We’ve poured countless hours of research and effort into this thread to provide valuable insights for free.
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1 / The Terra (LUNA) Collapse: A Historic Crypto Disaster
The fall of Terra (LUNA) stands as one of the most catastrophic events in cryptocurrency history. Once a leading project with billions in market value, its dramatic downfall not only wiped out fortunes but also eroded trust across the crypto ecosystem.
In this thread, I’ll break down Terra’s ambitious algorithmic stablecoin model, the events that triggered its collapse, and the essential lessons every crypto investor must learn.
Let’s dive into the story of Terra (LUNA) and its shocking demise.
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2 / Terra’s Vision: Revolutionizing Payments
Terra aimed to transform payments through its algorithmic stablecoin, UST.
Unlike traditional stablecoins backed by reserves (e.g., USDT, USDC), UST relied on a complex algorithmic relationship with Terra’s native token, LUNA, to maintain its $1 peg.
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3 / The Mechanism: A Risky Design
The idea seemed simple:
1 UST could always be exchanged for $1 worth of LUNA.
To stabilize UST, LUNA would be burned to mint UST and vice versa.
But this algorithmic approach had a critical flaw: under stress, the system designed to stabilize UST could trigger a catastrophic death spiral.
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4 / The Collapse Begins: May 2022
UST began losing its $1 peg after significant withdrawals from Anchor, a DeFi platform central to Terra’s ecosystem.
Anchor attracted over 70% of UST supply by offering an annual yield of nearly 20%. When concerns arose about sustainability, users rushed to withdraw, creating immense selling pressure.
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5 / The Death Spiral
As UST dipped below $1, the system attempted to restore the peg by minting LUNA.
Instead, this flooded the market with LUNA, crashing its price.
The downward spiral accelerated, with UST’s value plummeting to $0.10 and LUNA’s supply skyrocketing from 350 million tokens to over 6.5 trillion.
Within days, LUNA’s price collapsed from $80 to near zero.
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6 / Impact: A $40 Billion Wipeout
Major exchanges delisted LUNA and UST due to extreme volatility. Terra’s market cap, which once exceeded $40 billion, evaporated almost overnight.
The collapse sent shockwaves across the crypto world, leaving investors devastated.
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7 / The Role of Do Kwon
All eyes turned to Do Kwon, Terra’s charismatic founder known for his confidence and bold claims.
As UST and LUNA crashed, his defiance gave way to damage control.
Desperate measures, including minting trillions of LUNA and deploying billions in Bitcoin reserves, failed to stabilize the system.
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8 / The Aftermath: A Divided Community
Do Kwon proposed forking the Terra blockchain to create a new LUNA token, but trust had already been shattered.
Investors felt betrayed, and the community became divided.
Lawsuits and investigations soon followed, with Do Kwon facing increasing scrutiny and calls for accountability.
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9 / Revelations and Controversy
It was revealed that Do Kwon had control over the burning wallet and access to the keys, despite earlier denials.
His management of LUNA’s supply played a key role in the ecosystem’s collapse.
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10 / Global Regulatory Crackdown
The Terra disaster drew global regulatory attention, highlighting the risks of algorithmic stablecoins and unregulated DeFi projects.
Authorities worldwide began investigations into Terra for potential fraud and market manipulation.
In South Korea, prosecutors issued an arrest warrant for Do Kwon, making him a central figure in the legal fallout.
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11 / Do Kwon’s Arrest
After months on the run, Do Kwon was detained in Montenegro in March 2023 while using a forged passport.
His arrest marked a turning point, as authorities in South Korea and the U.S. pursued him for allegations of fraud, manipulation, and misleading investors.
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12 / Lessons from the Terra Collapse
The Terra collapse exposed the inherent risks of algorithmic stablecoins and high-yield DeFi projects.
Key takeaways for investors:
Always understand the risks before investing.
Never invest more than you can afford to lose.
Do thorough research before trusting any project, no matter how promising it seems.
We’ve worked hard to provide these insights for free in this thread. Thank you for reading!
