“And on the pedestal, these words appear:

My name is Ozymandias, King of Kings;

Look on my Works, ye Mighty, and despair!

Nothing beside remains. Round the decay

Of that colossal Wreck, boundless and bare

The lone and level sands stretch far away.”

-"Ozymandias," Percy Bysshe Shelley, January 1818

“Your size is not size.”

-Do Kwon, March 2022

LUNA, the token that was supposed to algorithmically balance the TerraUSD "stablecoin," is currently trading at $1.92, down 94% from yesterday. It's gotten as low as 70 cents. TerraUSD (UST) last traded for around 67 cents.

This almost definitely indicates the Terra/Luna "experiment" is ended. Because the entire structure was predicated on external subsidies and those funders may have finally wised up, the chances of the system restabilizing and TerraUSD regaining its peg spontaneously are near zero. Do Kwon is unlikely to receive a second bailout.

It's tough not to wonder what's going through Kwon's mind as he observes the ruins of what was once the contours of a burgeoning kingdom just days ago. Few collapses in business history, or even in public life in general, have been as swift and humbling.

Elizabeth Holmes' collapse, on the other hand, came near.

Self-deception is the most effective kind

Theranos' founder and CEO, once heralded as a pioneer on the cover of glossy business journals, is now a 38-year-old pariah, doomed to spend the rest of her life as synonymous with fraud and moral weakness as Enron's Jeffrey Skilling and Kenneth Lay.

Skilling, Holmes, and Kwon have more in common than meets the eye. Crypto veterans are well aware of the main line of financial scams in the industry, which consists primarily of short frauds such as rug pulls and careless claims about nonexistent partnerships. You learn to spot cynical operators' energy, the gleam in their eye that indicates their hole card.

Kwon stands out because that sparkle was never quite as visible – like Skilling and Holmes, it's possible he trusted his own ruse. Despite reams of critical assessments of Luna's fundamental structure, Kwon has not only remained the course, but has tried to find additional funds to flush through the holes in his sinking flagship over the previous 24 hours. He's not even close to admitting that he made the holes when he built it. At the very least, he's giving a convincing performance as a man who believes in what he's selling.

This is critical since the collapse of luna will almost certainly result in massive litigation and even criminal prosecutions. In certain circumstances, the defense would very probably try to persuade judges and juries (extremely plural) that Kwon truly believed in the initiative and that its failure was a genuine oversight rather than a long and complicated fraud.

The similar point was made in the criminal prosecution of Elizabeth Holmes, which finished in January. At the age of 19, Holmes launched her company with the goal of miniaturizing blood tests. But she lacked technical knowledge on how to do so, and the result was a multiyear cycle of compounded errors, evasions, and deceptions. Although Holmes' defenders argued that she acted incompetently, a jury convicted her guilty of fraud.

Do Kwon was in his late twenties when he founded TerraUSD, not 19. Nonetheless, he promised investors something very fascinating and valuable — a decentralized stablecoin – without offering a novel or even intelligent strategy to creating one. In fact, he effectively copied and pasted the tokenomics of previous ventures that close observers had predicted would fail again under the Luna name for months. Then it failed, in May 2021, when the market capitalization of TerraUSD was only $2 billion.

Kwon brushed aside the first, little setback as a minor hiccup and made no substantive alterations. Following a similar line of reasoning, Holmes staged early test demonstrations, claiming that because she was so confident that her invention would eventually succeed, covering up its current failure wasn't technically lying. Kwon went on to defend his alleged innovation with such zeal and venom that tens of billions of dollars were donated to him, bringing the paper worth of LUNA to $40 billion and the market cap of TerraUSD to more than $18 billion.

What occurred next seemed predetermined. But did Do Kwon realize it himself?

Primitive minds

Understanding this combination of conviction and fragility requires a knowledge of Freudian psychology. The primary Freudian concept is that we don't have complete control over our actions, and that our conscious minds are frequently just rationalizing activities that are truly led by our unconscious wants. This is one method to understand why people persist in believing things that are clearly false: impulsive and passionate people can't readily change their conduct to fit even the most evident rationale.

Rather than "knowing" that they've failed or made a mistake, these people often merely yell louder — a response formation, as Freud may have termed it. A frightening or hazardous notion is pushed away by loudly, publicly stating its precise opposite in this habit of mind. After Wall Street Journal reporter John Carreyou's initial expose on the fake organization, Elizabeth Holmes led her entire workforce in a chorus of "F**k you, Carreyrou!" She wasn't simply putting on a public show - she was pushing away her own sneaking intuition that she was a fraud.

In the year preceding up to this week's meltdown, Do Kwon displayed exactly the same type of reaction formation. He called to his critics as "cockroaches" after the May 2021 depeg. He called a detailed hypothetical depiction of the attack that took place this week "the most retarded thread I've read this decade" in November. Kwon himself labeled the analysts "idiot," "stupid," and "dumbass" in January when two threads attempted to explain Luna's fragility.

Such hostility is a tremendous red flag to those sensitive to human perversity, a sign to proceed with caution. When it comes to the less reflecting masses, though, rage is a perplexingly effective marketing strategy. Anger draws attention, which is why social media platforms have been caught encouraging users to be angry in order to increase user interaction. Supporters, or even casual observers, may interpret such outbursts as a victim's reasonable displeasure at being treated unfairly.

Anger, on the other hand, can skew our reasoning, and some studies have indicated that it increases confirmation bias by enhancing self-confidence. To put it another way, when you're furious – even if someone instructs you to be upset - you're more inclined to believe you're right and less likely to ask tough questions.

That kind of unwavering belief can help build empires. But their blindness around the edges will always haunt them, and as we saw this week, that's usually where the fatal blow comes from.

The power and the glory

Kwon is similar to Holmes in at least one other way: he realized that bringing great personalities into his project would legitimize it in the eyes of other investors, whether through Machiavellian insight or low animal cunning. Elizabeth Holmes courted high-profile board members such as Henry Kissinger, George Schultz, and James Mattis – people with a lot of public clout but little knowledge of biosciences. Those backers were crucial in propelling her into the spotlight and then continuing the Theranos deception.

The amount of big-name backing Kwon and Terra enjoyed has come under scrutiny in recent days. Whereas a low-rent exit scam would have recruited a few celebrity shills, Kwon drew in credible investors, including Coinbase Ventures, Pantera Capital, and, perhaps most importantly, Jump Trading, a long-time traditional equity trading firm that recently jumped into crypto.

All of those businesses should take time in the coming days to address their involvement in the project, whose fundamentals were so suspect that it may turn into a black eye not only for its founder but for the entire crypto sector. Some people backed Terraform Labs, the development team behind Terra-based tools and apps like the Mirror and Anchor protocols, rather than Luna/UST specifically, and if that's the case, it's important to state that.

According to Occam's razor, some major investors were not necessarily motivated by Terra's fundamentals. Discounts for early funders and short lockup periods have a reputation for allowing venture capitalists to profit handsomely even when a crypto project fails. Even if these financiers did trust in the idea, it's possible that their faith was based on Kwon's blustering, made-for-2022 image rather than Terra's technological capabilities.

That brings up one more possible parallel to Holmes: some argue that she was a victim of the Silicon Valley funding machine to some extent. According to the rationale, some venture funders noticed the marketing potential of her tale and appearance, but avoided questioning her abilities and ideas. As depicted in the Hulu series "The Dropout," Holmes was reduced to a tool for generating alpha, to be discarded if and when things went wrong. Do Kwon will undoubtedly be worse off as a result of this than any of the huge stores who handed him money.

Whatever their motivations, these investors are likely to be responsible for the massive increase in retail involvement in TerraUSD during the last year. It's a unique dynamic in crypto because standard markets don't let retail investors to invest in the private enterprises that venture capitalists support. In some ways, it's a lose-lose situation: VCs are programmed to fail frequently, so they can't be held accountable when average Janes follow them into a bad gamble. Given their ability to indicate confidence without always disclosing dangers, ethical crypto VCs may wish to take a more responsible approach.

It may be time for even more severe self-reflection for professional investors who were completely taken in by Do Kwon — his grandstanding, his rage, and everything else.

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