Do Kwon Is the Elizabeth Holmes of Crypto LUNA, the token that was meant to algorithmically balance the terraUSD (UST) “stablecoin,” is trading as I write this at about $1.72 – down 95% since yesterday. It has dipped as low as 70 cents. UST was recently trading at about 40 cents. This means the UST/LUNA “experiment” is almost certainly over. The chances that the system will restabilize and UST will regain its peg naturally are near zero, since the entire structure was based on external subsidies and those funders may have finally wised up. Terra founder Do Kwon likely won’t get another bailout. It is impossible not to contemplate what is going through Kwon’s head as he surveys the wreckage of what just days ago had the outlines of a nascent empire. There have been few falls as sudden and humbling in business history, or even in public life more generally. But one that comes close is Elizabeth Holmes. Self-deception is the most effective kind Once a cover subject for glossy business magazines that hailed her to the sky as a revolutionary, the founder and CEO of Theranos is now a 38-year-old pariah, doomed to spend the rest of her life as synonymous with deception and moral weakness as Enron’s Jeffrey Skilling and Kenneth Lay. Skilling, Holmes and Kwon also have deeper commonalities. Crypto longtimers are well familiar with the main line of financial scams in the sector, mostly short cons like rug pulls and lazy lies about nonexistent partnerships. You learn to recognize the energy of such cynical operators, the glint in their eye that reveals their whole card. Kwon stands out because that glint was never so obvious – like Skilling and Holmes, it seems plausible he actually believed his own come-on. Despite reams of critical appraisals of the fundamental structure of Luna, Kwon not only stayed the course, but over the last 24 hours has angled to find more capital to flush through the holes in his sinking flagship. He’s nowhere near acknowledging that he put the holes there himself. At the very least, he’s doing a great impression of a man who really believes in what he’s selling. That matters immensely because there will inevitably be major lawsuits and even criminal prosecutions around the collapse of luna. The defense in those cases will almost certainly try to convince judges and juries (very much plural) that Kwon really believed in the project and that its failure was an honest shortfall, not a lengthy and complex deception. The same argument was central to the Elizabeth Holmes criminal trial, which ended in January. Holmes founded her company at age 19 on the idea that blood testing could be miniaturized. But she had no real technological insights into how that might be accomplished, and what ensued was a multiyear series of compounding failures, evasions and deceptions. Holmes’ lawyers tried to argue that she had acted ineptly but honestly, but a jury found her guilty of fraud. Do Kwon, similarly, promised investors something extremely cool and useful – a decentralized stablecoin. But he didn’t have a novel, or even sophisticated, approach to building one. Instead, he basically copy-pasted the tokenomics of projects that had already failed, and that close observers warned for months would fail again under the Luna brand. Then it did fail – in May 2021. Kwon essentially dismissed that first, smaller failure as an irrelevant glitch and made no real changes. He went on to defend his supposed innovation with such passion and vitriol that people gave him tens of billions of dollars, growing the paper value of LUNA to $40 billion. What happened next was seemingly inevitable. But did Do Kwon understand that? Primitive minds Freudian psychology is crucial to understanding this combination of conviction and fragility. The basic Freudian insight is that we don’t really have full control of our behavior, that our conscious minds are often simply rationalizing behaviors that are actually guided by our unconscious desires. This is one general way to understand people’s tendency to double down on things that are obviously not true: Impulsive and impassioned people can’t easily modify their behavior to accord with even the most obvious reason. So while they may on some level “know” that they’ve failed or made a mistake, these folks instead often just yell louder – what Freud might have called a reaction formation. In this habit of mind, a threatening or dangerous thought is pushed away by loudly, publicly declaring its exact opposite. When Elizabeth Holmes led her entire staff in a chant of “F**k you, Carreyrou!” after Wall Street Journal reporter John Carreyou’s first expose on the fraudulent company, I doubt she was just putting on a public performance – more likely, she was pushing away her own sneaking suspicion that she was a fraud. Do Kwon showed exactly the same sort of reaction-formation in the year leading up to this week’s meltdown. After the May 2021 depeg, he referred to his critics as “cockroaches.” When two threads in January sought to explain Luna’s fragility, Kwon personally called the analysts “idiot,” “stupid” and “dumbass.” To those attuned to human perversity, such vitriol is a huge red flag, a sign to tread very cautiously. But anger is a confoundingly good marketing tactic when it comes to the less reflective masses. Anger attracts attention – that’s why social media sites have been caught fostering anger to drive more user engagement. Supporters, or even mere onlookers, may see such outbursts as the understandable frustration of a victim getting a raw deal. But anger can distort our reasoning, and some research has specifically found that it tends to increase confirmation bias by boosting self-confidence. In other words, when you’re angry – including when someone tells you to be angry – you’re more likely to think you’re right and less likely to ask difficult questions. Empires can be built on that kind of unquestioning conviction. But they will always be haunted by their blindness at the edges – and as we saw this week, that’s usually where the death blow comes from. –David Z. Morris | 