Terra/Luna Algorithmic Stablecoin Collapse (Do Kwon, 2022)
Introduction
TerraUSD (UST) was a stablecoin whose peg to the US dollar was maintained not by dollar reserves but by an algorithmic relationship with a companion token, LUNA. The mechanism worked as follows: when UST traded below $1, holders could burn UST to mint LUNA at a favourable rate, reducing UST supply and pushing the price back toward the peg. When UST traded above $1, holders could burn LUNA to mint UST, increasing supply. The system relied on arbitrageurs acting to maintain the peg and on market confidence in LUNA having intrinsic value.
Terraform Labs, founded by Do Kwon and Daniel Shin, built the Terra ecosystem from 2018. By early 2022, UST had a market capitalisation of approximately $18 billion and LUNA was valued at around $85 per token, giving the ecosystem a combined market cap exceeding $40 billion. The Anchor Protocol, a lending platform built on Terra, offered approximately 20% annual yield on UST deposits — a yield that attracted enormous inflows but was widely questioned by economists as unsustainable.
The Collapse
On 7–8 May 2022, a series of large UST withdrawals from Anchor and coordinated selling pressure on UST caused the peg to slip below $1. The algorithmic response — burn UST, mint LUNA — began, but as LUNA supply inflated rapidly and confidence collapsed, LUNA''s price fell. As LUNA fell, the burn mechanism became less effective at restoring the peg, requiring ever-larger LUNA issuance, which accelerated LUNA''s price decline further. Within days:
- UST lost its peg permanently, trading at cents
- LUNA collapsed from ~$85 to fractions of a cent
- The Luna Foundation Guard (LFG), which held approximately $3.5 billion in Bitcoin as a reserve, deployed those reserves attempting to defend the peg — unsuccessfully
- Approximately $40 billion in combined market value was destroyed within a week
Fraud Allegations and Evidence
The SEC''s February 2023 complaint and subsequent trial evidence established several key claims:
Prior near-collapse (May 2021): UST experienced a near-identical de-peg event in May 2021 that was resolved through coordinated intervention by market makers Do Kwon had privately enlisted. Kwon and colleagues did not disclose this event publicly and continued to market UST as a proven, stable mechanism. Internal communications showed awareness of the fragility.
Anchor yield: The 20% Anchor yield was funded by Terraform Labs'' own reserves — it was not generated organically. Do Kwon and colleagues knew this was unsustainable but marketed it as a feature of the ecosystem rather than a subsidy.
Market maker manipulation: The SEC alleged that Kwon directed market makers to maintain the UST peg artificially to support the appearance of a functional mechanism, concealing the dependence on intervention.
Jump Crypto settlement: Jump Crypto, a major market maker, was later identified as having been paid to defend the UST peg during the May 2021 event — a rescue that was not disclosed and that gave false confidence to subsequent investors.
Do Kwon''s Arrest and Extradition
Do Kwon fled South Korea after Korean regulators issued an arrest warrant. He was apprehended in Montenegro in March 2023 on charges of travelling on forged documents. After a lengthy extradition dispute between the United States and South Korea, he was extradited to the United States in 2025. He was convicted in the US on fraud charges.
Systemic Impact
The Terra/Luna collapse was one of the precipitating events of the 2022 crypto bear market. It contributed directly to the collapse of Three Arrows Capital (3AC), a major crypto hedge fund that held large LUNA positions, and the subsequent failures of Celsius Network and Voyager Digital, which had lent to 3AC. The cascading failures destroyed hundreds of billions in aggregate market value across the crypto sector.
The SEC Judgment, Kwon's Extradition, and the Crypto Contagion
The Securities and Exchange Commission filed its complaint against Do Kwon and Terraform Labs in February 2023 in the Southern District of New York, charging Kwon with orchestrating a multi-billion dollar crypto asset securities fraud. The complaint relied substantially on internal Terraform communications showing that Kwon and colleagues were aware of the May 2021 near-collapse, that they had privately recruited market makers to defend the peg without public disclosure, and that the Anchor Protocol's 20% yield was funded by Terraform's own reserves rather than organic protocol revenue. In April 2024, Terraform Labs settled the SEC charges for $4.47 billion — one of the largest monetary judgments in SEC history and, at that time, the largest in the commission's cryptocurrency enforcement actions. Do Kwon did not settle alongside the company; his criminal proceedings ran separately.
Kwon was arrested at Podgorica airport in Montenegro in March 2023 while attempting to board a flight to Dubai using what Montenegrin authorities determined were falsified Costa Rican travel documents. He had left South Korea before Korean authorities issued an arrest warrant in September 2022 and had spent months evading law enforcement across multiple jurisdictions. Both the United States and South Korea sought extradition, creating a diplomatic dispute that wound through the Montenegrin judicial system for over a year. Montenegrin courts initially ruled in favour of extradition to South Korea; subsequent proceedings and appeals eventually resulted in extradition to the United States. Kwon arrived in the United States in late 2024 and was arraigned in federal court in Manhattan in January 2025 on charges including wire fraud, commodities fraud, and securities fraud.
Settlement, Trial, and the Systemic Legacy
The CFTC separately charged Kwon and Terraform Labs in February 2023. In September 2024, Kwon settled the CFTC charges, consenting to a judgment on the commodities fraud claims while his criminal case remained pending. The separation of the civil regulatory resolutions from the criminal trial created an extended legal timeline: the civil SEC judgment (April 2024) preceded the criminal arraignment (January 2025) by nine months.
The $4.47 billion SEC settlement figure is important for context. The SEC's total monetary relief in fiscal year 2023 was approximately $4.9 billion across all enforcement actions — meaning the Terraform settlement alone represented nearly the entire annual enforcement haul. This was not a technical securities violation with a nominal fine; it was a judgment scaled to the magnitude of the harm.
The systemic impact of the Terra/Luna collapse extended well beyond the $40 billion destroyed in the token ecosystem. Three Arrows Capital, the Singapore-based crypto hedge fund that had accumulated large LUNA positions, filed for liquidation in June 2022 after sustaining losses it could not absorb. 3AC's collapse triggered margin calls across lending platforms that had extended it credit, most significantly Celsius Network and Voyager Digital. Both filed for bankruptcy in July 2022. BlockFi, which had exposure through its Alameda Research relationship, filed in November 2022. The cascading insolvencies affected hundreds of thousands of retail depositors across multiple platforms and contributed to a crypto market contraction that erased trillions of dollars in aggregate market capitalisation.
Verdict
Confirmed. The SEC charges, corroborated by internal communications and evidence at trial, establish that Kwon and Terraform Labs concealed the May 2021 near-collapse, misrepresented the Anchor yield mechanism, and directed undisclosed market manipulation to maintain the appearance of a functional peg. The conviction confirmed fraudulent intent. The ~$40 billion destruction was the foreseeable consequence of a mechanism Kwon knew to be fragile.
What Would Change Our Verdict
- Successful appeal overturning the conviction on factual grounds
- Evidence that the May 2021 intervention was disclosed and the fragility was genuinely unknown to leadership
Evidence Filters17
May 2021 near-collapse concealed from public
DebunkingStrongInternal communications disclosed in the SEC case showed that UST experienced a near-identical de-peg event in May 2021 that was resolved through covert market maker intervention. Kwon and colleagues did not disclose this event, continuing to market UST as a proven mechanism.
Jump Crypto paid to secretly defend the peg in 2021
DebunkingStrongThe SEC alleged that Jump Crypto (a major market maker) was paid to defend the UST peg during the May 2021 near-collapse through undisclosed intervention. Jump Crypto subsequently settled SEC charges related to this activity.
20% Anchor yield was a Terraform-funded subsidy, not organic
DebunkingStrongThe 20% annual yield offered by the Anchor Protocol on UST deposits was funded directly from Terraform Labs' treasury reserves, not generated by organic lending demand. Kwon and colleagues presented it as a market-driven return while knowing it was a subsidy.
~$40 billion in market value destroyed May 2022
SupportingStrongThe combined UST and LUNA market capitalisation fell from approximately $40 billion to near zero within one week in May 2022. The speed and scale of the destruction is consistent with a mechanism whose fragility had been actively concealed.
Do Kwon arrested Montenegro on forged travel documents
DebunkingKwon was apprehended in Montenegro in March 2023 while travelling on forged documents — conduct consistent with deliberate flight from prosecution rather than someone who believed he had done nothing wrong.
SEC charges filed February 2023 — fraud, unregistered securities
DebunkingStrongThe SEC filed charges against Terraform Labs and Do Kwon in February 2023 for fraud and offering unregistered securities. The complaint detailed the May 2021 concealment and the undisclosed market maker payments.
Luna Foundation Guard deployed $3.5B Bitcoin reserve — failed
SupportingStrongThe LFG deployed approximately $3.5 billion in Bitcoin reserves in an attempt to defend the UST peg during the May 2022 collapse. The failure of the reserve to arrest the death spiral demonstrated that the mechanism lacked the robustness claimed.
Rebuttal
The reserve deployment demonstrates that some preparation existed but also that the mechanism's designers understood the peg could come under attack — contradicting claims of confidence in pure algorithmic stability.
Three Arrows Capital collapse triggered by LUNA exposure
DebunkingThree Arrows Capital (3AC), a major crypto hedge fund, held significant LUNA positions and collapsed following the Terra implosion, triggering further cascading failures at Celsius Network and Voyager Digital — systemic harm extending far beyond direct UST/LUNA holders.
Economists flagged 20% Anchor yield as unsustainable before collapse
DebunkingStrongMultiple economists and crypto analysts published analyses questioning the sustainability of the Anchor yield before the May 2022 collapse. The concerns were public; Kwon and Terraform Labs dismissed them publicly while internally knowing the yield was subsidised.
Do Kwon convicted in US on fraud charges
DebunkingStrongFollowing extradition from Montenegro to the United States in 2025, Do Kwon was convicted on fraud charges in US federal court. The conviction is the definitive legal resolution of the fraud allegations.
Show 7 more evidence points
Algorithmic Stablecoin Death Spiral Mechanics
SupportingStrongThe TerraUSD (UST) stablecoin maintained its $1 peg through an algorithmic mechanism where users could burn UST to mint LUNA and vice versa. In May 2022 large coordinated sell pressure on UST triggered the mechanism in reverse — collapsing UST caused LUNA to hyperinflate to maintain the peg, which further eroded confidence in both assets, creating a death spiral that wiped $40 billion in market value within 72 hours.
Do Kwon SEC Charges and Fraud Allegations
SupportingStrongThe SEC charged Do Kwon and Terraform Labs in February 2023 with orchestrating a multi-billion dollar crypto asset securities fraud. The complaint alleged Kwon and the company had misrepresented UST's stability, had secretly paid a Korean e-commerce company to create artificial demand for UST, and had made false statements about the protocol's track record of maintaining the peg during an earlier near-collapse in May 2021.
Jump Crypto's Secret Market Support in 2021
SupportingStrongCourt filings and reporting by the Wall Street Journal revealed that in May 2021 when UST briefly lost its peg, Jump Crypto had secretly purchased hundreds of millions of UST to restore the peg under an agreement with Terraform Labs. This intervention was never disclosed to investors. Do Kwon had publicly attributed the recovery to the algorithm working as designed — a claim the SEC described as materially false.
Coordinated Attack Theory
DebunkingSome Terra supporters and Do Kwon himself alleged that the May 2022 collapse was not organic but a deliberate coordinated short attack by well-capitalised actors who built massive short positions before dumping UST to trigger the death spiral. While large-scale coordinated withdrawals did occur, investigators and analysts found no definitive proof of a coordinated conspiracy, and the underlying algorithmic fragility was the fundamental cause.
UST De-Peg May Have Been Triggered by Coordinated Market Attack
NeutralBlockchain analytics firms including Nansen and on-chain researchers identified large coordinated withdrawals from the Anchor Protocol and simultaneous UST sell pressure across multiple venues beginning May 7-8, 2022 that preceded the spiral. Some analyses suggest a deliberate attack exploiting the mechanism's known vulnerability to a bank-run dynamic, not simple market deterioration. Citadel Securities and BlackRock were named in speculation that was not subsequently verified, but the "attack" hypothesis — a large actor exploiting the mechanism intentionally — is taken seriously by DeFi security researchers independent of Do Kwon's legal defense. If accurate, this framing shifts some moral and causal responsibility, though it does not affect the mechanism's fundamental design vulnerability.
Do Kwon's Pre-Collapse Statements May Reflect Bona Fide Belief, Not Intentional Misrepresentation
NeutralSouth Korean and US securities regulators' fraud allegations against Do Kwon center partly on public statements made as UST was de-pegging that asserted stability. Do Kwon's defense (in ongoing extradition proceedings) argues these statements reflected his genuine belief that the Luna Foundation Guard's bitcoin reserves would successfully defend the peg — a belief that proved catastrophically wrong. The legal distinction between knowingly false statements (fraud) and optimistic statements based on erroneous belief (misrepresentation or negligence) is central to the pending proceedings. Many true believers in algorithmic stablecoins, including credentialed economists, shared the underlying mechanism's theoretical premises. Whether Kwon crossed from believer to fraudster requires establishing what he knew and when — proceedings not yet fully concluded.
$4.47B SEC judgment — one of the largest monetary penalties in SEC history
SupportingStrongIn April 2024, Terraform Labs settled SEC fraud charges for $4.47 billion — at that time the largest monetary judgment in SEC cryptocurrency enforcement and representing nearly the entirety of the SEC's total monetary relief for fiscal year 2023. The scale of the judgment reflects the court's acceptance of the systemic-fraud framing advanced by the SEC's complaint and is the definitive regulatory validation of the confirmed verdict.
Evidence Cited by Believers6
~$40 billion in market value destroyed May 2022
SupportingStrongThe combined UST and LUNA market capitalisation fell from approximately $40 billion to near zero within one week in May 2022. The speed and scale of the destruction is consistent with a mechanism whose fragility had been actively concealed.
Luna Foundation Guard deployed $3.5B Bitcoin reserve — failed
SupportingStrongThe LFG deployed approximately $3.5 billion in Bitcoin reserves in an attempt to defend the UST peg during the May 2022 collapse. The failure of the reserve to arrest the death spiral demonstrated that the mechanism lacked the robustness claimed.
Rebuttal
The reserve deployment demonstrates that some preparation existed but also that the mechanism's designers understood the peg could come under attack — contradicting claims of confidence in pure algorithmic stability.
Algorithmic Stablecoin Death Spiral Mechanics
SupportingStrongThe TerraUSD (UST) stablecoin maintained its $1 peg through an algorithmic mechanism where users could burn UST to mint LUNA and vice versa. In May 2022 large coordinated sell pressure on UST triggered the mechanism in reverse — collapsing UST caused LUNA to hyperinflate to maintain the peg, which further eroded confidence in both assets, creating a death spiral that wiped $40 billion in market value within 72 hours.
Do Kwon SEC Charges and Fraud Allegations
SupportingStrongThe SEC charged Do Kwon and Terraform Labs in February 2023 with orchestrating a multi-billion dollar crypto asset securities fraud. The complaint alleged Kwon and the company had misrepresented UST's stability, had secretly paid a Korean e-commerce company to create artificial demand for UST, and had made false statements about the protocol's track record of maintaining the peg during an earlier near-collapse in May 2021.
Jump Crypto's Secret Market Support in 2021
SupportingStrongCourt filings and reporting by the Wall Street Journal revealed that in May 2021 when UST briefly lost its peg, Jump Crypto had secretly purchased hundreds of millions of UST to restore the peg under an agreement with Terraform Labs. This intervention was never disclosed to investors. Do Kwon had publicly attributed the recovery to the algorithm working as designed — a claim the SEC described as materially false.
$4.47B SEC judgment — one of the largest monetary penalties in SEC history
SupportingStrongIn April 2024, Terraform Labs settled SEC fraud charges for $4.47 billion — at that time the largest monetary judgment in SEC cryptocurrency enforcement and representing nearly the entirety of the SEC's total monetary relief for fiscal year 2023. The scale of the judgment reflects the court's acceptance of the systemic-fraud framing advanced by the SEC's complaint and is the definitive regulatory validation of the confirmed verdict.
Counter-Evidence9
May 2021 near-collapse concealed from public
DebunkingStrongInternal communications disclosed in the SEC case showed that UST experienced a near-identical de-peg event in May 2021 that was resolved through covert market maker intervention. Kwon and colleagues did not disclose this event, continuing to market UST as a proven mechanism.
Jump Crypto paid to secretly defend the peg in 2021
DebunkingStrongThe SEC alleged that Jump Crypto (a major market maker) was paid to defend the UST peg during the May 2021 near-collapse through undisclosed intervention. Jump Crypto subsequently settled SEC charges related to this activity.
20% Anchor yield was a Terraform-funded subsidy, not organic
DebunkingStrongThe 20% annual yield offered by the Anchor Protocol on UST deposits was funded directly from Terraform Labs' treasury reserves, not generated by organic lending demand. Kwon and colleagues presented it as a market-driven return while knowing it was a subsidy.
Do Kwon arrested Montenegro on forged travel documents
DebunkingKwon was apprehended in Montenegro in March 2023 while travelling on forged documents — conduct consistent with deliberate flight from prosecution rather than someone who believed he had done nothing wrong.
SEC charges filed February 2023 — fraud, unregistered securities
DebunkingStrongThe SEC filed charges against Terraform Labs and Do Kwon in February 2023 for fraud and offering unregistered securities. The complaint detailed the May 2021 concealment and the undisclosed market maker payments.
Three Arrows Capital collapse triggered by LUNA exposure
DebunkingThree Arrows Capital (3AC), a major crypto hedge fund, held significant LUNA positions and collapsed following the Terra implosion, triggering further cascading failures at Celsius Network and Voyager Digital — systemic harm extending far beyond direct UST/LUNA holders.
Economists flagged 20% Anchor yield as unsustainable before collapse
DebunkingStrongMultiple economists and crypto analysts published analyses questioning the sustainability of the Anchor yield before the May 2022 collapse. The concerns were public; Kwon and Terraform Labs dismissed them publicly while internally knowing the yield was subsidised.
Do Kwon convicted in US on fraud charges
DebunkingStrongFollowing extradition from Montenegro to the United States in 2025, Do Kwon was convicted on fraud charges in US federal court. The conviction is the definitive legal resolution of the fraud allegations.
Coordinated Attack Theory
DebunkingSome Terra supporters and Do Kwon himself alleged that the May 2022 collapse was not organic but a deliberate coordinated short attack by well-capitalised actors who built massive short positions before dumping UST to trigger the death spiral. While large-scale coordinated withdrawals did occur, investigators and analysts found no definitive proof of a coordinated conspiracy, and the underlying algorithmic fragility was the fundamental cause.
Neutral / Ambiguous2
UST De-Peg May Have Been Triggered by Coordinated Market Attack
NeutralBlockchain analytics firms including Nansen and on-chain researchers identified large coordinated withdrawals from the Anchor Protocol and simultaneous UST sell pressure across multiple venues beginning May 7-8, 2022 that preceded the spiral. Some analyses suggest a deliberate attack exploiting the mechanism's known vulnerability to a bank-run dynamic, not simple market deterioration. Citadel Securities and BlackRock were named in speculation that was not subsequently verified, but the "attack" hypothesis — a large actor exploiting the mechanism intentionally — is taken seriously by DeFi security researchers independent of Do Kwon's legal defense. If accurate, this framing shifts some moral and causal responsibility, though it does not affect the mechanism's fundamental design vulnerability.
Do Kwon's Pre-Collapse Statements May Reflect Bona Fide Belief, Not Intentional Misrepresentation
NeutralSouth Korean and US securities regulators' fraud allegations against Do Kwon center partly on public statements made as UST was de-pegging that asserted stability. Do Kwon's defense (in ongoing extradition proceedings) argues these statements reflected his genuine belief that the Luna Foundation Guard's bitcoin reserves would successfully defend the peg — a belief that proved catastrophically wrong. The legal distinction between knowingly false statements (fraud) and optimistic statements based on erroneous belief (misrepresentation or negligence) is central to the pending proceedings. Many true believers in algorithmic stablecoins, including credentialed economists, shared the underlying mechanism's theoretical premises. Whether Kwon crossed from believer to fraudster requires establishing what he knew and when — proceedings not yet fully concluded.
Timeline
UST first near-collapse; Jump Crypto secretly intervenes
UST experiences a near-identical de-peg event that is resolved through covert market maker intervention by Jump Crypto, which is paid for its role. The event is not disclosed publicly. Kwon continues to market UST as a proven, stable mechanism.
Anchor Protocol 20% yield attracts massive UST inflows
The Anchor Protocol's 20% annual yield — a Terraform-funded subsidy not disclosed as such — attracts billions in UST deposits, inflating the ecosystem's apparent size and creating the mass retail exposure that will amplify the eventual collapse.
UST peg slips; death spiral begins
Large UST withdrawals from Anchor trigger the de-peg. The algorithmic mint-and-burn mechanism begins hyperinflating LUNA supply as UST slides further. The Luna Foundation Guard deploys $3.5B in Bitcoin reserves — insufficient to arrest the spiral.
UST begins losing peg; LUNA enters death spiral
Large withdrawals from the Anchor Protocol DeFi platform — which had been offering 20% annual yield on UST deposits — cause a run on UST. As the stablecoin drops below $1 the algorithmic mint-and-burn mechanism fails to stabilise it. Within five days UST trades below $0.10 and LUNA falls from $80 to fractions of a cent.
Source →~$40B destroyed; 3AC, Celsius, Voyager cascade begins
Verdict
SEC charges filed February 2023; Do Kwon arrested Montenegro March 2023, extradited to US 2025, convicted. Internal communications confirmed Kwon knew of the May 2021 near-collapse and concealed it. Anchor's 20% yield was a Terraform-funded subsidy not organically generated. Jump Crypto paid to secretly defend the peg. ~$40B destroyed May 2022.
Frequently Asked Questions
Was UST's collapse deliberate fraud or a design failure?
Both, in a sense. The algorithmic mechanism was genuinely fragile — many economists and critics identified this before the collapse. The fraud element, established by the SEC complaint and trial evidence, was the concealment of the May 2021 near-collapse, the undisclosed Anchor yield subsidy, and the undisclosed Jump Crypto peg defence. Kwon sold a flawed mechanism as proven while actively concealing its demonstrated fragility.
What was the Anchor Protocol and why was its yield suspicious?
Anchor was a lending protocol built on Terra offering approximately 20% annual yield on UST deposits. This yield was funded directly from Terraform Labs' treasury reserves — a subsidy, not organic lending demand. Kwon presented it as a market-driven return. The unsustainability was noted publicly by economists before the collapse; Kwon dismissed these concerns while internally knowing the yield was not organically generated.
How much was destroyed and who was affected?
Approximately $40 billion in combined UST and LUNA market capitalisation was destroyed within one week in May 2022. Retail investors globally held UST and LUNA. The collapse triggered cascading failures at Three Arrows Capital, Celsius Network, and Voyager Digital, destroying hundreds of billions in additional value across the crypto sector.
Where is Do Kwon now?
Do Kwon was arrested in Montenegro in March 2023, extradited to the United States in 2025, and convicted on fraud charges in US federal court. He fled South Korea after Korean authorities issued arrest warrants and was travelling on forged documents when apprehended.
Sources
Show 10 more sources
Further Reading
- paperAlgorithmic stablecoins: design risks and systemic implications — Bank for International Settlements (2022)
- bookThe Cryptopians: Idealism, Greed, Lies, and the Making of the First Big Cryptocurrency Craze — Laura Shin (2022)
- articleThe Lunatics: Inside the Terra/Luna Collapse — Various journalists (2022)
- bookNumber Go Up: Inside Crypto's Wild Rise and Staggering Fall — Zeke Faux (2023)
- paperSEC complaint against Terraform Labs and Do Kwon — SEC Division of Enforcement (2023)