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 docket sentenced Kwon to fifteen years in jail on Friday, Dec. 15.
Chen framed his submit as a critique of the authorized mechanics, not a personality protection. “I wished Do to fail. I wished him punished. I believed he was smug 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 individual. However the authorized case is damaged.”
Do Kwon Conviction Misframed Terra’s Collapse
He described Choose 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 fees as is. There’s no debating afterward.” Chen stated he discovered it “extremely ironic” that Do Kwon didn’t contest the case.
On the middle of Chen’s critique is prosecutors’ idea 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 Leap 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 improper route. “Fraud is once 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 stated ‘no reserves, the algorithm alone handles it’ when he really did have Leap as a backstop.”
In Chen’s view, meaning Do Kwon was “claiming much less security than he really had,” including: “If he’d disclosed Leap, traders would have been extra assured, not much less.” He distilled his conclusion bluntly: “You don’t defraud somebody by hiding further security mechanisms. The route is backwards.”
Chen additionally disputed how prosecutors interpreted a reported non-public comment attributed to Do Kwon — that Terra “would possibly’ve been fucked with out Leap” — as proof Kwon knew the mechanism was damaged. “Would possibly’ve been fucked is uncertainty about an unknowable counterfactual,” Chen wrote. “Knew it will have failed is a declare of particular data.”
He argued the one method 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 reside monetary system. “The algorithm was working throughout that interval,” Chen wrote. “Arbitrage was occurring. UST was being burned for LUNA. Leap was additionally shopping for. Each issues had been true.”
Even the non-disclosure itself, Chen argued, may very well be framed as strategic quite than misleading. “Algorithmic stablecoins function in adversarial circumstances,” 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 stated, 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 out to be a tactical drawback: “Would disclosing Leap have made Terra kind of safe? Attackers may 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 data. “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 chance 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 selections.”
He additionally drew a pointy line between the Could 2021 episode and the Could 2022 collapse, arguing the knowledge atmosphere modified materially in between. “By Could 2022, traders 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 Leap is causally disconnected from Could 2022 losses as a result of the knowledge atmosphere had fully modified by then.”
One in every 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 supplied a easy instance for example 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 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 fully 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 would high up Chai with KRT,” whereas conceding Do Kwon “most likely stretched the reality early on” about on-chain cost settlement.
Anchor, Chen wrote, was “more durable to defend.” Selling the roughly 20% yield as sustainable whereas reserves depleted was “reckless,” and he stated 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 unique account. Treating these conditions as equal is improper.”
Chen closed with a broader warning about precedent and builder habits. “If founder confidence plus venture failure equals fraud, we’ve criminalized entrepreneurship,” he wrote, arguing it exposes founders who publicly categorical optimism about merchandise that later fail. His ultimate framing returned to course of: no matter one thinks of Do Kwon personally, Chen argues the plea locked in prosecutors’ narrative with out the sort 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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