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Terra/LUNA is a promising platform for stablecoins
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It collapsed and lost $40 billion in its market capitalization
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It has left a lasting impact on the ecosystem
Terra/LUNA, two and half years ago in May 2022 was one of most promising cryptocurrency projects. TerraUSD (UST), its algorithmic stablecoin had a fatal flaw. Combine that with a panic in the market, and it all imploded. Billions of dollars were lost and trust was broken. The crypto space is still feeling the pain.
Today, we look back at Terra/LUNA, its collapse, and the fallout.
What was Terra/LUNA
Terra (LUNA) is a blockchain platform which aimed to create a stable economy by using its algorithmic stablecoin TerraUSD (UST), designed to be pegged 1:1 to the US dollar.
The platform employed a unique mechanism that maintained UST’s stability of price by minting and burning LUNA, the native token in response to market fluctuations.
Users could create LUNA if UST dropped below $1. This lowered the supply of UST, causing its price to drop back to $1. If UST rose above $1, users would be able to burn LUNA. This would increase UST supply and bring the price down.
It’s a see-saw that doesn’t let either side fall too far.
Why did Terra/LUNA Ecosystem collapse?
Around May 2022 Terra/LUNA became extremely popular. At its height, the coin reached #4 on the list of biggest cryptocurrencies based on market capitalization. Its market cap was more than $40 billion.
DeFi (decentralized Finance) projects gained in popularity at the same time. Yield farming was particularly appealing to the community. Users staked their tokens in a project or network and earned yield for their contribution.
Read about the TerraUSD collapse: The risks of algorithmic stablecoins
Anchor Protocol was one of these projects, a decentralized financial (DeFi), platform on Terra blockchain that offered high interest rates (upto 20%) for UST deposit. The 20% rate was considered unsustainable by many (banks offer no more than 3% today), but it also attracted significant investment.
When investors began to withdraw large amounts of money in early May 20, 2022, UST began to lose its peg. It was a domino-effect: the more UST strayed away from $1, the greater the fear. The greater the fear, the larger the withdrawal. The larger the withdrawal, the greater the depegging. It was a vicious circle that caused UST to drop to $0.10.
LUNA’s supply grew from 350 million tokens to over 6.5 trillion in a matter of days.
The entire market capitalization for the system vanished, and the tokens were delisted by most exchanges, citing the extreme volatility.
The Crash and its Aftermath
The Terra/LUNA crash had a profound impact on the entire cryptocurrency industry, both short-term and long-term. Bitcoin, for instance, dropped from $40,000 to $20,000 in the days following the collapse. Other altcoins saw double-digit losses as well, leading to a general sell-off of the entire market.
Read about the reaction of Terra (LUNC and (LUNA), prices to SEC lawsuit
The crash has shattered investor trust in algorithmic stablecoins, and exposed vulnerabilities in the crypto-ecosystem. It also attracted more regulatory scrutiny, which meant more red tape and more obstacles.
This crash also brought down many large crypto companies that were heavily exposed to UST, LUNA and other cryptocurrencies. Three Arrows Capital and other companies, such as Celsius, Voyager and others, had to declare bankruptcy and close their businesses.
Do Kwon was the face of the project and faced legal trouble when investigations into fraud, market manipulation, and other crimes began. He fled and was arrested on March 23, 2023 in Montenegro.
He was arrested at the Podgorica airport while attempting board a flight with false documents. Kwon pleaded guilty to U.S. criminal charges of fraud including securities fraud, money laundering, and wire fraud two weeks ago.
Bloomberg reported that his trial will begin in early 2026.
