Terra / LUNA / UST collapse: Terra's UST lost its peg in May 2022, triggering a LUNA death spiral that erased an estimated $40B in value
In early May 2022, UST, Terra's algorithmic stablecoin, lost its dollar peg as large holders withdrew from Anchor, the high-yield lending protocol. The protocol's mechanism minted large amounts of LUNA to absorb redemptions, which hyperinflated LUNA supply and drove both tokens toward zero by May 12. Reported losses range from about $40B to $60B depending on the source and measurement point, and the case later drew regulatory and criminal action against Do Kwon and Terraform Labs.
What happened
According to MIT Sloan, Harvard and the Federal Reserve analyses, the crisis began on May 7, 2022, when large holders began withdrawing UST from Anchor. Other traders followed, and blockchain transparency made the withdrawals visible and accelerated the run.
Terra's design allowed users to swap 1 UST for $1 worth of LUNA and vice versa. When UST traded below $1, redemptions increased LUNA supply and pushed its price lower, which prompted further UST redemptions in a reflexive cycle.
On May 8, 2022, LFG said it would deploy $1.5B of reserves to defend the peg. Sources report that Terra and LFG also used bitcoin reserves and other market operations, but UST kept losing value.
By May 12, 2022, according to reporting cited by the Richmond Fed and others, LUNA supply had hyperinflated and the peg was effectively abandoned. Terra validators later halted the chain, which some sources describe as an emergency measure.
Later, South Korean authorities reportedly moved to freeze LFG-related assets, and US regulators took enforcement action. Do Kwon and Terraform Labs faced fraud-related allegations and legal proceedings, which are separate from the market crash itself.
How it worked
The failure was a reflexive run on an algorithmic stablecoin. UST's peg depended on arbitrage that let holders redeem UST for LUNA at a fixed rate. When UST sold below $1 on markets, redeeming it minted LUNA, which increased supply and lowered LUNA's price. This made the redemption rate less valuable, which drove more redemptions and more minting, creating a feedback loop.
Anchor's high deposit yields for UST were widely reported as a source of fragility. Doubts about Anchor's sustainability are cited by MIT Sloan and Harvard as a driver of the run.
Some later papers describe a Curve-3pool liquidity pool attack or liquidity withdrawal on May 7, 2022 as the first de-peg trigger. This is framed as an attack narrative and is disputed; MIT Sloan and Harvard conclude that the crash was unlikely to be due to concentrated manipulation by a third party.
Timeline
- 2022-05-07Large UST withdrawals from Anchor and Curve begin the run; some papers describe a Curve-3pool liquidity attack as the trigger.
- 2022-05-08UST falls clearly below $1, reportedly as low as $0.985 per a Fed summary; LFG announces $1.5B of reserves to defend the peg.
- 2022-05-10UST reportedly trades around $0.65 per one source; LUNA supply is hyperinflating.
- 2022-05-12LUNA supply has ballooned (Richmond Fed reports growth from about 0.4B to 32.0B tokens between May 10 and May 12); the peg is effectively abandoned and LUNA trades near zero.
- 2022-05-25Reports say South Korean police moved to freeze LFG-related assets.
Where the money went
Reporting cited in the research (Nansen-linked analysis, as reported by CryptoSlate) says UST was withdrawn from Anchor via Wormhole, moved from Terra to Ethereum, and swapped through Curve pools into other stablecoins. Later reporting said Terra/LFG-related funds moved into Binance portfolios, which chain data reportedly linked to LFG control. South Korean authorities reportedly sought to freeze LFG-linked assets; a 2023 report said Kwon-linked wallets were drained of over $2M after the freeze request; reports say South Korea sought freezes on 3,313 BTC attributed to Kwon, and court filings reportedly referenced about $176M in frozen assets tied to Kwon. These amounts are reported and not fully verified.
Wallets linked to this case
| Address | Chain | Role | Source |
|---|---|---|---|
0x8d47f08ebc5554504742f547eb721a43d4947d0a | Ethereum | reported as linked to initial depeg activity; attribution un | source |
Every address is from a public source. Check any wallet in the dirty wallet checker.
The response
LFG announced a $1.5B reserve deployment on May 8, 2022, and Terra and LFG used bitcoin reserves and market operations to try to restore the peg; these did not stop the collapse. Terra validators reportedly halted the chain as an emergency measure. The sources do not document a formal insurance fund or a project-run compensation program for retail users. Do Kwon publicly denied some claims about where LFG funds were held, according to the reporting cited, and later faced legal action.
Market and user impact
Reported losses of about $40B to $60B in the Terra/LUNA ecosystem. UST fell as low as about $0.65 per one source and LUNA fell from roughly $31 to about $0.01. UST lost more than 75% of its value in mid-May and LUNA more than 99.9%, according to an academic summary. Retail holders and traders bore the losses, and the event reportedly drew regulatory attention to algorithmic stablecoin design.
What people say
90% negative · 2% positive · the rest neutral · themes: stablecoin depeg, death spiral, bank run dynamics, Anchor yield risk, regulatory enforcement, fraud allegations
How to protect yourself
- Algorithmic stablecoins that rely on a second token's minting to maintain a peg can enter reflexive death spirals under heavy redemptions.
- Very high yields on deposits (such as Anchor's UST yield) can signal unsustainable economics; check where returns come from before depositing.
- Watch stablecoin peg deviations and redemption pressure early, and treat large-scale withdrawals by known large holders as a warning sign.
- Reserve funds and bailout announcements do not guarantee a peg; verify the size, transparency and backing of reserves.
- Keep track of cross-chain bridge exposure and liquidity pools, since the run spread across Terra, Ethereum, Curve and centralized exchanges.
- Recognize that unsettled claims of fraud or attribution are not the same as court findings; wait for verified legal outcomes.
Still unknown
- Whether any single actor or coordinated group intentionally triggered the depeg, and whether the Curve-3pool attack narrative is accurate.
- The exact reported loss figure, since sources range from about $40B to $60B and the sources do not give an audited total.
- Whether the wallet addresses cited are controlled by Do Kwon, LFG or any other party; the research notes that attribution is inferred.
- The full scope of criminal and securities actions, and the status of any recovery or compensation for affected users.
- The date and exact circumstances of the chain halt and the precise amount of LFG reserves used in defense.
Sources
- Terra (blockchain) - Wikipedia
- MIT Sloan: Anatomy of a Run - Terra/LUNA crash
- Harvard Law School Forum on Corporate Governance: Anatomy of a Run
- Federal Reserve FEDS paper 2023-044
- Richmond Fed Economic Brief EB 22-24
How we report: Sentinel reads news, investigators' posts, company statements and on-chain data, attributes every claim to its source and marks unconfirmed numbers as reported. Severity measures size and systemic risk; the response score measures how fast and transparently users were protected. Not financial advice and not a finding of guilt. Corrections: contact us.
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