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Terra LUNA and UST Collapse (May 2022)

Curve 3pool imbalance and LUNA hyperinflation.

The mint-and-burn peg

TerraUSD (UST) kept its dollar peg through an on-chain swap: 1 UST could always be burned for $1 of newly minted LUNA, and vice versa. Arbitrageurs profited whenever UST drifted from $1, but the mechanism only worked while LUNA's market cap comfortably exceeded UST's supply.

Anchor's 19.5 percent

The Anchor Protocol paid about 19.5 percent on UST deposits, subsidized by Terraform Labs reserves. By May 2022 Anchor held roughly $14 billion, around 75 percent of the $18.7 billion UST supply, so demand was concentrated in a single yield source.

The run

On May 7, 2022, large UST withdrawals from Anchor and Curve's 4pool pushed UST to $0.985. The Luna Foundation Guard sold about 80,000 BTC to defend the peg, but by May 12 UST traded near $0.30 and LUNA supply exploded from about 350 million to over 6.5 trillion tokens.

Chain halt and Terra 2.0

Terra validators halted the chain at block 7,603,700 on May 12. On May 28, 2022, a new chain launched with LUNA (now LUNA 2.0) airdropped to former holders, while the old chain was renamed Terra Classic with LUNC.

Contagion

About $40 billion in value disappeared within a week. Three Arrows Capital, Celsius and Voyager, which had exposure, failed in June and July 2022. Do Kwon was arrested in Montenegro in March 2023 and later extradited to the US.

By the numbers

For Terra LUNA and UST Collapse, the reference figures are ust peak supply of ~$18.7 billion, depeg began of May 7-9, 2022, luna supply after of ~6.5 trillion, value lost of ~$40 billion+. The comparison table below lines up metric, before (early may 2022), after — UST supply: ~$18.7B / Peg lost; LUNA price: ~$80 / <$0.0001; LUNA supply: ~350M / >6.5T; LFG BTC reserve: ~80,000 BTC / Largely sold.

Modeling Terra LUNA and UST Collapse with the LST Depeg Arbitrage Yield Calculator

The LST Depeg Arbitrage Yield Calculator takes three inputs — LST discount (%), Days to redeem, Amount ($). Annualized = (1 ÷ (1 − discount))^(365/days) − 1. With its default inputs (LST discount (%) = 1; Days to redeem = 7; Amount ($) = 10000) it returns 68.89 %; swap in the figures from Terra LUNA and UST Collapse above to reproduce the scenario yourself.

Modeling Terra LUNA and UST Collapse with the Drawdown Recovery Calculator

The Drawdown Recovery Calculator takes three inputs — Drawdown (%), Monthly return (%), Capital ($). Required gain = 1 ÷ (1 − drawdown) − 1. With its default inputs (Drawdown (%) = 75; Monthly return (%) = 5; Capital ($) = 1000) it returns 300 %; swap in the figures from Terra LUNA and UST Collapse above to reproduce the scenario yourself.

Data Table

For educational and informational purposes only. Not financial, investment, tax or legal advice. Figures are approximate and historical; crypto assets are volatile and you may lose capital. Do your own research.