We’ve poured extensive research and effort for free into this thread. Before diving in, please consider
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1/ The collapse of Terra (LUNA) marks one of the most catastrophic events in crypto history. Once a top-tier project with billions in market value, its downfall left a trail of devastation, wiping out $40 billion in a day, erasing fortunes, and shaking trust in the industry.
In this thread, we’ll explore:
Terra’s ambitious algorithmic stablecoin model
The chain of events that led to its collapse
Key lessons every crypto investor must learn
Let’s unravel the story of Terra (LUNA) and its dramatic fall.
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2/ Terra was a blockchain project with the goal of transforming payments using its algorithmic stablecoin, UST.
Unlike traditional stablecoins like USDT or USDC, which are backed by fiat reserves, UST aimed to maintain its $1 peg through a complex relationship with Terra’s native token, LUNA.
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3/ The concept was straightforward:
Users could always exchange 1 UST for $1 worth of LUNA, and vice versa.
This process burned LUNA to mint UST, stabilizing UST’s price.
However, the algorithmic model had a fatal flaw: under stress, the stabilization mechanism could trigger a devastating feedback loop—a "death spiral."
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4/ The collapse began in May 2022, when UST lost its $1 peg after massive withdrawals from Anchor, a DeFi platform central to Terra’s ecosystem.
Anchor attracted over 70% of UST’s total supply by offering an eye-catching 20% annual yield on UST deposits. This dependency became a critical vulnerability when panic set in.
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