In a short period of time, assets worth $40 billion were wiped out.

The Terra (LUNA) crash was one of the most devastating events in the history of cryptocurrency.

This article will deeply analyze why Terra’s ambitious algorithmic stablecoin model failed, sort out the key events that led to its collapse, and summarize the profound lessons that cryptocurrency investors should learn.

Let’s analyze it in depth.

Terra is a blockchain project that aims to revolutionize the payment system through the algorithmic stablecoin UST.

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

The core idea is that users can exchange 1 UST for 1 USD worth of LUNA at any time, and vice versa; UST is minted by destroying LUNA, thereby stabilizing its price.

But as we will see, the algorithmic model is deeply flawed: when the system suffers a shock, the mechanism designed to stabilize the UST instead evolves into a death spiral.

In May 2022, UST began to deviate from its peg to $1 due to massive withdrawals from Anchor, a crucial DeFi platform in the Terra ecosystem.

Anchor once offered an annualized yield of nearly 20% on UST deposits, which attracted a large number of UST deposits, which once accounted for more than 70% of the total supply.

When market concerns about sustainability emerged, users began to withdraw funds in large numbers, which brought sudden selling pressure to UST.

As the UST price fell below $1, the mechanism to restore the peg required the minting of more LUNA, but this instead led to an oversupply of LUNA in the market and ultimately triggered a plunge in LUNA prices.

The crisis quickly escalated. UST completely broke away from its peg to $1, falling to as low as $0.10.

At the same time, in order to restore the value of UST, the supply of LUNA soared from about 350 million to more than 6.5 trillion. This directly caused the price of LUNA to plummet from more than $80 to nearly $0.0001 in just a few days.

In view of the dramatic volatility of LUNA and UST, major exchanges began to delist them, and Terra’s market value of approximately US$40 billion evaporated almost overnight.

As the Terra debacle continues to unfold, all eyes are on the project’s outspoken founder, Do Kwon.

Do Kwon, known for his confident and bold statements, has been a vocal advocate for Terra’s success and often publicly rebukes critics.

However, as UST and LUNA collapsed, his tone changed from initial tough rebuttal to later crisis public relations.

Do Kwon announced a “recovery” plan that proposed forking the Terra blockchain and issuing new LUNA tokens, but public confidence in the project had already been shattered.

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

Despite Do Kwon’s previous denials on Twitter, the controversy was further fueled by news that he did control the destruction address and held the keys.

Terra’s collapse has drawn intense attention from regulators around the world, raising deep concerns about investor protection and prompting calls for greater regulation of the cryptocurrency industry.

Regulators in various countries have begun to review algorithmic stablecoins and DeFi projects, and some countries have launched investigations into Terra to determine whether there is fraud and market manipulation.

Prosecutions against Terra, Do Kwon and others were quickly launched. South Korean prosecutors have issued an arrest warrant for Do Kwon, making him a central figure in the legal dispute.

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

Authorities captured him in Montenegro and found him in possession of a forged passport. His arrest marks a major turning point in the Terra debacle, which had seen him actively pursued by international agencies including South Korea and the United States for his role in the incident.

The arrest further intensifies scrutiny of Do Kwon, with legal proceedings focusing on allegations of fraud, market manipulation and misleading investors.

The collapse of Terra profoundly exposed the risks inherent in algorithmic stablecoins and high-yield DeFi projects. It is a warning that when there is uncertainty about stability, the system can quickly collapse.

Key Takeaway: Before investing in cryptocurrencies, make sure you fully understand the risks involved.

In such a volatile market environment, even large projects may face the risk of collapse. It is important to be cautious, never invest more money than you can afford to risk, and always do sufficient research.