yeah, I wasn't familiar with that moment at the time. I'm reading about it right now as you were describing it. You know, that is it's a hilarious just moment in time. If you're Do Kwon, you have to stand up for what you believe in. And that can be that can veer into the ludicrous pretty quickly. But, you know, what's a million dollars when you have a billion dollars? That bet took place in March just a few months ago.
As I write this, it's Friday morning. Terra USD is now worth about $0.10. Luna, which last week was worth $80 a coin, is now worth $0.00007. People in crypto are still piecing together what exactly made the two coins finally death spiral. The emerging consensus is that someone with a lot of money saw this giant vulnerability in Terra and realized they could make a healthy profit just by tipping it over.
My favorite conspiracy theory about who was behind this is Citadel, the investment firm run by Ken Griffin. Have you heard he owns a copy of the U.S. Constitution? Anyway, Citadel denied this strenuously. But whoever did do it, if the attacker theory is right, they may have used an attack vector laid out in public on Twitter last fall. That's when one user explained exactly how Terra was vulnerable and described how an attack on it could work, provided the attacker had access to enough money.
Doquan actually responded to that tweet thread to tell them they were wrong and to issue once again his favorite catchphrase, silence is a perfectly acceptable option if stupid. This week, crypto internet is a grim place. Usually there's lots of manic bragging, jousting among different coin holders. Right now it's just fear, anger, and sadness. There are unconfirmed reports of suicides in the Terraluna subreddit and a long list of suicide hotlines pinned to the top of the page.
And so what do you think happens now? Let's see, that's the $64,000 question. I don't know how this shakes out, but it's really tough to see a community in the state that it is. There's so much fear in the discord community.
for this community that the moderators have elected to put one hour blocks between a post. So if I post, I have to wait an hour to post again, which makes it impossible to have a discussion with someone. I just have to post, and it's probably going to be something bombastically fearful. And then other people are going to post too. And there's no other way of doing it because of how much craziness is going on. But
But there's just so much fear. I was in that discord tonight just sort of because I've been there before and it tends to be a place of unmitigated, joyful lunacy. And I noticed the same thing that they'd read limited responses and it just felt at the risk of being like maudlin or something. It felt eerie. It felt like being at a funeral where...
people were moving in slow motion. Yeah. It's like you, some, I saw some people say, I'm making my comment now. I'm not going to get to say anything for another hour, but here it is.
And, you know, I don't know that that is a decision that they made because they didn't really have any options. What are you going to have a discord that's just blowing up with constant comments? But it's just one sign of what happens when a lot of people are really scared because a thing that they believed in that is that a dollar was worth a dollar isn't true. And that proposition and the crumbling of that proposition means that they're going to lose a lot of money.
And what do you think it means for crypto in general? I mean, you started for you. The story of Doquan starts with him being served by the SEC and sort of not taking it particularly seriously, like going on stage anyway, telling people it didn't happen like that.
this week, Janet Yellen was talking about Tara, something that I'm sure someone probably had to explain to her relatively recently. Like, do you think this points to regulation? It already is. Um, in, in Europe, the European commission has just moved forward with a bill to, uh,
ban large form stable coins. I don't know the specifics of it. I don't know exactly if it is in response to Terra. I think it's been in the works for a while, but it's no coincidence that it is happening right now that this thing is getting pushed through. There is a feeling among regulators, I was just talking with a local regulator from Alabama earlier tonight, that
People are getting hurt because they don't fully understand what's happening and because the risks aren't being presented well. So I don't know where this shakes out, but I can't imagine that it doesn't cause a huge regulatory event. And therefore, it's going to be a really important moment that shapes crypto going forward.
And the story of crypto going forward, it's likely a story that will be told without this season's main character, Do Kwon, who departs the stage having lost his big bet. Not just the $11 million bet with his Twitter rival, the real big bet, the bet that his idea would work. His company is in flames. His legacy in this world that once celebrated him as a king, he's now hated. Yesterday, reports from Korean news said that his wife had asked for police protection after an investor showed up at his doorstep.
Do Kwon's most recent tweet is from Tuesday, which now feels like a decade ago. He wrote, "Terror's return to form will be a sight to behold. We're here to stay. And we're going to keep making noise." He hasn't tweeted since. That's it for this breaking news edition of Crypto Island this week. Crypto Island is edited by Shruti Panamaneni, theme music by Christine Andrews. The show is mixed and sound designed by Steven Jackson and Phil Demachowski at Audio Non Visual.
This episode was fact-checked by Garrett Graham, who also helped out last week. Just couldn't add him to the credits since I'd recorded them in a bathroom. Crypto Island is an experiment. We are building this plane in the air. If you'd like to support the show, head on over to pjvote.com and sign up for my paid newsletter. It's five bucks a month. You'll get emails written for me with extra stuff from these episodes, weird things I find on the internet, and a direct line to my joy, excitement, and anxiety. You can also sign up for the newsletter for free if you want. It's fine.
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