LUNA / UST: The $40 Billion Death Spiral
The $40 billion algorithmic stablecoin that 'mathematically could not fail.' It failed in 72 hours.
This story also appears in our Villains & Heroes section under Do Kwon, but the mechanism deserves its own spotlight. The Terra/LUNA collapse was the single most destructive event in crypto history until FTX.
UST was an algorithmic stablecoin pegged to $1. It maintained its peg through a balancing mechanism with LUNA. When UST demand fell, LUNA was burned. When demand rose, LUNA was minted. The system worked on paper. On paper.
The fatal flaw was the Anchor Protocol, which offered 20% APY on UST deposits. This attracted billions in capital. But the yield was subsidized, not sustainable. When the subsidy ran dry and large holders began exiting, the peg wobbled.
On May 7, 2022, large UST sell orders broke the peg. The algorithm kicked in, minting massive amounts of LUNA to absorb the selling pressure. But more LUNA meant lower LUNA prices. Lower LUNA prices meant more minting needed. It was a death spiral with no brake pedal.
In 72 hours, LUNA went from $80 to fractions of a cent. $40 billion in combined market cap vaporized. The destruction was so complete that the token had to be renamed LUNA Classic because the original value was irrecoverable.
People lost retirement savings. College funds. Life savings. Reports linked several suicides to the collapse. Crypto Twitter became a wall of grief, rage, and despair. The community that had worshipped Do Kwon as a genius turned on him overnight. His tweets mocking critics with "your size is not size" and calling skeptics "poor" were screenshotted and weaponized.
The LUNA collapse triggered a chain reaction: Three Arrows Capital imploded, then Celsius, then Voyager, then FTX. One algorithmic stablecoin failure set off the worst contagion event in crypto history.
Do Kwon fled South Korea, was caught in Montenegro in March 2023 with fake passports, and was extradited to the United States in January 2025. He pleaded guilty. On December 11, 2025, he was sentenced to 15 years in prison and ordered to forfeit over $19 million. Terraform Labs separately settled with the SEC for $4.47 billion in June 2024 and agreed to shut down permanently.
The Aftermath
Do Kwon was sentenced to 15 years on Dec 11, 2025 with $19M forfeiture. Terraform settled with SEC for $4.47B and shut down. The LUNA collapse was the first domino in the 2022 meltdown, triggering 3AC, Celsius, Voyager, and ultimately FTX.
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