Terra / UST collapses

UST was an *algorithmic* stablecoin: it held its $1 peg not with cash reserves but with a mint/burn loop against its sister token LUNA. You could always swap $1 of UST for $1 of LUNA and vice-versa. On paper, arbitrage keeps the peg. In a panic, it does the opposite.

The death spiral

UST slips below $1
   │  arbitrage: burn UST → mint $1 of LUNA
   ↓
LUNA supply inflates → LUNA price falls
   │  cheaper LUNA → less confidence in UST
   ↓
more UST sold → deeper depeg ──┐
   ↑                            │
   └──────── feedback ──────────┘   (days: $1 → ~$0)

The backstop that was supposed to absorb the peg's value was itself the thing collapsing. Roughly $40B evaporated in days. The contagion took down hedge funds, lenders and eventually fed the chain of failures that ended with FTX.

What it taught

The 20% that papered over the flaw

Demand for UST wasn't organic — it was rented. Anchor Protocol offered a near-fixed ~20% yield on UST deposits, subsidized from reserves. That yield is what pulled in the $18B; it also meant most UST sat parked chasing the subsidy rather than being used. When confidence wobbled, that hot money was first out the door — and there was no real demand underneath it.

The contagion

UST didn't fail in isolation. Funds and lenders holding LUNA, parking treasury in Anchor, or carrying counterparty exposure went down in sequence — Three Arrows Capital, then Celsius, then Voyager — each failure margin-calling the next. The line runs more or less directly from this depeg to the credit crunch that ended with FTX six months later.

UST/LUNA ──→ 3AC ──→ Celsius / Voyager ──→ … ──→ FTX
 (May)       (Jun)      (Jul)                    (Nov)
 one peg break, propagating through leverage

Mechanism matters more than the marketing. A "stablecoin" whose collateral is its own reflexive token isn't stable — it's a confidence machine that runs in reverse under stress. It's the reason I treat pegs as something to *monitor*, not assume.