Terra/Luna: The Stablecoin Death Spiral (2022) - QuickFinanceStories

They called it the future of money. A stablecoin that didn't need dollars. Just an algorithm and confidence. $40 billion in confidence.

This is the story of how it all collapsed in a week. TerraUSD was supposed to always be worth one dollar. But unlike traditional stablecoins backed by cash in a bank, TerraUSD had no reserves.

No dollars. No Treasury bills. No collateral.

Just code. The mechanism was elegant on paper. When TerraUSD dipped below a dollar, you could swap it for Luna tokens.

When Luna dropped, you could swap it back. A perfect loop. Self-balancing.

Algorithmic magic. And to make it truly irresistible? The Anchor Protocol offered 20% annual interest on TerraUSD deposits.

In a world of zero interest rates, it was magnetic. Free money. Or so it seemed.

The Anchor Protocol offered 20% annual interest on TerraUSD deposits.

Billions poured in. At its peak, $18 billion was locked in Anchor alone. Do Kwon, Terra's charismatic founder, became crypto royalty.

He mocked doubters on Twitter. Called them "poor." Dismissed warnings with supreme confidence. Then in May 2022, someone started selling TerraUSD.

Big. Very big. TerraUSD slipped below a dollar.

The algorithm kicked in. Arbitrageurs began swapping TerraUSD for Luna, minting billions of new Luna tokens. Luna's price collapsed under the flood of new supply.

Which pushed TerraUSD even lower. Which triggered even more Luna minting. A death spiral.

Unstoppable. Accelerating. In four days, Luna went from $80 to fractions of a cent. $40 billion in combined value - gone.

Savings wiped out. Lives ruined. People lost everything.

The Luna Foundation Guard tried to defend the peg by selling its Bitcoin reserves. $3 billion in Bitcoin dumped on the market. Too little. Too late.

It didn't even slow the collapse. The aftermath was devastating. Several suicides were reported.

Do Kwon faced criminal charges in multiple countries. He was eventually arrested in Montenegro using a fake Costa Rican passport. The lesson was ancient: You cannot create stability from nothing.

Confidence is not collateral. And algorithms don't change human nature. When everyone runs for the exit at the same time, there is no algorithm that can save you.