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Depeg·resolved

Terra / UST Depeg — May 2022

The third-largest stablecoin lost its dollar peg over four days, taking $40 billion in combined LUNA and UST market cap to zero.

Terra was a Layer-1 blockchain whose native token LUNA underwrote an algorithmic stablecoin, UST. Holders could always burn $1 of LUNA to mint 1 UST, or burn 1 UST to mint $1 of LUNA. As long as LUNA had market value, the mechanism could absorb sell pressure on UST by minting LUNA and selling it on the open market.

The Anchor Protocol, an alleged "savings account" offering ~20% APY on UST deposits, held around 75% of all UST in circulation. The yield was subsidised from a reserve that was visibly depleting by early 2022. When confidence wavered, UST holders withdrew and sold; the mint-and-burn mechanism responded by inflating LUNA supply at an accelerating rate.

Within 96 hours, LUNA's supply expanded from approximately 350 million tokens to over 6.5 trillion. The price collapsed from $80 to fractions of a cent. UST stabilised briefly through Luna Foundation Guard interventions then resumed falling, settling near $0.10 by 12 May.

Do Kwon was indicted by the SEC and South Korean prosecutors. He was extradited to the United States in December 2024 to face federal fraud charges.

Timeline

  1. Large UST withdrawal from Anchor Protocol

    A series of large UST withdrawals begin from Anchor, the platform where ~75% of all UST was deposited at ~20% APY.

  2. UST loses dollar peg, trades to $0.98

    First significant depeg as concentrated selling overwhelms arbitrage capacity.

  3. Luna Foundation Guard deploys $1.5B BTC reserves

    The Singapore-based foundation begins selling Bitcoin reserves to defend the peg.

  4. LUNA hyperinflation begins

    As UST holders redeem en masse, LUNA supply expands from 350M to 6.5T tokens over the following 48 hours. Price collapses from $30 to under $0.01.

  5. UST drops to $0.10

    All major exchanges halt deposits and withdrawals of LUNA. Terra blockchain halts validators at block 7,607,789 to prevent governance attack.

  6. Terra 2.0 launches, original chain renamed Terra Classic

    A new chain (Terra) launches without the algorithmic stablecoin. The original chain continues as Terra Classic with the LUNC token.

  7. SEC charges Do Kwon and Terraform Labs with fraud

    Charges include misleading investors about the stability mechanism and the reserve assets backing UST.

  8. Do Kwon arrested in Montenegro

    Detained on charges of using forged Costa Rican travel documents.

  9. Do Kwon extradited to the United States

    After two years of legal battles between South Korea and the US for extradition rights, Montenegro extradites Do Kwon to the United States.

Who was involved

Structural failures identified

Related records

Sources

  1. SEC charges Terraform and Do Kwon, US Securities and Exchange Commission — Authoritative narrative of fraud claims
  2. Terra Ecosystem Revival Plan 2, Terra forum — Description of Terra 2.0 chain split