What happened
A dollar backed by nothing except the promise that you could always swap it for another token, which worked perfectly until the moment everybody tried.
| When | May 2022 |
| What kind of failure | Algorithmic stablecoin collapse |
| What it cost | About $40 billion of market value in under a week |
The version the public saw
UST was a stablecoin that held its dollar peg without holding dollars. Instead, one UST could always be exchanged for one dollar of LUNA and back again, and arbitrage would keep the price at a dollar. The Anchor protocol paid around twenty percent on UST deposits, which was described as a savings rate and attracted billions.
Underneath the same period
The design only holds while LUNA has enough market value to absorb redemptions. Burning UST mints LUNA, so a wave of people leaving UST mints enormous quantities of LUNA, which destroys its price, which makes each remaining UST claim on less value, which causes more people to leave. The mechanism that defends the peg in calm conditions is the mechanism that destroys it under stress. The twenty percent Anchor rate was subsidized from a reserve, not earned.
The sequence
Large withdrawals from Anchor
On 7 May 2022 several hundred million dollars of UST left Anchor and was sold. The peg slipped slightly.
The peg breaks
Selling accelerated. UST fell to about 35 cents within days as holders redeemed into LUNA and sold it.
LUNA hyperinflates
Supply went from around 350 million tokens to over six trillion in a matter of days. The price fell from about $80 to a fraction of a cent.
The chain halts
Validators stopped the Terra blockchain on 12 May to prevent governance attacks. Around $40 billion of value had gone.
The signals, before anybody knew the ending
None of these needed hindsight. Each one was public, or checkable, while the money was still there.
- A stablecoin with no reserves, holding its peg by design rather than by backing
- A twenty percent rate on a dollar asset, paid from a reserve rather than earned
- A reflexive mechanism where the defense and the failure use the same lever
- Prominent economists publicly describing the design as unworkable, before it failed
The aftermath
Do Kwon was arrested in Montenegro in 2023 on a false passport charge, eventually extradited, and sentenced to fifteen years in December 2025. The collapse triggered the failures of Three Arrows Capital, Celsius, Voyager and others through the following months.
The part that changes what you do
"Stablecoin" describes an intention, not a mechanism. Before holding one, find out what actually backs it: cash and short term government debt with published attestations, crypto collateral held in excess, or nothing but an algorithm. Those are three completely different risks wearing the same word.
Common questions
Are all stablecoins at risk of this?
Could Terra have been saved?
What was Anchor and why did it matter?
Where to go next
Other cases like this one
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