Terra Luna collapse: how an algorithmic stablecoin failed

What were Terra, UST and LUNA before the collapse?

Terra was a blockchain, UST was its stablecoin and LUNA was its companion token. Before the collapse, UST ranked as the third-largest stablecoin by market capitalisation. A stablecoin aims to hold a fixed value, here one US dollar, and users treat it as digital cash.

Most large stablecoins hold dollars or short-term bonds in reserve, and the holder can check the amount in a published report. UST took another path. It was not backed by dollar reserves, and its price relied on a rule written in code. The rest of this page explains why that choice made it fragile, and it shows the sequence from the first slip to the court outcomes.

How did the Terra Luna algorithmic stablecoin try to hold its peg?

UST relied on a burn and mint equilibrium. LUNA absorbed volatility. During the crash, holders converted UST into LUNA through the mint and burn system, and the conversion raised the supply of LUNA. The design assumed that confidence in LUNA would hold while this happened.

The weakness sits in that assumption. The stablecoin and its backup token form one loop, and a shock that lowers the price of LUNA weakens the support behind UST at the same time. The page on the UST depeg follows how the dollar peg broke, step by step.

Why did Anchor attract so many Terra stablecoin holders?

Anchor was a lending and borrowing protocol on Terra. Investors who deposited UST received a 19.45% yield, paid from Terra’s reserves. A yield of this size is far above the rate of a bank deposit, and it drew large deposits into the system.

A high fixed yield needs a source. When the source is a reserve fund and not a lending income, the yield lasts only as long as the fund does. This is a general check for any platform that offers returns well above the market: ask who pays the yield and from which income.

What happened to Terra Luna in the May 2022 collapse?

Starting 9 May 2022, UST lost its dollar peg. Over the following week it fell to about 10 cents, and LUNA dropped to virtually zero from an all-time high of $119.51. As holders converted UST into LUNA, the supply of LUNA grew, and its price fell further. On 13 May, Terraform Labs paused the Terra blockchain.

The Luna crash page gives the spiral in numbers, from the first drop to the pause. Almost $45 billion in market capitalisation disappeared within one week, which makes Terra one of the largest single failures in the crypto crash history.

Did the Luna Foundation Guard bitcoin reserve save the UST peg?

The Luna Foundation Guard, a non-profit set up in Singapore in January 2022 with Do Kwon as director, held 80,394 bitcoin worth about $2.4 billion as of 7 May 2022. Bitcoin was its largest reserve holding. The reserve aimed to defend the peg in a crisis.

The reserve did not restore the peg. As of 16 May 2022, the use of the bitcoin remained unclear in public sources. The lesson is general: a reserve must be larger than the run it faces, and it must be disclosed in a way that anyone can verify.

How did the Terra Luna collapse spread to other crypto firms?

Three Arrows Capital invested about $200 million in LUNA in February 2022, and LUNA fell to near zero in May. A British Virgin Islands court ordered the fund liquidated on 27 June 2022. Voyager then reported that the fund had not repaid loans totaling $666 million.

This chain shows how one failure reaches lenders. A fund loses on a token, cannot repay a lender, and the lender freezes customers. The overview of crypto collapses and the pages on 3AC and the lenders follow the same chain from other angles.

What did courts decide about the Terra Luna collapse?

The SEC charged Terraform Labs and Do Kwon with fraud in February 2023. In June 2024 the SEC announced that Terraform and Kwon would pay $4.5 billion following a fraud verdict. Kwon was arrested at Podgorica Airport in Montenegro on 23 March 2023, and a federal grand jury in Manhattan filed 8 charges.

In August 2025 he pleaded guilty to 2 fraud charges and agreed to forfeit $19 million. On 11 December 2025 he was sentenced to 15 years in prison. A court outcome closes the legal question and leaves the design lesson for every reader of stablecoin projects. The lesson concerns structure: a coin whose value depends on a sister token carries the risk of both.

Which 4 questions test the backing of a stablecoin like UST?

4 questions apply. What backs each unit: dollars, bonds or a token of the same issuer? Where is the backing held and who audits it? Who pays any yield, and from which income? What happens in a run, and who can verify it? A stablecoin that answers in writing gives you facts to test.

The EQOS Asia method page shows how such checks feed a structured score, and the contact page lets you bring a stablecoin exposure question from your own treasury. Teams in Singapore, ASEAN and Hong Kong can use it to review counterparties before a payment or a deposit.

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About the author

Stéphane Jambu

President, EQOS Forecast Asia

Stéphane Jambu leads EQOS Forecast Asia and works as a consultant in e-commerce, search visibility, and AI. LinkedIn profile