Former Terraform Labs developer Will Chen argued in a Dec. 13 X thread that the fraud case in opposition to Do Kwon was constructed on a “backwards” concept, days after a courtroom sentenced Kwon to fifteen years in jail on Friday, Dec. 15.
Chen framed his put up as a critique of the authorized mechanics, not a personality protection. “I needed Do to fail. I needed him punished. I believed he was boastful and reckless and I instructed him so to his face a number of occasions,” he wrote. “I’m not right here to defend Do Kwon the particular person. However the authorized case is damaged.”
Do Kwon Conviction Misframed Terra’s Collapse
He described Decide 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 expenses as is. There’s no debating afterward.” Chen mentioned he discovered it “extremely ironic” that Do Kwon didn’t contest the case.
On the middle of Chen’s critique is prosecutors’ concept round Terra’s Could 2021 depeg. As Chen summarized it, the federal government argued that Kwon claimed the algorithm “self-healed” whereas failing to reveal that Bounce Buying and selling stepped in to purchase UST and assist restore the peg, making his public statements misleading and subsequently fraudulent.
Chen’s rebuttal is that this logic runs within the flawed course. “Fraud is while you declare your system has security mechanisms it doesn’t have, and folks 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: “However what the federal government is alleging is the inverse. Do mentioned ‘no reserves, the algorithm alone handles it’ when he truly did have Bounce as a backstop.”
In Chen’s view, which means Do Kwon was “claiming much less security than he truly had,” including: “If he’d disclosed Bounce, 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 non-public comment attributed to Do Kwon — that Terra “may’ve been fucked with out Bounce” — as proof Kwon knew the mechanism was damaged. “Would possibly’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 really 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. Bounce was additionally shopping for. Each issues had been true.”
Even the non-disclosure itself, Chen argued, may very well be framed as strategic fairly 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 actual protection capabilities, they’ll calculate whether or not an assault is worthwhile,” Chen mentioned, arguing that “uncertainty about protection sources is itself a protection.”
He in contrast the concept to “strategic ambiguity” utilized by central banks and warned that public transparency round reserves can turn into a tactical drawback: “Would disclosing Bounce have made Terra kind of safe? Attackers might have calculated precisely how a lot pressure 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 outstanding critics. “The danger was described within the unique 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 selections.”
He additionally drew a pointy line between the Could 2021 episode and the Could 2022 collapse, arguing the knowledge setting modified materially in between. “By Could 2022, buyers knew about backstops,” he wrote, pointing to Luna Basis Guard’s public launch in January 2022 and the visibility of reserves on-chain. In Chen’s view, that breaks the causal chain: “The Could 2021 non-disclosure about Bounce is causally disconnected from Could 2022 losses as a result of the knowledge setting had fully modified by then.”
One in all 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 supplied a easy instance as an 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 features I by no means realized.” Treating peak-to-trough market cap evaporation as damages, he argued, “units a horrible authorized precedent for the trade.”
Whereas disputing the overarching fraud concept, Chen didn’t declare Terraform Labs’ messaging was clear throughout the board. He mentioned “the Chai stuff has extra advantage as an precise fraud declare,” whereas arguing the federal government’s portrayal was nonetheless overstated. “That’s not totally 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 can prime up Chai with KRT,” whereas conceding Do Kwon “in all probability stretched the reality early on” about on-chain cost settlement.
Anchor, Chen wrote, was “tougher to defend.” Selling the roughly 20% yield as sustainable whereas reserves depleted was “reckless,” and he mentioned Do Kwon knew “the 20% couldn’t final eternally with out a plan.” Nonetheless, Chen argued that even when yield advertising was deceptive, the catastrophic losses had been pushed by the depeg: “If UST had held, individuals 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 flawed.”
Chen closed with a broader warning about precedent and builder habits. “If founder confidence plus mission failure equals fraud, we’ve criminalized entrepreneurship,” he wrote, arguing it exposes founders who publicly specific 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.
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