Do Kwon, the co-founder of Terraform Labs, was sentenced to 15 years in prison by a New York court earlier this month due to his involvement in the collapse of his cryptocurrencies, TerraUSD and Luna. His downfall places him among a notorious group of prominent figures in the crypto industry, once hailed for their innovations, who later manipulated their ventures to deceive investors. Kwon faced serious charges, including money laundering and fraud, after being captured following an extensive manhunt. This article delves into his journey.
Do Kwon: The Young Crypto Innovator
Born on September 6, 1991, in South Korea as Kwon Do-hyung, Do Kwon transitioned from a software engineer to a cryptocurrency entrepreneur after earning a computer science degree from Stanford University. He gained initial experience at tech giants Microsoft and Apple before co-founding Terraform Labs in Singapore with Daniel Shin in 2018, where he took on the role of CEO.
Understanding Terraform Labs and Its Creations
Terraform Labs is known for creating the Terra blockchain, the Luna cryptocurrency, and the algorithmic stablecoin TerraUSD (UST), which was designed to maintain a constant value of $1 through a self-regulating mechanism involving Luna. To fully appreciate this, one must understand the nature of stablecoins.
The Concept of Dollar-Pegged Stablecoins
Stablecoins represent a category of cryptocurrencies aimed at maintaining a consistent value, often pegged at a 1:1 ratio with the US dollar or other fiat currencies. These digital assets seek to merge the advantages of cryptocurrencies, such as quick and borderless transactions, with the reliability of conventional currencies. By being dollar-pegged, stablecoins are utilized in various applications including trading, remittances, and decentralized finance (DeFi) lending. They are marketed as a “safe haven” during periods of cryptocurrency market volatility, a trait that contrasts sharply with the fluctuations seen in Bitcoin, Ethereum, Dogecoin, and similar assets.
Types of Dollar-Pegged Stablecoins
There are three primary categories of dollar-pegged stablecoins. The most prevalent are fiat-collateralized cryptocurrencies, which are backed by 1:1 reserves of US dollars, typically held in cash or treasury bonds by a centralized issuer. Tether and USD Coin are prominent examples of this type. The second category is crypto-collateralized stablecoins, which are over-collateralized by other cryptocurrencies secured within smart contracts. These collateral positions can be liquidated if their value diminishes, with DAI from MakerDAO being a notable example. Lastly, algorithmic stablecoins operate with minimal or no collateral. They rely on algorithms or incentives to adjust their supply automatically through arbitrage actions, often involving more volatile “sister” tokens that absorb price changes. Among these, Kwon’s TerraUSD (UST) was a notable algorithmic stablecoin.
The Mechanics Behind TerraUSD
UST employed a “burn-and-mint mechanism” involving the sister coin, Luna. Contrary to being backed by dollar reserves, the system operated in a way where users could ‘burn’ UST to ‘mint’ more Luna when UST’s value dropped, and vice versa, creating a cycle of dependency between the two tokens.
Kwon’s Deceptive Practices
Kwon misled investors regarding the stability and operational framework of TerraUSD, falsely asserting that its dollar peg was maintained solely by algorithms. However, a significant depegging occurred in May 2021 when UST lost its dollar equivalence. To mask this issue, Kwon covertly arranged for a trading firm to purchase large sums of UST to artificially restore its value, inflating the worth of his cryptocurrency ecosystem to $50 billion at its peak.
The Catastrophic Collapse of TerraUSD and Luna
The COVID-19 pandemic fueled a surge in crypto investments, but as restrictions eased, interest waned. In May 2022, the collapse of UST and Luna was triggered by a wave of panic withdrawals, akin to a bank run, erasing nearly $40 to $50 billion in investor wealth within days and leaving many retail investors devastated. This incident underscored the inherent risks associated with algorithmic stablecoins, revealing a facade of security without sufficient backing. The failure of UST played a significant role in the larger crypto market downturn known as “crypto winter,” which also influenced the downfall of other firms, including FTX, led by Sam Bankman-Fried, and impacted companies like Three Arrows Capital and Voyager.
Kwon’s Life as a Fugitive
Following the collapse in 2022, Kwon went into hiding, reportedly first seeking refuge in Singapore before moving to the Balkans, utilizing fraudulent passports. His evasion came to an end in March 2023 when he was apprehended at Podgorica Airport in Montenegro while attempting to board a flight to Dubai with forged Costa Rican identification. He received a brief sentence in Montenegro for passport fraud, while both the US and South Korea were pursuing his extradition.
Legal Consequences and Sentencing
On December 31, 2024, Montenegro extradited Kwon to the United States, where he faced trial in a Manhattan federal court. Kwon, once revered in the crypto world, pleaded guilty in August 2025 to charges including conspiracy to commit fraud and wire fraud. Nearly a year post-extradition, he was sentenced to 15 years in prison on December 11, with credit for time spent in custody, including approximately 17 months served in Montenegro.
Kwon’s Fraud on a Generational Scale
The presiding US judge characterized the fraud involving TerraUSD as “epic” and of “generational scale.” In court, Kwon expressed regret for his actions. He and Terraform Labs reached a settlement in a separate civil case with the US Securities and Exchange Commission (SEC), amounting to $4.55 billion, which included an $80 million personal penalty. However, Kwon’s legal troubles may continue, as he could face further charges in South Korea following the completion of his sentence in the US.
