South Korean algorithmic stablecoin erased ~$40B in 72 hours in May 2022—the largest single crypto collapse in history and the trigger for a global contagion wave.
Evaluating only Terraform Labs / Terra-LUNA’s profile at its peak — without knowing the outcome — the model ranked Fraud as the #1 likely cause. That’s exactly how it died.
Terraform Labs was founded in 2018 by Do Kwon and Daniel Shin to build Terra, a blockchain protocol built around the algorithmic stablecoin UST (TerraUSD). UST maintained its $1 peg through a mint-burn mechanism with LUNA: to mint $1 of UST, $1 of LUNA was burned, and vice versa. The protocol's Anchor lending platform offered 20% APY on UST deposits with no sustainable yield source—the returns were subsidised from reserve funds. By May 2022, UST had a market cap exceeding $18B. When a large sell order triggered a modest depeg in early May 2022, a classic bank run began: UST holders redeemed for LUNA, LUNA supply increased, LUNA price fell, reducing the confidence in UST's backing, which triggered more redemptions. Within 72 hours, LUNA had lost 99.9% of its value and UST had permanently depegged, erasing approximately $40B in combined market cap. Do Kwon was later charged with fraud by the SEC, Interpol issued a Red Notice, and he was arrested in Montenegro in 2023.
Lesson
“Before deploying capital into any yield product offering >10% APY on a stablecoin, identify the yield source: who is paying, why, and is that payment sustainable at 10x the current deposit base? If the answer is "protocol reserves" or "future token appreciation," the yield is not real and will eventually fail to pay.”