The Terra / Luna Collapse

In May 2022, Terra's UST stablecoin lost its dollar peg and Luna went from $80 to under $0.0001 in seven days. $60B in market cap vaporized. The collapse triggered a cascade: 3AC, Celsius, Voyager, and eventually FTX.

How UST was supposed to work

UST was algorithmic. To mint 1 UST, burn $1 worth of Luna. To redeem, burn 1 UST for $1 worth of Luna. Arbitrageurs kept the peg tight in normal conditions.

Where the yield came from

Anchor Protocol offered 19.5% APY on UST deposits. This was subsidized by Terra Foundation. Anchor held 75% of all UST supply because of this yield. Nobody actually used UST for payments.

The unwind (May 7-12)

1. Attacker (or panicky whale) withdrew ~$85M UST from Curve's UST-3pool. Peg wobbled to 0.98.
2. Anchor depositors panicked, tried to withdraw. UST supply started flooding into Luna via redemption.
3. Luna price crashed as supply hit market. More Luna needed to redeem each UST.
4. Death spiral: Luna → 0, UST → 0.
5. By day 7: Luna at $0.0001. UST at $0.10.

Why it was inevitable

• Reflexive design: UST peg depended on Luna value, Luna value depended on UST demand.
• Anchor's 19.5% was a Ponzi-style subsidy, not sustainable yield.
• 75% of UST supply was in one contract (Anchor). Redemption pressure had no natural absorber.

The cascade

• 3AC (Three Arrows Capital) was long Luna, got liquidated everywhere, went bankrupt.
• Celsius was lending to 3AC and had bad-debt exposure. Froze withdrawals in June.
• Voyager followed weeks later.
• FTX started "rescuing" firms, drawing down user deposits to do so. Set up its own collapse in November.

What survived

Do Kwon fled, was arrested in Montenegro in 2023, extradited to the US. Legal proceedings ongoing.