Terra's Algorithmic Stablecoin Collapse: How LUNC Survived the Crisis

The Terra ecosystem imploded in May 2022 after its algorithmic stablecoin lost its dollar peg, causing millions of investors to hold near-worthless assets. The original chain was preserved as Terra Luna Classic (LUNC) after a community vote, while a new chain called Terra 2.0 launched without the failed stablecoin model.

Terra's core product was a suite of algorithmic stablecoins, most importantly TerraUSD (UST), which maintained its dollar peg through an on-chain arbitrage mechanism with LUNA, the native token of the Terra blockchain. However, when both UST and LUNA started falling at the same time, the mechanism did not stabilize the system; it accelerated the collapse.

The crisis began in earnest on May 7, 2022, when a large holder withdrew roughly $150 million in UST liquidity from Curve Finance. This withdrawal combined with broader market pressure pushed UST slightly off its $1 peg, triggering a textbook bank run executed at blockchain speed.