Terraform Labs founder Du Kwon pleaded guilty in August 2025 to fraud in connection with the collapse of the TerraUSD stablecoin in 2022. Investors lost more than $40 billion at the time. Since then, Kwon has faced serious charges of fraud and money laundering in the US. He has been convicted several times and now faces twelve years in prison in South Korea.
In this article, we will try to answer what impact his possible conviction will have on the stablecoin market and how to avoid something similar happening to you.
Article contents – Du Kwon:
Stablecoins may not actually be stable?
Stablecoins are digital tokens whose value is pegged to a fiat currency. The best-known stablecoins today are official tokens backed by the US dollar (USDC, USDT) or the euro (EUROC). Their stability is usually guaranteed by banks, and the value of their coins is backed by dollars or government bonds. Investors buy them precisely because of their security. So how is it possible that TerraUSD stablecoin collapsed?
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The essence of the problem — Algorithmic stablecoin
TerraUSD (UST) was not really a classic stablecoin. It was a so-called algorithmic stablecoin, which, unlike traditional ones, was not backed by physical currency or assets. So how did it work and how could it be classified as a stablecoin?
UST worked algorithmically, which means it was tied to a cryptocurrency, in this case LUNA, which belonged to the same Terra platform. The principle of its operation was as follows: if the price of UST fell below $1, investors could burn UST and receive LUNA in return. Conversely, if the price of UST rose above $1, investors could burn LUNA and receive UST in return. It was assumed that the stable value of UST would be maintained through supply and demand between UST and LUNA. And now you probably already know what the problem was.
Causes of the UST crash — The fragility of algorithmic stablecoins
In May 2022, panic broke out in the market, during which investors began to sell UST en masse. Its price fell well below the set dollar, but it was no longer possible to stabilize it. The sell-off of UST put enormous pressure on LUNA, whose price plummeted. The algorithm was no longer able to stabilize UST, resulting in a cascade of sales that destroyed both currencies at once.
Lesson learned — Not all stablecoins are created equal
Looking at the whole case, it is clear where the mistake was made. Algorithmic stabilization failed because it only worked in a reasonable market environment. Once mass panic set in, the whole system was too fragile to sustain itself. This was also the view of the courts, which claimed that Du Kwon and Terraform Labs deliberately presented the UST cryptocurrency as a “stable dollar equivalent,” even though it was not actually backed by that currency and was in fact extremely risky. Despite these facts, the company continued to market and recommend UST as a safe investment.
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Du Kwon – Could something similar happen to other stablecoins?
After reading this story, most investors are probably most interested in whether something similar could happen to them. And the answer is actually quite simple – yes and no.
If you invest in classic backed stablecoins (such as USDC or EUROC), it is almost impossible. Their reserves are transparent and regularly audited. However, if you have chosen algorithmic stablecoins (USDD, AMPL, DAI, cUSD, and others), then the risk is quite significant. As soon as there is massive selling pressure or the algorithm fails, the value of the stablecoin can drop dramatically. Investors should therefore not be dazzled by the term “stablecoin” alone and should always find out whether the currency is backed by real reserves or whether it is based solely on an algorithm and another cryptocurrency.
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