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DeFi and Credit Risk
Do not mention Terra. The message, whether explicit or not, was always evident.
The elite of South Korea's crypto scene converged on hotel ballrooms in Seoul's posh Gangnam neighborhood earlier this month. They were there to take part in a series of conferences intended to highlight the developing crypto ecosystem in Asia.
Before it imploded last spring, Terra, a South Korean-founded enterprise, was one of the most talked-about initiatives in the cryptosphere. It was essentially the spark that ignited the collapse of the whole cryptocurrency market, sending prices of all commodities, including bitcoin and ether, to levels not seen in more than a year.
Many of Terra's initial builders, investors, and partners were among the 7,000 guests at Korea Blockchain Week (KBW), the largest event to take place in Seoul this month. The problems and excesses that led to the project's uncharacteristic growth and fall could have been discussed in great detail on KBW.
Instead, the KBW agenda glaringly lacked any discussion of Terra, whose contentious techniques continue to spread throughout decentralized finance (DeFi). Humdrum debates about GameFi, NFTs (non-fungible tokens), and the future of DeFi took the place of Terra-centered soul-searching. The former Korean DeFi star was forbidden and always the elephant in the room.
Overall, the incidents in Seoul gave the sense that a self-conscious sector was reluctant to admit its errors or engage in controversy.
What was Terra?
The $40 billion Terra disaster, in which an ecosystem's value crashed to almost nothing, still hangs over the South Korean crypto community that gave birth to and nurtured it.
A decentralized stablecoin called UST, which tried to preserve its $1 peg through intelligent programming rather than through direct 1:1 support, served as the foundation of Terra. The vision was expansive. It was effective up until it wasn't.
Many of the retail investors who were sold the idea of a decentralized dollar by Terraform Labs, the company that developed Terra, suffered significant losses when UST (and its sister token, Luna) plunged sharply to zero in May.
UST's stabilizing mechanism, which was designed to increase and decrease the supply of luna to keep UST at $1, was predicted to fail for months before the crash, much like practically all similar trials before it.
Let's just say that the project was dangerous. However, Do Kwon, the founder of Terra, and many of his investors insisted that UST was a secure investment.
The development of South Korea's fledgling crypto sector was significantly aided by Terra. Many of the developers and retail investors I spoke with in Korea claimed Terra as their entry point into the market, occasionally with an embarrassment-inducing chuckle. And I received pitch after pitch from initiatives that had to switch from the doomed "Terra Classic" blockchain to one of the other two.
The Terra taboo
The Terra debacle affected Hashed, a Seoul-based investment company with a reputation for being competitive in Korea's crypto industry, just like it affected everyone else. The company, which was one of Terra's biggest investors, reportedly lost $3.5 billion as a result of the project's failure.
However, Terra detractors have long argued that Hashed is partially to blame for maintaining the project's delicate ecosystem.
The core process of Terra was challenged from the beginning, but Terraform Labs and its brazen creator didn't want you to take their criticisms seriously. They created a cult-like environment in which detractors were shunned for spreading "FUD," or "fear, uncertainty, and doubt."
For instance, Kwon tweeted in response to one critic in July 2021, "I don't debate the poors." Some of Terra's devoted followers, whom he himself referred to as "lunatics," applauded his response.
Through substantial incentive programs supported, in part, by investor funds, Terraform Labs attracted customers into the Terra ecosystem outside of its propaganda machine. Critics worried that if the funding for those incentives ran out, there would be insufficient demand for Terra's UST and Luna tokens to prevent the UST from remaining "pegged" to the dollar. (In truth, Terraform Labs ran out of runway for rewards well before the UST process broke down.)
According to a recent Korean media article, Hashed joined the promotion frenzy: The fund released biased forecasting projections portraying the project in a favorable light, and top brass from the firm assaulted critics who called out Terra's mechanics.
Of course, Hashed's investments in Terraform Labs were also crucial in assisting with the launch of the Terra spacecraft.
Has Hashed learned anything by investing in a venture that purportedly cost billions of dollars and destroyed its financial statements? Do not query Hashed.
At KBW, Hashed declined to discuss Terra, the company's most well-known investment, with CoinDesk. The largest blockchain-focused venture capital fund in South Korea made it clear through its PR representatives that it preferred to discuss its more recent bets, a desire that was also reflected in the conference's Terra-free schedule.
Learning from the best
I had lunch with a few of the speakers at Buidl Asia, one of the conferences that came before KBW, including Vitalik Buterin, the co-founder of Ethereum. During a discussion on stablecoins that I moderated, I remarked that the organizers had forewarned me not to use the word "Terra." (We still said it.)
Buterin said that he had also received advice not to bring up Korea's crypto bogeyman. Buterin is a figure akin to Jesus in the cryptocurrency world, and the Ethereum community reveres his tweets and blogs as holy writings.
He also had trouble saying "Terra"
There is still debate about how a risky wager like Terra managed to develop into a DeFi monster despite its obvious shortcomings.
But speakers in Seoul, many of whom, like Hashed, were heavily involved in the project, tended to act as if the largest crypto catastrophe in history had never happened rather than posing difficult questions about how to avoid the next $40 billion blowup.
The KBW panel titled "Next Generation of Finance on Blockchain" would have been the one most qualified to answer the Terra question. However, as a specialist on how DeFi could expand sustainably, KBW chose Dylan Macalinao, a co-founder of the blockchain startup Saber, as a spokesperson.
Only a few days previously, Macalinao and his brother Ian had been caught by CoinDesk for utilizing about a dozen aliases to exaggerate the extent of the decentralized finance network associated with Solana. By the time of Macalinao's panel, the Saber exposé was still the topic of conversation on cryptocurrency Twitter. However, as CoinDesk's Sam Reynolds noted, the panel made no mention of the Macalinaos' exploits, which included promoting projects while concealing the fact that they were actually their own.
Due to the panel's full avoidance of the Saber controversy (much alone Terra), the conference as a whole had a more promotional feel than insightful one. One also got the idea that the crypto community still worships the wrong deities as a result of it.
Terra? Hardly knew her…
Everyone seems to be involved in the effort in some way.
I talked to former Terraform Labs employees who are now critics about how Korean authorities had temporarily barred them from leaving the nation.
When UST and Luna crashed, requiring the corporation to develop its own chain, an executive from the South Korean gaming company Com2Us said that the company had built out complete in-game economies on Terra.
I also ran with a representative of Chai, the Do Kwon-founded payment system that was meant to serve as the UST stablecoin's initial use case. Eventually, Chai split from Terra, and the employee I spoke with claimed that the business had shifted its emphasis to blockchain-based games.
While Terra may not have received harsh criticism during the official panels at Korea Blockchain Week, in one-on-one interactions, the knives were out.
Comments included conjecture about Do Kwon's mental makeup and hypotheses about whether the Terra accident was the result of an inside job.
There was a clear feeling of betrayal. And yet, despite the conference's glowing portrayal of the larger crypto business, each of these individuals attended the event, which was organized by Terra's partners.
If anything in South Korea was crystal evident, it was that cryptography has a short-term memory issue.
The same way that Terra's top investors appear to have forgotten their part in the worst cryptocurrency meltdown in history, its born-again detractors are all too prepared to ignore the reality that they frequently invested into the Terra dream before concluding that it was a house of cards.
Perhaps expecting Terra's wealthy backers to openly discuss their involvement in pushing the project, especially while it is being investigated, is impractical. The larger crypto community should establish forums for discussion that are open to looking at projects with a more critical eye, especially among the more informed investors and builders who purchased Terra while cognizant of its shortcomings.
