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- 🤯 How Terraform Labs defrauded investors and wiped out the entire crypto market in 72 hours
🤯 How Terraform Labs defrauded investors and wiped out the entire crypto market in 72 hours
$60B Crypto Scam, Exposed
Admond Lee
May 25, 2025
Hey Founders,
Welcome to The Runway Ventures — a weekly newsletter where I deep dive into failed startup stories to help you become the top 1% founder by learning from their mistakes with actionable insights.
Today’s story is about how Terraform Labs defrauded investors and wiped out the entire crypto market in 72 hours. Let’s get to it! 🚀
Today at a Glance:
☠️ 1 Failed Startup → Terraform Labs
⚠️ 2 Mistakes → Built a house of cards (with zero backup plans)
🧠 3 Lessons Learned → Your business model must create real value
🔗 The Runway Insights → 5 AI startup ideas so good you might want to quit your job in 24h
💰 Southeast Asia Funding Radar → Airwallex raises $300M to build the future of global banking
☠️ 1 Failed Startup: Terraform Labs
🚀 The Rise of Terraform Labs
🇸🇬 Founded by Do Kwon and Daniel Shin in January 2018, Terraform Labs wanted to make cryptocurrencies practical for everyday use while maintaining price stability by creating a blockchain protocol.
The Problem — 📉 Cryptocurrencies were too volatile for everyday transactions and traditional stablecoins rely on fiat reserves or over-collateralisation, limiting capital efficiency.
No one uses Bitcoin or Ethereum for actual payments because prices swing wildly.
☕️ I mean… who wants to buy coffee with Bitcoin if its value might double tomorrow?
The Solution — 📈 Terraform Labs developed the Terra blockchain, powering an “elastic” money supply where two tokens — LUNA (governance & collateral) and TerraUSD (UST) (algorithmic stablecoin) — would balance each other to maintain UST’s $1 peg.
With this innovative approach, UST didn’t require full backing from traditional assets (cash / Treasury bonds) compared to other stablecoins (i.e. USDC).
🤯 Instead, it would use a companion token called LUNA in a mint-and-burn mechanism to maintain stability.
♻️ Here’s how UST and LUNA worked together:•
• If UST went above $1, users could burn LUNA to mint more UST and profit from the difference.
• If UST fell below $1, users could buy the discounted UST and swap it for $1 worth of LUNA.
• This mechanism created a self-correcting system where market forces would always keep UST at $1, hence maintaining the price stability of UST as a stablecoin.
 | The self-correcting system is brilliant. And investors ate it up. 🤑 Terraform Labs attracted more than $200 million from prestigious investment firms including Arrington Capital, Coinbase Ventures, Galaxy Digital, and Lightspeed Venture Partners. |
📈📈📈📈 🌋 At its peak (just 3 years after launching):
Dozens of DeFi projects (Anchor, Mirror, Astroport) built on Terra by 2021.
Terra had become the 2nd largest blockchain by market capitalisation after Ethereum.
The Terra ecosystem was the 3rd largest cryptocurrency by market cap after Bitcoin and Ethereum, valued at $60 billion.
In April 2022, LUNA soared to an all-time high of $119.51 with $41 billion market cap.
By May 2022, UST had over $18 billion in circulation and was one of the top 10 stablecoins by market cap.
WILD.
Terraform Labs was unstoppable.
Not just that, Do Kwon (co-founder of Terraform Labs) even bragged this:
95% of crypto projects will die… but not us.
Overnight, Kwon became a crypto celebrity, amassing a large Twitter following where he often mocked critics and sceptics as "poor."
🍹 The confidence was intoxicating, and investors couldn't get enough.
The platform hosted thousands of decentralised applications (dapps), and Terraform's Anchor protocol (a lending platform) was offering a mind-boggling 20% annual yield on UST deposits.
🏆 It was crypto's golden child…
📉 The Fall of Terraform Labs
… until it wasn't.
The house of cards began tumbling down in early May 2022.
📉 Everything collapsed when UST lost its sacred $1 peg after a “coordinated attack” on its liquidity pool (blockchain monitoring bots detected unusually large withdrawals and sales of UST).
People panicked.
📉📉 The self-correcting system printed more and more LUNA tokens in a desperate attempt to restore the peg. But this only diluted LUNA's value, causing it to plummet, which further eroded confidence in UST.
🤯 In just 3 days, $40 billion in market value evaporated into thin air.
📌 Here’s what happened to Terraform Labs:
🌝 To The Moon!!!
2018
Jan — 🪙 Do Kwon and Daniel Shin launched the Terra network to create price-stable cryptocurrencies against major fiat currencies.
20 Apr — ⚠️ In a moment of eerie foreshadowing, Cyrus Younessi, head of risk at MakerDAO, warned that Terra/LUNA might not work, describing almost exactly the scenario that would unfold 4 years later.
23 Apr — Terraform Labs was officially incorporated in Singapore.
30 Jan 2019 — Terraform Labs introduced LUNA token, its first cryptocurrency token.
2020 — Launched TerraUSD (UST), a stablecoin pegged to the US dollar.
7 Jul — 🤔 Anchor Protocol, a Terra-based application built by Terraform Labs (huh), was launched, luring users with 20% APY.
2019-2021 — 💰 The company raised over $200 million from top-tier investors.
Dec 2021 — Terra became the 2nd largest blockchain by market capitalisation after Ethereum.
16 Mar 2022 — 💰 Terraform Labs raised $88 million in Series B funding, just 2 months before the collapse.
20 Apr 2022 — 💰The company raised another $50 million at a valuation of $350 million, less than a month before implosion.
LUNA peaked at $119.51.
😱 From HODL to HOLYSHITTTTTT…
2022
7 May — 🚨 Liquidity pool attack
Large withdrawals and sales of UST were observed, beginning the de-pegging process.
9 May — 😱 TerraUSD's price crashed to 35 cents, far from its designed $1 peg.
Panic spread like wildfire through crypto markets.
Do Kwon tried to raise emergency funds to stabilise the system, but it was too late.
12 May — 📉 LUNA collapsed from $80 to just pennies, effectively becoming worthless.
🤯 In just 3 days, $40 billion in market value was gone (just like that).
💸 Thousands of investors lost their life savings.
📉 The collapse triggered a broader crypto market crash and brought down other major players like Three Arrows Capital hedge fund, which in turn took out other crypto companies including Genesis Global Capital and indirectly impacted FTX (maybe story for another time…).
Sep —South Korean prosecutors filed a warrant for Do Kwon's arrest, and Interpol added him to its Red Notice list.
2023
16 Feb — 👨🏻⚖️ SEC charged Terraform Labs & Kwon with securities fraud.
23 Mar — 🚔 Do Kwon was arrested in Montenegro trying to flee on fake passport.
Apr — Co-founder Daniel Shin was indicted by South Korean authorities for his role in the Terra ecosystem.
31 Oct — During his trial, Daniel Shin blamed Do Kwon for the company's implosion, claiming he had "parted ways" with Kwon in 2020.
Shin's lawyers stated: "The cause of the coin plunge was the unreasonable operation of the Anchor Protocol conducted by CEO Kwon and external attacks. It has nothing to do with [Shin]."
13 Nov — ❓ Despite the collapse and ongoing legal troubles, Terraform Labs acquired Pulsar Finance, a cross-chain portfolio manager and data provider.
2024
21 Jan — ☠️ Terraform Labs filed Chapter 11 bankruptcy in New York.
5 Apr — 🤦🏻♂️ New York jury found Terraform & Kwon liable for defrauding investors.
13 Jun — 🚨 A U.S. District Court judge approved a $4.47 billion settlement between Terraform Labs, Do Kwon, and the SEC.
Kwon was fined $80 million.
Kwon and the company were banned from buying and selling crypto asset securities.
27 Dec — 🇺🇸 Montenegro ordered extradition of Do Kwon to United States.
31 Dec — Kwon was handed over to the FBI in Podgorica to begin U.S. proceedings.
2025 — 🙏🏻 Claims portal opened for victims to claim their losses in Terra / Luna (deadline: 16 May 2025).
⚠️ The Terraform Labs saga is a textbook example of how NOT to build a sustainable financial system.
♻️ The fundamental flaw was trying to create value from circular logic – UST was supposedly valuable because it could be exchanged for LUNA, while LUNA derived its value largely from its role in the UST ecosystem. When confidence broke, there was no floor.
SEC Chair Gary Gensler summed it up perfectly after the settlement:
Terraform and Do Kwon’s fraudulent activities caused devastating losses for investors, in some cases wiping out entire life savings. Their fraud serves as a reminder that, when firms fail to comply with the law, investors get hurt.
🫡 I’m not a crypto bro, but here are my takeaways:
The Terra collapse wasn't just a company failure – it was a systemic meltdown that revealed the fragility of algorithmic stablecoins and triggered a broader crypto crisis.
From $60 billion empire to $0 in 72 hours, Terraform Labs' story is the ultimate cautionary tale of what happens when financial engineering replaces fundamentals, when confidence is confused for value, and when success breeds the kind of hubris that blinds you to obvious risks.
Lastly, only invest in crypto with the money that you can afford to lose. Never bet your savings on something that’s very volatile.
Want to learn more about Terraform Labs’s downfall?
⚠️ 2 Mistakes
Mistake 1: Built a house of cards (with zero backup plans)
The whole system only works if people believe it works. Once that belief falters, it's game over.
♻️ You see, Terra’s entire system relied on circular logic — UST’s value depended on LUNA, and LUNA’s value depended on UST staying pegged. It was like two people trying to hold each other up on a sinking raft.
In fact, Cyrus Younessi, head of risk at MakerDAO, predicted Terra (LUNA) drama back in 2018 as he bashed the idea to solely back UST with the LUNA token.
🌀 He mentioned that this "one-asset" backing is too fragile — investors' panic would easily launch a "death spiral" mechanism when two cryptocurrencies — a stablecoin and its "basic token" — would be racing towards zero.
When market confidence wobbled, the entire house of cards collapsed. And that’s exactly what happened to Tera and LUNA token.
Mistake 2: Offered unsustainable returns to fuel growth
☠️ The Anchor Protocol – Terraform's lending platform – offered a mind-boggling 20% APY on UST deposits. But those yields weren’t organic — they were subsidised by Terra’s reserves.
This wasn't just generous, it was mathematically unsustainable. The yields weren't backed by genuine economic activity but were essentially subsidised to attract users and capital.
💣 When you're promising returns that defy financial gravity, you're not building a business, you're constructing a time bomb.
🧠 3 Lessons Learned
Lesson 1: Your business model must create real value
No matter how elegant your mechanism, hard assets matter. Always build on solid economic fundamentals, not just clever financial engineering.
🌮 Key Takeaways:
🏦 Build real-world reserves & redundant safety nets
For example, Circle’s USDC never lost its peg during the March 2020 market crash because of real-asset backing and pause functions on redemptions.
Circle maintains $1 in actual reserves (cash and Treasury bills).
As a result, this transparency creates trust – the foundation of any financial system.
🌊 Stress test the worst-case scenario
Terra assumed LUNA holders would always burn tokens to save UST. But when panic hit, everyone ran for the exits, and the system imploded.
Always be paranoid to prepare for worst-case scenarios and build buffers for potential disasters ahead.
Lesson 2: Balance growth incentives with sustainable economics
Terraform Labs grew explosively, becoming the 2nd largest blockchain by market cap after Ethereum in just 3 years. But this growth was fuelled by unsustainable incentives — notably the 20% APY that attracted billions in capital.
🌮 Key Takeaways:
🤑 Model unit economics before launching incentive programs
Never pay out more than the profit margin.
Interestingly, Chocolate Finance in Singapore faced exactly the same problem due to their incentive programs.
🍫 In February 2025, Chocolate Finance rolled out a “2 air miles per dollar” debit card promo (capped at S$1,000/month) including bill payments via AXS (a normally excluded category)
The campaign immediately blew past projections as users “gamed” the system by stacking up miles on routine bills, draining the company’s liquidity buffer and prompting abrupt cuts — first halting AXS payments, then freezing instant withdrawals under its “Chocolate Liquidity Programme”.
A wave of panic withdrawals ensued, turning a service perk into a self-fulfilling “bank run” that exposed how unsustainable growth incentives can collapse even well-capitalised fintechs.
Luckily, Chocolate Finance managed to resume its operations and insisted this was “not a liquidity issue” but a volume-management step.
🙏🏻 Moral of the story — cap incentives by capacity and communicate clearly to customers before/during/after shit happens.
Lesson 3: Embrace radical transparency & compliance
In crypto (and honestly, any high-growth industry), transparency and compliance aren’t just boxes to tick for regulators — they’re the bedrock of trust, resilience, and long-term survival.
That’s because transparent disclosures reduce information asymmetry, helping users and regulators spot problems before they become crises.
🌮 Key Takeaways:
🫡 Integrate compliance from day 1
Don’t treat it as an afterthought or a “when we get big” problem.
Use RegTech tools to automate KYC/AML, transaction monitoring, and reporting-platforms like IdentityPass or AMLRadar to save you headaches and legal bills.
⚡️ Stay ahead of regulation
Laws change fast, especially in crypto.
Work with legal experts in every market you operate in, and keep your compliance frameworks updated.
✍🏻 Document everything
Keep thorough records of audits, KYC checks, and compliance training.
This isn’t just for regulators — it’s also for investors and future partners who will want to see your house is in order.
In industries plagued by scams or secrecy (like crypto), being radically open can set you apart and attract the most discerning investors and partners.
🔗 The Runway Insights
5 AI startup ideas so good you might want to quit your job in 24h (Link)
How to stop holding yourself back (Link)
How dbt Labs built a $4.2B software business out of a 2-person consultancy (Link)
Inside Supabase’s product & community led growth (Link)
The 4 lessons I learned from growing a unicorn (Link)
How to identify your ICP to go from $0 to $5M (Link)
💰 Southeast Asia Funding Radar
Airwallex raises $300M to build the future of global banking (Link)
Whale raises $60M to expand enterprise AI suite globally (Link)
CrediLinq bags $8.5M to help B2B platforms offer embedded finance to their customers (Link)
OpenFX raises $23M to build near-instant cross-border transactions (Link)
Gprnt bags $4.62M from Ant and MUFG Bank for its utility-powered ESG disclosure platform (Link)
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That’s all for today
Thanks for reading. I hope you enjoyed today's issue. More than that, I hope you’ve learned some actionable tips to build and grow your business.
You can always write to me by simply replying to this newsletter and we can chat.
See you again next week.
- Admond
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