Investors lost $40 billion in just one day.
Here's the untold story of what happened.
We put a lot of research and work into this topic for free before you read it.
1/ The collapse of Terra (LUNA) represents one of the biggest catastrophes in cryptocurrency history. Once a leading project with a market cap in the billions of dollars, Terra’s fall sent tremors through the industry, wiping out fortunes and shattering confidence.
In this post, I’ll explain how Terra’s ambitious algorithmic stablecoin model failed, the events that led to its collapse, and the critical lessons every crypto investor should learn from the mess.
Let's review the story of Terra (LUNA) and its dramatic fall
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2/ Terra was a blockchain project that aimed to revolutionize payments through its algorithmic stablecoin, UST.
Unlike traditional reserve-backed stablecoins like USDT or USDC, UST is designed to maintain its $1 peg through a complex relationship with Terra’s native token, LUNA.
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3/ The idea was simple: users could always exchange 1 UST for $1 of LUNA, and vice versa, with LUNA being burned to forge UST and stabilize its price.
But as we will soon see, the algorithmic model had critical loopholes: when the system was stressed, the mechanism that was intended to stabilize the UST turned into a death loop.
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4/ In May 2022, UST started losing its $1 peg after large withdrawals from Anchor, a DeFi platform that was crucial to the Terra ecosystem.
Anchor offered a high annual return of nearly 20% on UST deposits, attracting a significant portion of UST – over 70% of the total supply.
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5/ When concerns about sustainability arose, users rushed to withdraw their funds, leading to sudden selling pressure on UST.
With UST dropping below $1, the mechanism to restore the peg involved minting more LUNA, but that only flooded the market and caused the price of LUNA to crash.
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6/ The crisis quickly escalated. UST lost its $1 peg completely, falling to as low as $0.10.
Meanwhile, the LUNA supply surged from around 350 million tokens to over 6.5 trillion in a desperate attempt to reclaim the value of UST. This caused the price of LUNA to drop from over $80 to nearly $0.0001 in a matter of days.
Major exchanges began delisting LUNA and UST due to their extreme volatility, and Terra’s market cap, which was around $40 billion, evaporated almost overnight.
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7/ As Terra’s collapse unfolded, all eyes turned to Du Quan, the project’s outspoken founder. Known for his confidence and bold claims, Du Quan was an outspoken advocate for Terra’s success, often brushing aside critics.
But with UST and LUNA collapsing, his tone shifted from defiance to damage control.
The team rushed to restore the UST peg, implementing emergency measures such as minting trillions of LUNA and using billions of dollars of Bitcoin reserves to try to stabilize the situation. However, these efforts were too little, too late, and the downward slide continued.
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8/ Du Kuan announced plans to “recover” by proposing a split of the Terra blockchain and launching a new LUNA token, but confidence in the project has already been shattered.
The community was divided, and many investors felt betrayed. Lawsuits and investigations into Terra's collapse followed, with Du Kuan facing increasing legal scrutiny and calls for accountability.
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9/ The controversy increased when it emerged that, despite his previous denials on Twitter, Du Kwan had control of the burned wallet and had access to the keys.
His involvement in managing LUNA's supply played a crucial role in the collapse of the ecosystem.
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10/ Terra’s collapse caught the attention of regulators around the world, raising concerns about investor protection and leading to calls for stricter regulation of cryptocurrencies.
Authorities have begun scrutinizing algorithmic stablecoins and DeFi projects, with some countries launching investigations into Terra for potential fraud and market manipulation.
Lawsuits against Terra, Do Kwon, and others quickly followed. South Korean prosecutors issued an arrest warrant for Do Kwon, making him a key figure in the legal fallout.
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11/ After months on the run and facing multiple legal challenges, Du Kwan was finally arrested in March 2023.
He was arrested by authorities in Montenegro, where he was found to be using a forged passport. His arrest marked a major shift in the fallout from the Terra collapse, with international authorities, including South Korea and the United States, actively seeking his arrest for his role in the disaster.
The arrest has heightened scrutiny of Kwan, with legal action focusing on allegations of fraud, market manipulation and deceiving investors.
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12/ The Terra collapse exposed the risks of algorithmic stablecoins and high-yield DeFi projects. It showed how quickly things can unravel when stability is uncertain.
Key lesson: Always understand the risks before investing in cryptocurrencies.
In such a volatile space, even big projects can collapse. Be careful, never invest more than you can afford to lose, and always do your research.
We put a lot of research and work into this topic for free before you read it.