What Happened to Terra/UST: Anatomy of a $60 Billion Depeg
The step-by-step mechanics of the May 2022 Terra collapse: how an algorithmic stablecoin's reflexive loop reversed, why the rescue failed, and what it changed forever.
On 7 May 2022, TerraUSD — the third-largest stablecoin in the world, with roughly $18 billion in circulation — slipped below $1. Five days later it traded at fractions of a cent, its sister token LUNA had hyperinflated from $80 to less than a tenth of a cent, and approximately $60 billion of paper wealth was gone. This is the incident report.
The design
UST was an algorithmic stablecoin. It held no dollars. Instead, a smart contract allowed anyone to burn $1 worth of LUNA to mint 1 UST, or burn 1 UST to mint $1 worth of LUNA. That arbitrage window was the entire peg mechanism: if UST traded at $0.99, traders could buy it and redeem it for $1 of LUNA — profit, and the price recovered. If UST traded at $1.01, traders minted fresh UST and sold it — profit, and the price recovered.
The system’s unstated assumption: confidence in LUNA’s value never breaks. Because when UST holders rush for the exit, they are paid in newly printed LUNA.
The week it broke
7–8 May: A large UST sell-off on Curve, combined with a broader market downturn, pushed UST slightly below peg. The Anchor Protocol — Terra’s savings product paying an unsustainable ~20% APY — was already bleeding deposits, removing the biggest source of structural UST demand.
9 May: UST depegs to ~$0.60–0.70. The Luna Foundation Guard, Do Kwon’s reserve entity, deploys its ~$3.5 billion war chest of Bitcoin and UST to defend the peg. The defense fails: every UST redeemed through the algorithm mints more LUNA, diluting LUNA’s price, which makes the next redemption print even more.
10–12 May: The reflexive loop runs in reverse at full speed. LUNA’s supply balloons from ~350 million to over 6.5 trillion tokens in days. UST falls below $0.10, then $0.01. Trading halts, bridges freeze, and the blockchain itself is briefly stopped and restarted by validators.
The contagion
Terra’s collapse did not stay contained. Three Arrows Capital, overexposed to the trade of the year, blew up within weeks. Lenders Celsius and Voyager halted withdrawals and filed for bankruptcy. The “crypto winter” of 2022–2023 has a before-and-after date, and it is May 2022.
The aftermath
Do Kwon fled Singapore, was arrested in Montenegro in March 2023 on forged-document charges, extradited to the United States, and in 2025 pleaded guilty to wire fraud and conspiracy — agreeing to forfeit $19 million and face up to 25 years. The algorithmic stablecoin category he championed effectively ceased to exist as a serious design.
The lesson, logged
UST failed exactly the way NuBits failed in 2018, only at thirty-thousand times the scale: a stability mechanism backed by endogenous value — value created by the system itself — has no floor. When confidence leaves, the mechanism that was supposed to restore the peg becomes the machine that prints the collapse. Every serious stablecoin design since 2022 answers one question first: what external, auditable asset catches the price? Terra’s answer was “LUNA.” That is no answer at all.