Part 3 of our deep-dive series into the $284 billion stablecoin revolution
On May 6, 2022, Do Kwon tweeted: "Anon, you could listen to CT influensooors about UST depegging for the 69th time. Or you could remember they're all now poor, and go for a run instead."¹ Within 72 hours, his $45 billion ecosystem was worthless, 280,000 South Koreans had lost their savings, and Kwon was a fugitive. This isn't just a story about algorithmic hubris, it's about how one mans "stable" invention became crypto's Lehman Brothers.
The Man Who Failed Twice
Here's what most people don't know: Terra wasn't Do Kwon's first algorithmic stablecoin disaster. In 2020, under the pseudonym "Rick Sanchez," Kwon quietly launched Basis Cash, a failed algorithmic stablecoin that collapsed within months.² When confronted, Terraform Labs engineer Hyungsuk Kang admitted: "It was clear the project wasn't tested...we weren't even sure it would work." Yet Kwon learned nothing. Or perhaps he learned exactly the wrong lesson that he could walk away from failure without consequences.
By 2021, Kwon had refined his pitch. UST would be different. Instead of pure algorithms, it would have the Anchor Protocol offering a "sustainable" 20% yield. Except the math never worked. Anchor needed $6 million daily in subsidies to maintain that yield.³ Kwon knew this. Internal documents revealed Terra was spending $450 million annually propping up Anchor's rates to attract deposits. It was a Ponzi wearing the mask of innovation.
The Luna Foundation Guard (LFG), Terras supposed safety net, accumulated 80,000 Bitcoin ($3.5 billion) as reserves. Kwon positioned this as insurance, but it was theater. The reserves could only defend small depegs, not a bank run. When Bloomberg’s Joe Weisenthal questioned the model’s sustainability in March 2022, Kwon responded with characteristic arrogance: "I don't debate the poor."⁴
The Anatomy of Disaster
May 7, 2022, 2:23 PM UTC: Someone swapped $85 million UST for USDC on Curve's liquidity pool.⁵ The trade was large enough to unbalance the pool, dropping UST to $0.985. Arbitrageurs smelled blood. What followed was a masterclass in financial contagion. The death spiral mechanism was elegantly destructive. UST holders could always redeem 1 UST for $1 worth of LUNA, regardless of UST's market price. When UST traded at $0.90, traders could buy it and swap for $1 of LUNA, pocketing 10% profit. But here's the fatal flaw: this required minting new LUNA tokens. As confidence collapsed and billions in UST sought redemption, the protocol minted trillions of LUNA, creating hyperinflation that destroyed both tokens simultaneously.⁶
May 8: Kwon deployed $1.5 billion in Bitcoin trying to defend the peg. UST briefly recovered to $0.92. Crypto Twitter declared victory. But withdrawals from Anchor Protocol accelerated: $14 billion became $9 billion in hours.⁷ The smart money was running. May 9: UST permanently broke below $0.60. LUNA, worth $87 five days earlier, traded at $30. The protocol’s mint-burn mechanism went into overdrive, creating 250 billion new LUNA tokens in 24 hours.⁸ Do Kwon stopped tweeting. May 10: Game over. UST hit $0.30. LUNA cratered to $0.10. The protocol minted 6.5 trillion LUNA tokens. From 350 million to 6.5 trillion in three days.⁹ The inflation rate exceeded Weimar Germany's. Exchange after exchange halted trading. $45 billion in market cap: completely gone within three days.
The Human Wreckage
Behind the numbers lay tragedy. In South Korea, where crypto speculation had become mainstream, 280,000 citizens held LUNA or UST.¹⁰ Online forums filled with suicide threats. One investor posted: "I lost my house deposit, three years of savings. I want to die." The Korean National Police received multiple reports of self-harm linked to Terra losses. Daniel Shin, Terra's co-founder and heir to a Korean retail empire, quietly dumped $105 million in LUNA before the collapse.¹¹ Pantera Capital, which invested at $0.80, sold near the peak for 100x returns. Jump Trading, Alameda Research, and Three Arrows Capital: the smart money got out. Retail investors became exit liquidity.
The contagion spread immediately. Celsius Network, exposed to UST through Anchor, froze withdrawals within weeks. Three Arrows Capital, leveraged long on LUNA, collapsed entirely, taking multiple lenders with them. BlockFi, Genesis, Voyager…dominoes fell across crypto. The total damage exceeded $200 billion in broader market losses.¹²
The Fugitive's Aftermath
Do Kwon fled South Korea before the collapse, sensing what was coming. Interpol issued a Red Notice. South Korean prosecutors charged him with fraud, breach of trust and violation of capital markets law.¹³ For months, he evaded capture, moving through Dubai and Serbia, tweeting defiantly: "I'm not on the run."
In March 2023, Montenegrin police arrested Kwon at Podgorica Airport carrying Costa Rican passports under false names.¹⁴ His laptop contained plans for a new project. Even facing extradition, fraud charges and a $4.47 billion SEC settlement, the largest crypto enforcement ever, Kwon maintained UST wasn't a fraud but an "experiment."¹⁵
Why This Changes Everything
Terra's collapse killed algorithmic stablecoins as a concept. Every subsequent attempt has failed or pivoted to partial backing. Regulators worldwide cited Terra when crafting stablecoin legislation. The GENIUS Act explicitly prohibits algorithmic mechanisms. MiCA bans uncollateralized stablecoins entirely.¹⁶
However, the deeper lesson is about trust architecture. Satoshi designed Bitcoin to be trustless. Terra required trusting Do Kwon's algorithm, Anchor's yields, and LFG's reserves. When trust evaporated, so did $45 billion. The market learned: stablecoins need real backing, not mathematical promises.
The final irony? Tether, with all its controversies and opacity, survived because it held actual dollars (mostly). Sometimes, boring reality beats elegant theory. In finance, stability isn't an algorithm, it's a treasury bill sitting in a bank account.
Next week in Part 4: How stablecoins conquered emerging markets and became the underground dollar system for billions worldwide.