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Terra and Luna

From Invertopedia, the encyclopedia of how things fail

Entry 005. An analysis built from the public record, not an insider account. Spot an error? Tell us.

Terra was a blockchain built by Terraform Labs. Its stablecoin, UST, was meant to stay at $1 because it could always be swapped for $1 worth of its sister token, LUNA[3][1]. Terra's Anchor protocol advertised returns of up to 20% on UST[1]. In May 2022 UST lost its peg and both tokens fell to near zero[1], wiping out about $40 billion[4][2]. Founder Do Kwon pleaded guilty to fraud in 2025 and was sentenced to 15 years in prison[5][4].

Contents
  1. 1The bet
  2. 2What happened
  3. 3The kill shot
  4. 4Red flags ignored
  5. 5The cost
  6. 6The inversion
  7. 7What survived
  8. 8References

The bet

That arbitrage alone could hold a dollar peg. Anyone could burn $1 of LUNA to mint one UST, or redeem one UST for $1 of LUNA. If UST slipped to 90 cents, traders would buy it and redeem it for a dollar's worth of LUNA, pushing the price back up[3].

That a high yield would keep demand coming. Anchor was supposed to pay 19.5% to UST lenders, and before the collapse it was on pace to run through its own reserve within two months[3]. The Luna Foundation Guard built a bitcoin reserve of about $3.5 billion as a backstop[3].

What happened

May 2021UST dips to $0.96 and recovers[3]. Kwon later admits he made false statements about why it regained the peg, and that a trading firm was involved.[6]
Feb – May 2022The Luna Foundation Guard raises $1 billion for a bitcoin reserve and grows it to about $3.5 billion by May 5.[3]
May 9, 2022UST falls as low as $0.61. The Guard says it will lend out $1.5 billion in bitcoin to defend the peg.[3]
May 11, 2022UST has collapsed below $0.30. LUNA trades near $1.25, down from $84 a week earlier.[3]
Feb 16, 2023The SEC charges Terraform Labs and Kwon with fraud.[1]
Mar 2023Kwon is arrested in Montenegro for travelling with forged documents.[7][8]
Apr 5, 2024A jury finds Terraform and Kwon liable for securities fraud. They later agree to pay more than $4.5 billion.[9][10]
Dec 31, 2024Montenegro extradites Kwon to the United States.[7][11]
Aug 12, 2025Kwon pleads guilty to conspiracy to defraud and wire fraud.[6][5]
Dec 11, 2025Judge Paul Engelmayer sentences Kwon to 15 years, more than the 12 prosecutors asked for.[4][2]

The kill shot

The peg was held by a token whose value depended on the peg holding. Once confidence cracked, each one dragged the other down.

Redeeming UST meant creating new LUNA and selling it. That works while people want LUNA. When UST holders all ran at once, the redemptions flooded the market with LUNA, its price fell, and each dollar of UST needed even more LUNA to cover it. In one week LUNA went from $84 to about $1.25[3].

The system had already wobbled once. UST slipped to $0.96 in May 2021 and recovered[3]. Kwon later admitted in court: "In 2021, I made false and misleading statements about why [UST] regained its peg," and that a trading firm had been involved[6].

Red flags ignored

  • 20% on a stablecoin. Anchor advertised up to 20%[1] while its reserve was on pace to run dry within two months[3].
  • The backing was its own token. What held UST at $1 was the promise that it could be redeemed for $1 worth of LUNA, a token Terra itself issued[3].
  • The first rescue was not what it seemed. Kwon later admitted the story of the 2021 peg recovery was false[6].
  • Real-world use was overstated. The SEC alleged investors were misled about LUNA's use on a Korean payment app[1].
  • Confidence over candor. Kwon posted "Deploying more capital - steady lads." At sentencing the judge called the post devastating for investors[4].

The cost

About $40 billion in value was wiped out[4][2]. The failure set off a chain of billion-dollar crypto collapses in 2022 that ended with FTX[11].

The SEC's judgment came to more than $4.5 billion. Terraform owed about $3.59 billion in disgorgement, $467 million in interest and a $420 million penalty. Kwon owed $110 million in disgorgement, $14.3 million in interest and an $80 million penalty[10]. In the criminal case he agreed to forfeit $19 million and some of his properties[4].

The inversion

If the backing is worth something only while the thing it backs works, there is no backing. Ask what a stablecoin holds that would still be worth a dollar on the worst day.

What survived

Terraform agreed to stop selling its tokens and wind down, with what was left going to investors and creditors through a bankruptcy liquidation plan[10].

Kwon can ask to transfer to a prison in South Korea after serving half his U.S. sentence, and U.S. prosecutors agreed not to oppose it[12]. Korean prosecutors have said he would face a separate trial there, and one said a guilty verdict "could lead to a sentence of more than 30 years"[12].

References

  1. ^ “SEC Charges Terraform and CEO Do Kwon with Defrauding Investors in Crypto Schemes”. U.S. Securities and Exchange Commission, February 16, 2023. The charges, Anchor's advertised yield of up to 20%, the May 2022 depeg to near zero, and the alleged payment-app claims.
  2. ^ “Terraform Labs founder Do Kwon sentenced to 15 years over $40 billion Terra-Luna collapse: Inner City Press”. The Block, December 11, 2025. The sentence, the two counts, and credit for time held in Montenegro.
  3. ^ “Terra, Luna and UST: How we got here”. The Block, May 11, 2022. How UST's mint-and-redeem peg worked, Anchor's 19.5% yield and shrinking reserve, the Luna Foundation Guard's bitcoin reserve, the May 2021 dip and the May 2022 price falls.
  4. ^ “Do Kwon Sentenced to 15 Years in Prison Over $40 Billion Terra Crypto Collapse”. Decrypt, December 11, 2025. The 15-year sentence, the $40 billion collapse, the judge's quotes, the "steady lads" post, the $19 million forfeiture and the sentencing requests.
  5. ^ “South Korean crypto mogul Do Kwon pleads guilty to fraud”. Al Jazeera, August 13, 2025. The guilty plea, the counts, the forfeiture and the extradition in December 2024.
  6. ^ “Terraform's Do Kwon Pleads Guilty to Conspiracy, Wire Fraud in UST Blow-up”. CoinDesk via Yahoo News, August 12, 2025. Kwon's admission about the 2021 peg recovery, the plea terms and the transfer agreement.
  7. ^ “Montenegro extradites Terraform Labs co-founder Do Kwon to the US with help from Interpol”. The Block, December 31, 2024. The March 2023 arrest on forged travel documents and the extradition.
  8. ^ “Terra (blockchain)”. Wikipedia. Background on the May 2022 collapse and the Montenegro arrest.
  9. ^ “Statement on Jury's Verdict in Trial of Terraform Labs PTE Ltd. and Do Kwon”. U.S. Securities and Exchange Commission, April 5, 2024. The jury verdict after a nine-day trial.
  10. ^ “Terraform and Kwon to Pay $4.5 Billion Following Fraud Verdict”. U.S. Securities and Exchange Commission, June 13, 2024. The April 5, 2024 jury verdict, the more than $4.5 billion judgment and its parts, and the wind-down of Terraform.
  11. ^ “Do Kwon pleads guilty to fraud in connection with $40bn Terra failure”. DL News, August 12, 2025. Extradition on New Year's Eve 2024 and the chain of failures that followed Terra.
  12. ^ “Terra Founder Do Kwon May Face South Korean Trial Despite 15-Year US Prison Sentence”. Decrypt, December 15, 2025. The prisoner-transfer route and Korean prosecutors' plans.
Categories: Crypto · Stablecoin · Collapsed in 2022 · Cause of death: circular backing · From the public record