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ChainLens
Regulatory action

Terra/LUNA Collapse

Algorithmic stablecoin UST lost its dollar peg and hyperinflated its pair LUNA into a death spiral, erasing $40B+ in market cap in 4 days.

Losses
$40.0B
Affected
~1,000,000
Started
May 2022
Collapsed
May 2022

Timeline

2020-2022: Terra ecosystem grows via Anchor Protocol offering 19.5% APY on UST deposits

May 7, 2022: $285M UST sold on Curve's 4pool, triggering peg stress

May 9, 2022: UST breaks $1 peg. Arbitrage mechanism tries to restore peg by minting LUNA to redeem UST

May 10-12, 2022: LUNA supply explodes from 350M to 6.5 trillion coins. Price falls from $80 to $0.0000001

May 13, 2022: Binance, Coinbase, FTX delist LUNA

2023: Do Kwon arrested in Montenegro on passport forgery charges while attempting to flee to Dubai

2024: Kwon found liable for fraud in US civil case (SEC); criminal cases ongoing in US and South Korea

Evidence

Verified via: SEC v Do Kwon (2023), South Korean prosecutor's office filings, on-chain analysis by Nansen and Chainalysis, Montenegrin court records.

Lessons for you

  1. Algorithmic stablecoins have zero reserve backing — they rely on game theory that can break under stress
  2. 19.5% APY on a 'stable' asset was mathematically a promise to collapse
  3. Peg mechanisms that mint new tokens to defend price create death spirals under large sell-offs
  4. 'It's different this time' claims about algorithmic stables have been wrong every time