What happened to TerraUSD (UST)?

How was TerraUSD supposed to hold $1?

Fiat-backed stablecoins hold cash and short-term government debt and let customers redeem tokens for dollars (see types of stablecoins). TerraUSD took a different route. It was an algorithmic stablecoin, a design the Federal Reserve describes as having little or no collateral and relying on code and incentives to match supply with demand.

According to the US Department of Justice, the Terra protocol promised that one UST could always be exchanged for $1 worth of LUNA, and $1 of LUNA for one UST. If UST traded at $0.98, a trader could buy it, swap it through the protocol for $1 of newly created LUNA, and sell the LUNA, earning about two cents and shrinking UST supply. If UST traded above $1, the trade ran the other way.

Why did people hold UST?

A big reason was yield. The DOJ says the Anchor protocol offered approximately 20% a year on UST deposits, and the SEC alleged UST was marketed as yield-bearing. For holders, a "stable" dollar paying that much looked like a savings account with an extraordinary rate.

Researchers studying the crash for the US National Bureau of Economic Research (NBER) found that the collapse centered on Anchor. Once the peg wobbled, depositors had a reason to leave fast: the first sellers got closest to $1. High advertised returns are a recurring warning sign, as we note in common crypto scams.

What happened in May 2021 and May 2022?

The peg first slipped in May 2021. According to the DOJ, when the algorithm failed to restore it, Do Kwon, Terraform's chief executive, agreed with executives at a high-frequency trading firm that the firm would buy large amounts of UST to artificially support the $1 price.

By May 2022, the DOJ says, the UST market was about nine times larger by market value, so a similar rescue was no longer possible. UST lost its peg again. Holders swapped UST for LUNA; new LUNA flooded the market; its price collapsed; each swap returned less real value; and more holders ran. The SEC says UST and its sister tokens fell close to zero, wiping out about $40 billion in market value nearly overnight. The NBER study found that wealthier, more sophisticated investors tended to run first and lose less, while smaller investors ran later and lost more.

What did regulators and courts find later?

The legal fallout ran for more than three years. The table lists the main official milestones.

The DOJ also said Kwon secretly controlled the Luna Foundation Guard, which was presented as independent, and misused hundreds of millions of dollars of its assets. Rules introduced since then — the EU's MiCA and the US GENIUS Act — focus on reserves, disclosure and redemption, the very things UST lacked.

What mistakes did TerraUSD holders make?

• Trusting the word "stable". A name is not a backing. UST had no pool of dollars behind it.
• Treating high yield as safe income. A 20% return on a dollar token was a sign of risk, not of strength.
• Reading recovery as resilience. The May 2021 recovery looked like proof the design worked; the DOJ says it was propped up.
• Waiting too long. In a run, early sellers lose least. If you cannot judge the backing, the size of the position matters more than timing.
• Assuming the protocol is the same as the people. Code ran the swaps, but people made the decisions the courts later examined.