But TerraUSD was risky even by the standards of experimental crypto technology. Unlike the popular stablecoin Tether, it was not backed by cash, treasury bills or other traditional assets. Instead, it derived its supposed stability from algorithms that tied its value to Luna. Mr. Kwon has used the two associated coins as the basis for more elaborate borrowing and lending projects in the murky world of decentralized finance, or DeFi.
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From the start, crypto experts were skeptical that an algorithm would maintain the stability of Mr. Kwon’s twin cryptocurrencies. In 2018, a white paper outlining the stablecoin proposal reached the desk of Cyrus Younessi, an analyst for crypto investment firm Scalar Capital. Mr Younessi sent a note to his boss, explaining that the project could enter a “death spiral” in which a collapse in Luna’s price would cause the stablecoin to fall with it.
“I was like, ‘This is crazy,'” he said in an interview. “It obviously doesn’t work. »
As Luna understood, the opponents grew stronger and stronger. Charles Cascarilla, founder of Paxos, a blockchain company that offers a competing stablecoin, questioned Luna’s underlying technology during an interview last year. (Mr. Kwon responded by taunting him on Twitter: “Wtf it’s Paxos. ”) Kevin Zhou, a hedge fund manager, has repeatedly predicted that the two currencies will collapse.
But venture capital investments still poured in to fund projects based on Luna’s underlying technology, like services that let people trade cryptocurrencies or borrow and lend TerraUSD. Investors including Arrington Capital and Coinbase Ventures invested more than $200 million between 2018 and 2021, according to PitchBook, which tracks the funding.
In April, Luna’s price peaked at $116 from less than $1 at the start of 2021, creating a generation of crypto millionaires. A community of retailers has formed around the coin, hailing Mr. Kwon as a cult hero. Mike Novogratz, managing director of Galaxy Digital, which invested in Terraform Labs, announced his support by obtaining a Luna themed tattoo.