Terra Luna crash: how a $40 billion stablecoin died

What happened to Terra Luna? In May 2022 the stablecoin TerraUSD (UST), which was supposed to be worth exactly one dollar, lost its peg. Within about a week its sister token LUNA fell from roughly 80 dollars to a fraction of a cent, and around 40 billion dollars of market value disappeared. Founder Do Kwon pleaded guilty to fraud in the US in August 2025 and was sentenced to 15 years in prison in December 2025.

The name was the first joke. A "stable" coin that you could buy only because something else, much less stable, propped it up. It is a bit like calling a house "earthquake-proof" because it stands on a trampoline.

What were UST and LUNA?#

Terra was a blockchain built by the company Terraform Labs, co-founded by Do Kwon in South Korea. It had two main tokens:

• UST (TerraUSD) – an algorithmic stablecoin. Unlike USDT or USDC, it was not backed by dollars in a bank. It was meant to stay at 1 dollar thanks to code and traders' self-interest.
• LUNA – the second token that absorbed the swings of UST. Its price floated freely and at its peak in April 2022 it was about 119 dollars.

The magnet that pulled people in was Anchor Protocol, a lending app on Terra that paid close to 20 % a year on UST deposits. In a world where banks paid almost nothing, that looked like a gift. By May 2022 UST was worth about 18 billion dollars and most of it sat in Anchor.

How the death spiral worked#

The whole design stood on one rule: the system always let you swap 1 UST for 1 dollar's worth of newly created LUNA, and the other way round. The UST you swapped was destroyed ("burned").

1. In normal times, if UST dropped to 0.98 dollars, a trader bought it cheaply, swapped it for 1 dollar's worth of LUNA and sold the LUNA. Profit 2 cents, fewer UST in circulation, price back at 1 dollar.
2. That only works while LUNA is worth something and people want to buy it.
3. In May 2022 billions of UST were pulled out of Anchor and sold at once. UST fell under the peg – a depeg.
4. Everyone rushed to swap UST for LUNA, so the system printed huge amounts of new LUNA, which people immediately sold.
5. LUNA's price fell. Now 1 dollar's worth of LUNA meant even more new coins – more printing, more selling.
6. The falling LUNA destroyed what was left of the trust in UST, and more people swapped UST for LUNA. The loop fed itself.

Within days the supply of LUNA went from about 350 million coins to over 6.5 trillion. A reserve of about 80,000 bitcoins that the Luna Foundation Guard had bought to defend the peg was spent and did not help.

Timeline#

What happened to Do Kwon?#

Before the crash Kwon was famous for his confidence. In 2021 he told a critic on Twitter that he does not "debate the poor". After the crash he left South Korea, where prosecutors issued an arrest warrant, and spent months as a fugitive. In March 2023 he was caught at the airport in Podgorica, Montenegro, with falsified documents.

In the US the case ended in two parts:

• SEC (civil case): in April 2024 a jury found Terraform and Kwon liable for fraud. In June 2024 they agreed to pay about 4.47 billion dollars. Terraform went bankrupt and the money goes mostly to creditors.
• Criminal case: in August 2025 Kwon pleaded guilty. According to the US Department of Justice, he admitted, among other things, that when UST lost its peg in May 2021 he told the public the algorithm had fixed it – while in reality a trading firm had secretly bought UST to push the price back up. On 11 December 2025 Judge Paul Engelmayer sentenced him to 15 years, more than prosecutors had asked for, calling it a fraud "on an epic, generational scale". As of October 2026 he is serving the sentence in the US; he may later ask to be transferred to South Korea, where he also faces charges.

The contagion#

Terra did not fall alone. Investment fund Three Arrows Capital (3AC) had a large LUNA position and collapsed within weeks. Lender Celsius froze withdrawals in June 2022 and soon went bankrupt, and the lender Voyager followed. The chain reaction ended, in a way, with the fall of FTX in November 2022. A new "Terra 2.0" chain was launched in May 2022 with a new LUNA; the old token lives on as LUNC (Luna Classic).

Warning signs you could have seen#

• A high yield with no clear source. Nearly 20 % a year on "dollars" – paid by whom? Anchor's reserves were shrinking and had to be topped up by Terraform.
• "Stable" without reserves. UST was backed only by LUNA – a token whose value depended on UST staying stable. Two things holding each other up is not a foundation.
• One app held most of the money. When most UST sits in one place for the yield, everyone can leave at the same time.
• The peg had already wobbled once. In May 2021 UST fell to about 0.90 dollars. "The algorithm fixed it" was later shown to be untrue.
• Arrogance instead of answers. A founder who mocks critics instead of answering them is a warning sign in itself.

Common myths#

• "UST was hacked." It was not. The system did exactly what its code said – and the code had no brake.
• "Only a few whales lost money." Hundreds of thousands of ordinary people held UST and LUNA, many of them as savings.
• "All stablecoins are like UST." No. Stablecoins backed by real reserves work differently – read more in the lesson Stablecoins, altcoins and memecoins.

Sources#

• US DOJ: Do Kwon sentenced for orchestrating a $40 billion fraud (opens in a new tab)
• US DOJ: Do Kwon pleads guilty to fraud (opens in a new tab)
• US DOJ: Do Kwon extradited from Montenegro (opens in a new tab)
• Bloomberg: Terraform agrees to pay $4.47 billion in SEC case (opens in a new tab)
• CNN: Do Kwon sentenced to 15 years in prison (opens in a new tab)