Ex-Terra Insider Calls Do Kwon Case ‘Backwards’ In Explosive X Thread

Former Terraform Labs developer Will Chen argued in a Dec. 13 X thread that the fraud case towards Do Kwon was constructed on a “backwards” idea, days after a court sentenced Kwon to fifteen years in jail on Friday, Dec. 15.

Chen framed his post as a critique of the authorized mechanics, not a personality protection. “I wished Do to fail. I wished him punished. I assumed he was boastful and reckless and I advised him so to his face a number of occasions,” he wrote. “I’m not right here to defend Do Kwon the particular person. But the authorized case is damaged.”

Do Kwon Conviction Misframed Terra’s Collapse

He described Judge Engelmayer as “sympathetic” and “extraordinarily methodical,” however argued the responsible plea boxed Kwon into the federal government’s framing: “Do taking the responsible plea means admitting to the federal government’s prices as is. There’s no debating afterward.” Chen stated he discovered it “extremely ironic” that Do Kwon didn’t contest the case.

At the middle of Chen’s critique is prosecutors’ idea round Terra’s May 2021 depeg. As Chen summarized it, the federal government argued that Kwon claimed the algorithm “self-healed” whereas failing to reveal that Jump Trading stepped in to purchase UST and assist restore the peg, making his public statements misleading and due to this fact fraudulent.

Chen’s rebuttal is that this logic runs within the improper course. “Fraud is if you declare your system has security mechanisms it doesn’t have, and other people make investments trusting that faux security, after which they lose cash when the hazard you hid materializes,” he wrote, contrasting it with the allegation right here: “But what the federal government is alleging is the inverse. Do stated ‘no reserves, the algorithm alone handles it’ when he truly did have Jump as a backstop.”

In Chen’s view, meaning Do Kwon was “claiming much less security than he truly had,” including: “If he’d disclosed Jump, buyers would have been extra assured, not much less.” He distilled his conclusion bluntly: “You don’t defraud somebody by hiding extra security mechanisms. The course is backwards.”

Chen additionally disputed how prosecutors interpreted a reported personal comment attributed to Do Kwon — that Terra “would possibly’ve been fucked with out Jump” — as proof Kwon knew the mechanism was damaged. “Might’ve been fucked is uncertainty about an unknowable counterfactual,” Chen wrote. “Knew it might have failed is a declare of particular information.”

He argued the one approach to actually know the algorithm wouldn’t have recovered is to not intervene and watch it die, which he suggests is inconsistent with working a stay monetary system. “The algorithm was working throughout that interval,” Chen wrote. “Arbitrage was occurring. UST was being burned for LUNA. Jump was additionally shopping for. Both issues had been true.”

Even the non-disclosure itself, Chen argued, might be framed as strategic relatively than misleading. “Algorithmic stablecoins function in adversarial situations,” he wrote, suggesting that publicizing the scale and nature of defenses could make an assault simpler to cost. “If attackers know your precise protection capabilities, they’ll calculate whether or not an assault is worthwhile,” Chen stated, arguing that “uncertainty about protection assets is itself a protection.”

He in contrast the concept to “strategic ambiguity” utilized by central banks and warned that public transparency round reserves can grow to be a tactical drawback: “Would disclosing Jump have made Terra kind of safe? Attackers might have calculated precisely how a lot drive was wanted to overwhelm the protection.”

Chen then challenged whether or not the case established investor reliance and causation in a market saturated with info. “Do’s statements had been one sign in an extremely noisy channel,” he wrote, pointing to years of public debate round Terra’s dangers, open-source code, and distinguished critics. “The danger was described within the authentic white paper. The code was open supply. The potential failure mode was publicly debated for years,” Chen wrote, arguing prosecutors “by no means established direct causation between Do’s particular statements and investor choices.”

He additionally drew a pointy line between the May 2021 episode and the May 2022 collapse, arguing the knowledge setting modified materially in between. “By May 2022, buyers knew about backstops,” he wrote, pointing to Luna Foundation Guard’s public launch in January 2022 and the visibility of reserves on-chain. In Chen’s view, that breaks the causal chain: “The May 2021 non-disclosure about Jump is causally disconnected from May 2022 losses as a result of the knowledge setting had utterly modified by then.”

One of Chen’s most forceful objections was the scope of losses attributed to Do Kwon. “One factor I can’t recover from is the truth that Do signed off on pleading responsible to inflicting $40 billion in loss,” he wrote. “Market cap decline isn’t fraud loss.” He provided a easy instance for instance what he sees as a class error: “If I purchase LUNA at $1 and it goes to $100 after which again to zero, my loss is $1. The $99 was paper good points I by no means realized.” Treating peak-to-trough market cap evaporation as damages, he argued, “units a horrible authorized precedent for the trade.”

While disputing the overarching fraud idea, Chen didn’t declare Terraform Labs’ messaging was clear throughout the board. He stated “the Chai stuff has extra benefit as an precise fraud declare,” whereas arguing the federal government’s portrayal was nonetheless overstated. “That’s not solely correct,” he wrote of claims Chai didn’t use Terra, including that Chai “did use Terra for accounting,” that “Terra pockets was built-in into the app,” and “you possibly can prime up Chai with KRT,” whereas conceding Do Kwon “in all probability stretched the reality early on” about on-chain fee settlement.

Anchor, Chen wrote, was “more durable to defend.” Promoting the roughly 20% yield as sustainable whereas reserves depleted was “reckless,” and he stated Do Kwon knew “the 20% couldn’t final ceaselessly with out a plan.” Still, Chen argued that even when yield advertising and marketing was deceptive, the catastrophic losses had been pushed by the depeg: “If UST had held, folks would’ve simply earned much less curiosity. They wouldn’t have misplaced their principal.”

The ex-Terra developer additionally contrasts Do Kwon to Sam Bankman-Fried: “SBF actually stole buyer deposits and used them for different functions. That’s why SBF victims are being repaid. The cash was taken and nonetheless exists someplace. Terra victims can’t be repaid as a result of the worth was destroyed in a crash, not stolen and moved to a special account. Treating these conditions as equal is improper.”

Chen closed with a broader warning about precedent and builder habits. “If founder confidence plus undertaking failure equals fraud, we’ve criminalized entrepreneurship,” he wrote, arguing it exposes founders who publicly categorical optimism about merchandise that later fail. His closing framing returned to course of: no matter one thinks of Do Kwon personally, Chen argues the plea locked in prosecutors’ narrative with out the type of contested protection which may have narrowed each the speculation and the scope of damages.

At press time, LUNC traded at $0.00004080.