Overview
TerraUSD (UST) is dead. It collapsed in May 2022 in the most destructive event in DeFi history.
TerraUSD was the flagship algorithmic stablecoin of the Terra ecosystem, designed to maintain a $1 peg through a mint-and-burn mechanism with LUNA, Terra's native token. At its peak in April 2022, UST had a market capitalization of approximately $18 billion, LUNA was worth ~$40 billion, and the Terra ecosystem represented one of the largest blockchain ecosystems in crypto.
The death spiral began on May 7, 2022:
- Large UST sell-offs (estimated $300M-$2B) overwhelmed the Curve 3pool, causing UST to depeg slightly below $1.
- As UST depegged, arbitrageurs burned UST to mint LUNA (the peg mechanism), flooding LUNA supply.
- LUNA price crashed due to massive supply inflation, reducing confidence in the backing.
- Reduced LUNA value meant the mechanism couldn't absorb UST selling, creating a reflexive death spiral.
- Over 72 hours, UST collapsed from $1 to under $0.10, and LUNA hyperinflated from ~$80 to fractions of a cent.
- Approximately $40 billion in combined UST + LUNA market value was destroyed.
The collapse triggered industry-wide contagion. Celsius, Three Arrows Capital, Voyager, and BlockFi all suffered fatal losses linked to Terra exposure, leading to cascading bankruptcies that defined the 2022 crypto winter.
Do Kwon, Terra's founder, was arrested in Montenegro in March 2023 while traveling on a forged passport. He faces criminal fraud charges in both the United States and South Korea.
Peg Stability
Complete Peg Failure
UST's peg mechanism failed catastrophically and irreversibly. The algorithmic peg — relying solely on the mint/burn relationship with LUNA — had no hard collateral backing to absorb sustained selling pressure. When confidence broke, the reflexive death spiral accelerated faster than any mechanism could absorb.
Anchor Protocol Dependency
UST's adoption was overwhelmingly driven by Anchor Protocol, which offered ~20% APY on UST deposits. This yield was unsustainable — funded partly by reserves and partly by borrower interest that never matched deposit growth. Approximately 75% of all UST was deposited in Anchor, creating massive concentration risk. When Anchor's yield reserves depleted and rates were reduced, UST outflows accelerated.
No Recovery Mechanism
Once the death spiral began, there was no circuit breaker, no reserve deployment sufficient to restore the peg, and no mechanism to halt LUNA hyperinflation. The Luna Foundation Guard (LFG) deployed approximately $3.5 billion in Bitcoin reserves to defend the peg — it was entirely insufficient.
Collateralization
Zero Collateral (by Design)
UST was designed as a purely algorithmic stablecoin — backed by nothing except the market value of LUNA and the arbitrage mechanism. There was no USDC, no treasuries, no hard assets backing UST. The entire system relied on a circular dependency: UST's value was backed by LUNA, whose value derived partly from UST's utility. When one collapsed, the other inevitably followed.
LFG Bitcoin Reserve (Insufficient)
The Luna Foundation Guard accumulated approximately $3.5 billion in Bitcoin as a "reserve" to defend the UST peg. This was deployed during the crisis and was completely consumed without restoring the peg. A $3.5B reserve was insufficient to absorb selling pressure against an $18B stablecoin — the reserve ratio was approximately 20%, far below what would be needed.
Security
No Smart Contract Exploit
UST's collapse was not caused by a smart contract bug or external exploit. The system worked exactly as designed — the mechanism design itself was the flaw. The death spiral was a known theoretical risk that materialized under real market stress.
Economic Design Failure
The fundamental security failure was economic: an uncollateralized stablecoin relying on market confidence to maintain its peg is inherently fragile. When confidence breaks, the reflexive mechanism that should restore the peg instead accelerates its destruction.
Decentralization
Validator Network
Terra's blockchain operated with a delegated proof-of-stake validator set. The validator network itself was reasonably decentralized by Cosmos ecosystem standards. This is the only dimension where Terra scores above zero — the blockchain infrastructure functionally worked; it was the economic design that failed.
Do Kwon's Influence
Despite theoretical decentralization, Do Kwon and Terraform Labs exercised enormous influence over the ecosystem. The decision to deploy LFG reserves, the communication during the crisis, and the post-collapse fork were all centrally directed.
Adoption
Dead
UST has zero legitimate adoption. The token exists as a near-worthless artifact on Terra Classic. Any market activity is purely speculative trading of a dead asset by speculators hoping for some impossible recovery.
Historical Peak
At peak, UST was the third-largest stablecoin, used extensively across Terra's DeFi ecosystem (Anchor, Mirror, Astroport) and gaining adoption on other chains. This adoption vanished overnight during the collapse.
Risk Factors
- UST IS DEAD AND WORTHLESS.
- ~$40 BILLION IN VALUE DESTROYED in May 2022.
- FOUNDER ARRESTED ON CRIMINAL FRAUD CHARGES.
- Algorithmic peg failed catastrophically — no collateral, no safety net.
- Triggered industry-wide contagion — Celsius, 3AC, Voyager, BlockFi all collapsed.
- Circular dependency: UST backed by LUNA backed by UST's utility — reflexive death spiral.
- Anchor Protocol concentration: 75% of UST in one protocol earning unsustainable yield.
- LFG reserves insufficient: $3.5B in Bitcoin couldn't defend an $18B stablecoin.
Conclusion
TerraUSD's collapse is the definitive cautionary tale in DeFi — demonstrating that algorithmic stablecoins without adequate collateral are inherently fragile and prone to catastrophic, irreversible failure. The $40 billion destruction was not caused by a bug, a hack, or an unforeseen technical issue. It was caused by the fundamental economic design working exactly as critics had warned: a reflexive death spiral where depegging accelerates LUNA inflation, which further undermines UST confidence, in a vicious cycle with no floor.
The 0.2 overall score — effectively zero — reflects a completely dead protocol that caused the most destructive single event in DeFi history. The only non-zero score (decentralization: 1) acknowledges that the underlying blockchain technically functioned. Everything else — peg stability, collateralization, security, adoption — is permanently zero.
Do Kwon's arrest and criminal prosecution underscore the human cost of the failure. Tens of thousands of investors lost their savings. The Terra collapse permanently changed the crypto industry's approach to stablecoins, leading to the widespread adoption of overcollateralized and RWA-backed models.
Never invest in uncollateralized algorithmic stablecoins. The lesson of Terra/UST cost $40 billion. Don't pay it again.