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Terra Luna collapse 2022: how a $1 coin lost its dollar

UST was built to always be worth $1. A savings app paid close to 20% a year to hold it. In May 2022, it slipped below $1, and within days both UST and its sister coin LUNA were close to worthless.

Story · 8-minute read · Updated 2026-10-21

What Terra was

Terra was a crypto network run by a company called Terraform Labs, co-founded by Do Kwon.

It had two main coins:

• UST, a stablecoin: a coin meant to always be worth $1.
• LUNA, a second coin whose price could go up and down.

Most big stablecoins hold cash or bonds to back each coin. UST didn't. It was an "algorithmic" stablecoin. It used code and LUNA to try to hold $1.

How the $1 was supposed to hold

The idea worked like a seesaw.

• You could always swap $1 worth of LUNA for 1 UST, or 1 UST for $1 worth of LUNA.
• If UST fell to $0.98, traders could buy it cheap and swap it for $1 of LUNA. That buying would push UST back up.
• If UST rose above $1, they'd do the opposite.

In calm markets, this worked. But notice the weak spot. It only works while people believe LUNA is worth something.

Why so many people held UST

A Terra app called Anchor paid about 19.5% a year on UST deposits. In a world of near-zero bank rates, that was a magnet.

Billions of dollars flowed in. Critics warned that the rate was paid partly from reserves that kept needing top-ups. In early 2022, the group behind Terra added hundreds of millions of dollars to keep it going.

The Luna Foundation Guard, a non-profit tied to Terra, also started buying billions of dollars of bitcoin as a backup reserve for UST.

LUNA's price soared. In March 2022 it hit a new high above $100.

What happened

The first wobble

On 7–8 May 2022, large amounts of UST were sold at once. UST slipped to about $0.98.

That doesn't sound like much. But for a coin whose whole job is to be $1, it was a warning light.

The spiral

People with UST began to swap it for LUNA and sell the LUNA. That's what the system allowed.

But every swap created new LUNA. More LUNA pushed its price down. A cheaper LUNA meant more coins were needed for each $1, so even more LUNA was created.

This is often called a death spiral. Fear made it faster.

• By 10 May, UST was around $0.67.
• The bitcoin reserve was used, but it couldn't stop the slide.
• Within days, LUNA went from tens of dollars to fractions of a cent.

The moment everyone remembers

Within about a week, about $40 billion of value in UST and LUNA was gone, by most estimates.

The Terra network was halted for a time. Exchanges stopped trading the coins.

The damage spread. Over the summer of 2022, the crypto lender Celsius, the broker Voyager and the fund Three Arrows Capital all collapsed, each hurt in part by the crash. Later that year, the exchange FTX failed too. Our FTX story covers that chapter.

How the legal cases ended

• April 2024: a US jury found Terraform Labs and Do Kwon liable for civil fraud in a case brought by the SEC.
• June 2024: they agreed to pay about $4.47 billion to settle with the SEC. Terraform was ordered to wind down.
• March 2023: Kwon was arrested in Montenegro. He was later sent to the United States.
• August 2025: he pleaded guilty to conspiracy to defraud and wire fraud.
• 11 December 2025: a US federal judge sentenced him to 15 years in prison, more than the 12 years prosecutors had asked for.

What it teaches

1. A high, steady yield is a question, not an answer

A rate near 20% a year with "no risk" is the market asking you to look closer. Where does the money come from? What happens if it stops? Our crypto scams guide lists the warning signs.

2. "Stable" is a design goal, not a promise

A stablecoin is only as safe as what stands behind it. UST was backed by confidence in another coin. When confidence went, so did both. Read the stablecoin glossary page for how the main types differ.

3. Never put in more than you can lose

People who held only small amounts were hurt. People who moved their savings in were hurt badly. Size every position, crypto or not, so one failure can't sink you. Our risk management guide shows how.

4. Things that spiral down don't wait for you

Once UST broke $1, there was very little time. A plan you write before you enter, with a clear exit, is worth more than a plan you try to make during a panic.

What it doesn't mean

• It doesn't mean every stablecoin works like UST. Stablecoins backed by cash and short-term bonds work differently, though they have their own risks to check.
• It doesn't mean all of crypto is a scam. It means designs that depend on confidence alone can fail fast.
• It doesn't mean early warnings were obvious to everyone. Critics did raise alarms. Many holders believed the system had survived wobbles before and would again.
• It doesn't mean losses were recovered. Most holders got back little or nothing.

Timeline

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