Title: The Story of the 'LUNA Death Spiral': How $40 Billion Disappeared in a Week?
The story:
Imagine a brilliant financial engineer named Do Kwon, who decided to solve the biggest problem in the world of cryptocurrencies: the need for a stablecoin not controlled by banks or governments.
The 'brilliant' idea:
He did not tie his stablecoin, which he named TerraUSD (UST), to real dollars in a bank account. Instead, he created a smart algorithmic system linking it to another volatile currency called LUNA.
The equation was deceptively simple:
You can always exchange 1 UST (which should equal $1) for $1 worth of LUNA.
And you can always exchange $1 worth of LUNA for 1 UST.
This mechanism theoretically ensured that the price of UST would always remain at $1. To make it more enticing, they created a digital bank called Anchor Protocol, which offered an incredible interest rate of up to 20% annually for anyone who deposited their 'stable' UST with them.
Millions of people flowed in, putting their life savings into this system that seemed like a money-making machine that couldn't fail. The market value of the Terra-LUNA system reached over $40 billion.
The beginning of the disaster (May 2022):
One day, a 'whale' or a group of unknown whales sold a massive amount of UST in the market, causing its price to drop slightly to around $0.98.
Usually, this is not a serious matter. But it was the spark that ignited the 'Death Spiral.'
The Death Spiral:
When people saw that UST was no longer worth $1, they began to panic. They rushed to sell their UST and exchange it for other currencies. Here, the 'brilliant' algorithm began to work in a reverse and destructive manner:
Panic increases: The more people sold UST, the lower its price dropped.
The algorithm intervenes: To raise the price of UST and bring it back to $1, the algorithm began automatically 'printing' massive and crazy amounts of LUNA and selling it in the market to buy UST.
The collapse of LUNA: This flood of new LUNA coins flooded the market, causing the price of LUNA to plummet tragically.
Total loss of confidence: When investors saw that the LUNA currency, which was the only collateral for UST, was collapsing and heading to zero, they realized that the entire system was dying. They rushed to sell whatever UST they had left at any price, even if it was 50 cents or 10 cents.
The cycle repeats: This frantic selling of UST forced the algorithm to print more and more LUNA, causing its price to collapse faster... and so on in a terrifying feedback loop.
In just one week, the price of LUNA collapsed from around $80 to less than a thousandth of a cent. The $40 billion evaporated completely.
The real and painful story here is about thousands of ordinary people who trusted the term 'stablecoin' and put their savings and retirement into the Anchor Bank, only to watch everything disappear before their eyes in days. It is a cautionary tale about technological hubris, and how systems that seem perfect on paper can collapse catastrophically in the real world.