The Untold Story of the Terra (LUNA) Collapse: How an Ambitious Algorithmic Stablecoin Model Failed

The Terra (LUNA) collapse stands as one of the biggest disasters in crypto history. Once a top project with billions in market value, Terra's downfall sent shockwaves across the industry, wiping out fortunes and shattering trust.

Investors lost $40 billion in just one day.

Here’s the untold story of what happened

We put a lot of research and work FOR FREE into this thread before reading it.

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The Terra (LUNA) collapse stands as one of the biggest disasters in crypto history. Once a top project with billions in market value, Terra's downfall sent shockwaves across the industry, wiping out fortunes and shattering trust.

In this thread, I’ll break down how Terra’s ambitious algorithmic stablecoin model failed, the events that led to its collapse, and the critical lessons every crypto investor should learn from this fiasco.

Let’s dive into the story of Terra (LUNA) and its dramatic fall

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Terra was a blockchain project that aimed to revolutionize payments with its algorithmic stablecoin, UST.

Unlike traditional stablecoins backed by reserves like USDT or USDC, UST was designed to maintain its $1 peg through a complex relationship with Terra’s native token, LUNA.

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The idea was simple: users could always exchange 1 UST for $1 worth of LUNA, and vice versa, with LUNA being burned to mint UST and stabilize its price.

But as we would soon see, the algorithmic model had critical vulnerabilities: when stress hit the system, the very mechanism meant to stabilize UST would turn into a death spiral.

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In May 2022, UST began to lose its $1 peg after significant withdrawals from Anchor, a DeFi platform that was crucial to Terra’s ecosystem.

Anchor offered a high annual yield of nearly 20% on UST deposits, attracting a huge portion of UST—over 70% of the total supply.

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When concerns about sustainability arose, users rushed to withdraw their funds, creating sudden selling pressure on UST.

As UST's value dipped below $1, the mechanism to restore the peg involved minting more LUNA, but this only flooded the market and crashed LUNA’s price.

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The crisis accelerated rapidly. UST lost its $1 peg entirely, dropping to as low as $0.10.

Meanwhile, LUNA's supply soared from around 350 million tokens to over 6.5 trillion in a desperate attempt to restore UST's value. This caused LUNA’s price to plummet from over $80 to nearly $0.0001 within days.

Major exchanges began delisting LUNA and UST due to their extreme volatility, and Terra’s market cap, which had been around $40 billion, evaporated almost overnight.

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As the Terra collapse unfolded, all eyes turned to Do Kwon, the project’s outspoken founder. Known for his confidence and bold claims, Do Kwon had been a vocal advocate for Terra’s success, often dismissing critics.

But as UST and LUNA crashed, his tone shifted from defiance to damage control.

The team scrambled to restore UST’s peg, implementing emergency measures like minting trillions of LUNA and using billions in Bitcoin reserves to try and stabilize the situation. However, these efforts were too little, too late, and the downward spiral continued.

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Do Kwon announced plans for a "recovery" by proposing to fork the Terra blockchain and launch a new LUNA token, but confidence in the project had already been shattered.

The community was divided, and many investors felt betrayed. Lawsuits and investigations into Terra’s collapse soon followed, with Do Kwon facing growing legal scrutiny and calls for accountability.

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Controversy grew as it emerged that, despite his earlier denial on Twitter, Do Kwon did control the burning wallet and had access to the keys.

His involvement in managing LUNA’s supply played a crucial role in the ecosystem's collapse.

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The Terra collapse caught regulators' attention worldwide, sparking concerns about investor protection and leading to calls for stricter crypto regulations.

Authorities began scrutinizing algorithmic stablecoins and DeFi projects, with some countries launching investigations into Terra for potential fraud and market manipulation.

Lawsuits against Terra, Do Kwon, and others quickly followed. South Korean prosecutors issued an arrest warrant for Do Kwon, making him a key figure in the legal fallout.

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After months on the run and facing multiple legal challenges, Do Kwon was finally detained in March 2023.

Authorities caught up with him in Montenegro, where he was found using a forged passport. His involvement in the Terra (LUNA) collapse, which resulted in billions of dollars in losses and attracted the attention of international authorities, ultimately led to his apprehension.

The arrest brought fresh attention to the Terra case, with legal proceedings focusing on allegations of fraud, market