$40 billion in a matter of days: the collapse of the algorithmic stablecoin that promised the impossible (Terra/LUNA-UST)

Do Kwon's project offered depositors of the UST stablecoin a yield of around 20% per year through the Anchor protocol — a figure that should have raised a red flag for anyone familiar with traditional finance. UST held no real dollar reserves: its stability rested entirely on an algorithmic exchange mechanism with its sister token, LUNA. In May 2022 that mechanism buckled under the pressure of mass withdrawals, triggering a "death spiral" that wiped out more than $40 billion in value within days.

Terraform Labs, founded by Do Kwon, built UST on the idea of an algorithmic stablecoin rather than one backed by real assets: its $1 peg was maintained through a constant arbitrage mechanism of minting and burning LUNA in exchange for UST and vice versa. To attract capital into this system, the Anchor protocol offered UST depositors a yield of roughly 20% per year — a rate that far exceeded any market benchmark and, precisely for that reason, drew in billions of dollars in deposits. At its peak, the combined market capitalization of UST and LUNA exceeded $50 billion. Tellingly, UST had already lost its dollar peg once before, back in 2021, and at that time Kwon arranged for a high-frequency trading firm to support the price through large-scale purchases of UST — a temporary fix that masked the system's vulnerability rather than eliminating it.

In May 2022, large-scale withdrawals from Anchor and a wave of UST selling broke the dollar peg. The mint-and-burn mechanism that was supposed to restore the price instead set off hyperinflation in the supply of LUNA — to absorb the withdrawn UST, the protocol minted billions of new LUNA tokens. This was the "death spiral": LUNA's price crashed from tens of dollars to fractions of a cent within days, and UST never regained its dollar peg.

Do Kwon left South Korea, where proceedings had been opened against him, and remained in hiding abroad until 23 March 2023, when he was detained in Montenegro carrying a forged Costa Rican passport. After a prolonged period in custody amid competing extradition requests from South Korea and the United States, he was extradited to the United States on 31 December 2024.

In August 2025, Do Kwon pleaded guilty to wire fraud and conspiracy to commit securities and commodities fraud. On 11 December 2025, Judge Paul Engelmayer sentenced him to 15 years in prison, describing it as fraud of an "epic, generational scale."

Published 20 December 2025