TerraUSD (UST) Begins Losing Its $1 Peg
Terra's $18 billion algorithmic stablecoin UST began losing its dollar peg, dropping to $0.985, as over $2 billion was withdrawn from Anchor Protocol, triggering the crisis.
On May 7, 2022, TerraUSD (UST), the algorithmic stablecoin at the heart of the Terra ecosystem valued at approximately $18 billion, began losing its $1.00 peg, dropping to a low of $0.985. This seemingly small deviation triggered catastrophic events that would unfold over the following days. Over $2 billion in UST was rapidly withdrawn from Anchor Protocol, the DeFi lending platform offering unsustainable 20% yields that had attracted most UST adoption.
Several prominent investors reportedly sold over $285 million worth of UST on Binance, while the Curve Whale Watching bot detected an 85 million UST swap for USDC—clear signals of capital flight and collapsing confidence. The de-pegging exposed fundamental flaws in UST's algorithmic design, which relied on arbitrage mechanisms and the burning of LUNA tokens to maintain the dollar peg.
When confidence evaporated and selling pressure overwhelmed these mechanisms, the system entered a death spiral where falling UST value required ever-larger amounts of LUNA to be minted, diluting LUNA holders and accelerating both tokens' collapse. Do Kwon had previously dismissed the possibility of such an attack, claiming in November 2021 that it was theoretically impossible.
Some in the crypto community speculated about deliberate Soros-style attacks on UST's peg, though whether the collapse resulted from coordinated attack or organic loss of confidence remained debated.For Bitcoin, the beginning of UST's collapse had immediate implications—Luna Foundation Guard held approximately 80,000 Bitcoin specifically to defend UST's peg, meaning the crisis would soon force massive Bitcoin selling that would devastate markets.