TerraUSD depegs; Luna evaporates
TerraUSD, an algorithmic stablecoin with an $18 billion market cap, broke its peg to the dollar on May 9. The mechanism designed to restore the peg produced a death spiral. Luna, the supporting token, fell from $80 to fractions of a cent in 72 hours. Roughly $60 billion in combined value destroyed. The event triggered the cascading failures of Three Arrows Capital, Voyager, Celsius, and eventually FTX six months later.
Luna/UST is the clearest case study of how algorithmic stablecoins fail. The design assumed arbitrage would always restore the peg. When the market concluded the peg would not be restored, arbitrageurs exited, and the mechanism produced infinite supply of Luna to a nonexistent bid. The cascade took six months to work through crypto, ending in the FTX bankruptcy.
09 · COVID & Crypto Winter
COVID produced the fastest bear market in history — the S&P 500 fell 34% in 33 days — and the fastest recovery, powered by a $5T Fed and Treasury response. Two years later, the same liquidity bubble that drove the recovery unwound in crypto. Luna/UST lost $60B in three days. FTX — once valued at $32B — turned out to be a fraud. The Nasdaq fell 33%.
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