Do Kwon, the CEO of Terra creator Terraform Labs, was one of the pseudonymous co-founders behind failed algorithmic stablecoin Basis Cash, CoinDesk has learned.
Basis Cash (BAC) was a much-publicized revival in decentralized finance (DeFi) circles when it launched on Ethereum in late 2020, shortly before the launch of TerraUSD (UST), Terra's flagship stablecoin. Like UST, BAC tried to maintain its $1 peg through code rather than collateral.
But it failed to do so: The token of this long-abandoned project never reached its goal of dollar parity, sinking below $1 in early 2021 and trading well below a penny on Wednesday. Now history seems to be repeating itself: Over the past three days, UST's price has dropped rapidly below parity, reaching 27 cents in the early morning hours in the U.S. on Wednesday.
UST's price decline has shocked crypto markets and regulators alike as the once $15 billion stablecoin has continued its downward spiral. While the impact of BAC's $54.5 million was far less, it provides a historical data point for observers looking into the feasibility of algorithmic stablecoins.
Hyungsuk Kang, a former engineer at Terraform Labs (TFL), said Basis Cash was actually a side project of some of Terra's early developers, including himself and Kwon. Kang eventually left TFL to develop a Terra competitor called Standard Protocol.
"Basis Cash was untested at that point, and we weren't even sure if it would work," Kang said. Kwon "just wanted to try it out. He said this was a pilot project to do that.
Another grassroots cash maker who spoke to CoinDesk on condition of anonymity confirmed that Do Kwon and TFL employees were behind the project.
Both Kang and the anonymous employee tell CoinDesk that Kwon was "Rick Sanchez," the pseudonymous co-founder. CoinDesk has also seen internal "Basis Cash Korea (BCK)" chat logs in which Kwon refers to himself as "Rick."
(Kwon and his Basis Cash co-founder, "Morty," took their pseudonyms from the popular animated series "Rick and Morty.")
Kwon did not respond to CoinDesk's requests for comment.
Basis Cash never reached the heights of other Kwon-linked crypto projects. Its total market value (TVL) briefly peaked at $174 million in February 2021, two orders of magnitude below Terra's TVL of $30 billion before this week's historic selloff.
CoinDesk does not take lightly the decision to reveal the real name behind an online pseudonym (even if it has long been discarded). By default, we respect the privacy of pseudonymous actors who have made a name for themselves under their known handles, unless there is an overwhelming public interest in revealing their real identities.
In this case, there is such a public interest as Kwon's UST stablecoin death triggers a spiral that wreaks havoc on the entire cryptocurrency market. In this precarious situation, investors deserve to know that UST was not Kwon's first attempt at making an algorithmic stablecoin work.
What was Basis Cash?
Basis Cash and its promise of an algorithmic stablecoin predated crypto Rick and Morty.
An anonymous team of developers - mostly Terraform Labs employees, according to chat transcripts seen by CoinDesk - modeled Basis Cash after an earlier project called Basis (formerly known as Basecoin).
Basis, a former venture capital darling, raised $133 million before closing its doors in 2018 due to regulatory concerns. Founder Nader Al-Naji said at the time that there was "no way" for Basis' peg maintenance tokens to avoid being classified as securities; he closed the project rather than fight it out in court.
(Al-Naji later founded a controversial crypto startup under a pseudonym before eventually doxxing himself under pressure).
But grassroots algorithmic ideals continued to circulate in stablecoin circles until the heat of the 2020 DeFi summer, when Rick and Morty came on the scene. Kwon and other algorithmic stablecoin supporters have long argued that the DeFi space needs a decentralized, stable currency without censorship risk or central points of failure. Such an approach contrasts with that of market-leading stables like Tether's USDT and Circle's USDC, which maintain their $1 peg by (in theory) backing every digital dollar with their centralized treasuries.
"Does anyone remember what Basis was? It was one of the early 'DeFi' algorithmic stablecoins with high ambitions, but it was shut down due to SEC-related risks," Rick's now-deleted Telegram account said on the Basis Cash Telegram channel on Aug. 20, 2020. "Today, we're bringing Basis back from the grave."
Apparently intrigued by the early ideas behind Basis, Do Kwon directed a select group of TFL employees to revive what eventually became Basis Cash, according to Kang and another early TFL engineer. The Korean-based project was intended as a way to test the core concepts of the original Basis without running into the pitfalls of U.S. regulation.
According to CoinDesk's sources, Kwon intentionally distanced himself from the day-to-day operations of the project, despite proposing most of the core ideas behind Basis Cash and the underlying token model. Similar to UST, which relies on a token burn mechanism with its sister coin LUNA, BAC relies on a bonding mechanism to maintain its $1 peg.
Kwon also appeared to act as a spokesperson for the project on Twitter and other forums under his pseudonym "Rick" (CoinDesk cannot confirm whether others ever appeared as "Rick," but Kang, Basis Cash's other builder, and chat logs suggest the moniker belonged mostly to Kwon).
On its website, Basis Cash describes itself as a "Decentralized Stablecoin with an Algorithmic Central Bank," and in a November 2020 interview with CoinDesk, "Rick" shared a similar vision for Basis Cash as he did for UST.
"Long term, we look forward to seeing Basis Cash widely used as a primitive basis layer so that there is organic demand for the asset in many DeFi and commercial settings," he said on Telegram at the time.
Lessons for UST?
One of the first examples of an algorithmic stablecoin to be tested in the wild, Basis Cash never caught on. Game theory and smart contracts were supposed to regulate BAC's supply so it could trade at $1, but the token never managed to maintain its dollar peg.
Even during Basis Cash's struggles, Kwon's main account could be spotted from time to time in the project's Telegram, but without a pseudonym.
A user who was surprised to find the Terra founder in the Basis Cash Telegram group once asked Kwon what he was doing there.
"I like to study new things. Especially old things that are new again," he replied.
Zack Seward contributed reporting.