Key Takeaways

• Terra suffered the greatest crash in crypto history last week after its algorithmic stablecoin lost its peg to the dollar.
• The Layer 1 blockchain had a spectacular run leading up to its demise, but there were clear signs that it was nearing its end.
• The industry will need time to take stock of the events surrounding Terra’s implosion and learn from the project’s mistakes to move forward.

Terra’s implosion will be remembered as one of the biggest moments in crypto history. Chris Williams tells the story of the blockchain and its controversial founder, Do Kwon.
Buying the Dip 
Callum had never taken much of a deep interest in crypto until the market crashed in May 2021. Besides the small amount of Bitcoin and Ethereum he’d bought with spare cash from his retail job, he’d never made a serious investment or found a project he truly identified with. Based out of his family home about one hour west of London, he was still spending most of his free time on gaming, streaming, watching anime, and other stuff 22-year-old Internet natives are into. 
Things started to change when he noticed the U.K. rapper KSI endorsing a newer, sexier blockchain project that promised to create a programmable, decentralized money for anyone on the Internet to use. Keen to diversify beyond crypto’s two biggest blue chips, he spent hours sifting through the whitepaper and learning about its innovative dual token mechanism that aimed to create the digital equivalent of a $1 bill. Though crypto felt like it was dead again off the back of a China mining ban and meme coin exhaustion, he was so convinced he’d found a winner that he rushed to pour his funds in. Its native token was changing hands for only $6 following the crash, so it was practically a fire sale anyway. 
Callum’s investment soon paid off. By September, he’d already hit a 5x. Because he had such a strong belief in the project, he kept on pouring money in. He doesn’t remember how much he spent, but at one point he had 2,500 coins—the equivalent of about $300,000 at the peak. By then, Callum was fully immersed in the community, regularly chatting with other believers on Twitter DMs and following every big update in the ecosystem. He made a lot of friends, some of whom had gone in with much bigger bets than he had, but none of them gave him as much conviction as the project’s main figurehead, Do Kwon. 
“He felt like a leader, he seemed like he knew what he was doing, he was very social, he conveyed himself very well, and he reminded me of the crypto Elon Musk,” he recalled from his anime-plastered bedroom. “He was very inspiring with his words; anything he said had a convincing tone to it that gave you more confidence.” 
Terra’s Rise and Fall 
Callum’s feelings echo those of countless other members of Terra’s thousands-strong community, a group who identified themselves as “the LUNAtics.” Rallying the community together with his outspoken tweets and podcast appearances, the 30-year-old Kwon captured imaginations like few other crypto entrepreneurs ever have. With the market entering overdrive mode, he soon found himself at the helm of a multi-billion-dollar empire. Terraform Labs, the Singapore-based company he’d founded and presided over since 2018, had created a phenomenon in Terra, the world’s first stablecoin-focused blockchain to gain true adoption. 
With Kwon acting as Terra’s chief spokesperson and marketing weapon, prices kept rising even as the rest of the market tanked in early 2022. Callum was getting richer by the day, but he opted to go “diamond hands,” holding onto his coins for the long-term in favor of cashing out for a quick payday. By April, Terra’s volatile token, LUNA, had soared to $119 on all major exchanges. Five weeks later, it had crashed to zero. 
Callum managed to cover some of his cost basis and buy a new iPhone when prices were going up, but others weren’t so lucky. One Reddit user called Sam said they lost $500,000 worth of LUNA and Terra’s stablecoin, UST, as the project collapsed. They pulled out of an interview for this feature at the last minute, probably because they were still feeling despondent over their lost funds. 
Others lost more than just money. According to multiple reports, several members of the Terra community took their own lives in the days following LUNA’s crash. Jackson, a Kuala Lumpur investor who lost $40,000 worth of Ethereum on a LUNA trade, said in a Telegram message that his high school friend and wife took their own lives on the day LUNA hit $1; though they didn’t confirm whether they had invested in LUNA, the note they left for their two children mentioned a crash in the cryptocurrency market. On the /r/terraluna subreddit, one post is titled “I lost over 450k usd, I cannot pay the bank. I will lose my home soon. I’ll become homeless. suicide is the only way out for me.” The top pinned post features a list of national suicide helpline numbers. 
Kwon, once Terra’s charismatic cheerleader, has not yet commented on the tragic events that ensued following his project’s collapse. He said he was “heartbroken” that his invention hadn’t worked as intended and put forward a plan to revive Terra on May 13. Since then he’s mostly stayed silent, barring a few governance proposals, including one to fork the project with a new token. 
Terra Explained 
Before it fell apart, Terra was designed to bring decentralized finance, commonly referred to among crypto natives as the “DeFi” movement, mainstream with a clear focus on stablecoins. Unlike most other digital assets tracking the price of the U.S. dollar, it incorporated an algorithmic mechanism instead of using any form of collateral. “Terra” and “LUNA” take their names from the Latin words for “earth” and “moon,” with the relationship between the Terra blockchain and the LUNA token supposedly representing the gravitational force between the two. 
Terra’s (and, by extension, Terraform Labs’) flagship product was UST, a decentralized stablecoin that traded around $1 up until May 9. When Terraform Labs developed Terra, the team created a token burning mechanism intended to stabilize UST. Whenever UST fell below $1, Terra users could burn it in exchange for $1 worth of LUNA. Conversely, whenever UST traded above $1, users could mint it by burning $1 worth of LUNA. Because the UST supply would decrease when below peg and increase when above peg, it would theoretically always return to $1 as long as there was enough demand for both tokens. Terra’s minting and burning mechanism relied on arbitrageurs, traders who profit from inefficiencies and help markets stay balanced. 
In the fast-moving, ultra-competitive world of DeFi, innovation isn’t enough to succeed. If you want people to use your product, you have to pay them first. That’s partly why so many projects dish out tokens to early adopters. Terraform Labs understood that it needed to offer incentives to attract users, so it enticed them by offering lucrative yields. 
Terra users could earn around 20% APY by lending out UST on a platform called Anchor Protocol, which is a handsome return even by DeFi’s standards. As Anchor didn’t generate enough revenue to pay out 20% APY to everyone, Terraform Labs would always make up the shortfall. Anchor’s slick interface made it easy to put your assets to work and bank a nice return; the only trade-off was that you had to use a stablecoin that could potentially lose its peg in a meltdown. 
UST was not the first algorithmic stablecoin, but none have ever reached quite the same heights. At its peak, it was worth over $18 billion, larger than MakerDAO’s DAI and trailing only USDT and USDC. Previous attempts at uncollateralized dollar-pegged assets such as Empty Set Dollar’s ESD and Iron Finance’s IRON enjoyed their moments, but ultimately crashed and burned in similar, albeit less spectacular, circumstances to UST. Algorithmic stablecoins tend to be reflexive; when things are going good, they tend to work very well. But that can change very quickly, not least in prolonged bear markets. 
That’s largely because of the way algorithmic stablecoins work, plus a bit of basic human psychology. As algorithmic stablecoins like UST are not backed by dollars, gold, or other assets, they rely on the belief that they are worth the $1 they aspire to replicate. But that whole premise starts to fall apart as soon as people lose faith in the system. If enough holders look to cash out when a stablecoin starts to trade below peg, a race to the bottom scenario can ensue where everyone rushes to the exit door en masse. If everyone tries to cash out at the same time, the stablecoin can become imbalanced relative to other coins, meaning it trades at a discount. If the selling pressure continues, the volatile asset can quickly lose its value. Because arbitrageurs mint LUNA when they burn UST, heated market conditions with extreme selling pressure can quickly dilute the LUNA supply. 
In the traditional world, this is what’s known as a “bank run” as people rush to withdraw their money in fears of the custodian going insolvent. Bank runs are common in countries facing economic plight; Russia had one in February as the rouble plummeted in response to sanctions over the country’s invasion of Ukraine. In the real world, they can last days or weeks, but everything happens much faster once blockchains are involved. 
DeFi has seen a number of algorithmic stablecoin bank runs, and Kwon himself was familiar with the risks before launching Terra. As the project faced its demise, it emerged that Kwon had co-led Basis Cash, another failed algorithmic stablecoin project that crashed when a bunch of users fled for the exit into the ether. Nonetheless, Kwon believed that Terra would become the hub for the world’s greatest decentralized money.   
LUNAtics Assemble 
He had a lot of people convinced. 
Throughout 2021, the LUNAtics multiplied as crypto saw its biggest boom to date. They identified each other by the yellow moon emojis they sported in their Twitter handles, a symbol of their belief that Terra and Kwon would take them “to the moon”—crypto geek speak for making it by securing paper riches. Many of them were young men like Callum, starry-eyed dreamers who thought they’d struck gold on LUNA after missing out on double-digit Bitcoin and Ethereum. Like other crypto communities weighed down by their heavy bags of coins, their loudest members would turn against anyone who questioned their investment or raised concerns about Terra’s dual token design. Some have said that the LUNAtics resembled a cult, only Kwon would shill LUNA to his followers on Twitter instead of asking them to pay for weekend retreats or yoga classes. Conor admitted he could see where the cult comparisons had come from because it was “easy to get stuck in with it” when the numbers were going up. During one of his public appearances, Kwon can be seen, casual as anything in a pair of Nike joggers and sneakers, chanting “UST” in front of an enthused crowd. “Alright guys, now I feel like the Bitconnect guys,” he jokes, referencing the most infamous scam of crypto’s 2017 bull run. 
Kwon also had smart money on-side. Sold on his ineffable charm and vision for a decentralized Internet-based money, venture capital poured into the Terra ecosystem early on. Among its biggest supporters were crypto whales like Galaxy Digital and Pantera Capital, firms that rarely set a foot wrong with their multi-million dollar bets but somehow overlooked Terra’s problematic design. 
While Terra became a darling of VC-land in 2021, it also had its fair share of critics who’d watched other similar algorithmic stablecoins blow up in the past. Key crypto personalities like Scott Lewis, Ryan Sean Adams, and Gigantic Rebirth had warned against the protocol’s risks on Crypto Twitter, but were slammed for hating on Ethereum rivals and going perma-bear by Terra community members. Lewis had watched UST fall below $1 in the May 2021 crash, but most people forgot it had happened once the market picked up. 
When Galaxy’s Mike Novogratz showed off his own LUNA-themed tattoo as the token broke $100 for the first time in December, Adams responded to say that the post had made him “question everything [he] thought [he] knew about crypto.” Kwon was quick to interject. “Don’t worry it wasn’t much,” he quipped, prompting a flurry of likes from Terra’s most loyal LUNAtics. 

I’m officially a Lunatic!!! Thanks @stablekwon And thank you my friends at Smith Street Tattoos. pic.twitter.com/2wfc00loDs

— Mike Novogratz (@novogratz) January 5, 2022

The Terra whales were less vocal once things imploded and people had lost fortunes or family members. Pantera has stayed quiet, while Galaxy disclosed a $300 million Q1 2022 loss, which might come from its LUNA exposure. Novogratz, one of Kwon’s earliest supporters, hasn’t publicly commented on the saga. One of the few crypto billionaires to share his thoughts was Three Arrows Capital’s Su Zhu, who acknowledged Terra’s downfall in a tweet and said that he had invested in Terra because he believed in the community and “common purpose.” He didn’t mention the project’s biggest star. 

LUNA to the Moon
Kwon was brilliant from a young age. He was exceptionally talented, the kind of kid who had the rest of the class clambering for his math answers because he’d always finished everything in double time. He aced 5s on 15 Advance Placement programs and got into Stanford. Like many of crypto’s brightest minds, he majored in Computer Science. 
Kwon founded his first company within a year of graduating, a peer-to-peer telecommunications service called Anyfi. It landed a few million in funding but never really took off. He founded Terraform Labs two years later. 
Interest in crypto had all but died when Terraform Labs launched. One month earlier, retail mania had driven Bitcoin to $19,600 before it crashed 50% a few days later. Ethereum followed with a run to $1,430 but quickly tumbled. It lost 94% of its value over the course of the year, while most of the ICOs that had characterized the 2017 rally vanished.  
Terraform Labs stuck it out anyway. For the first year, Kwon and his co-founder Daniel Shin focused on development. The company’s engineers built out the blockchain using the Cosmos software development kit, the same framework used by THORChain, Juno, and Secret Network. Terra went live on mainnet in April 2019 and LUNA launched a few months later, when only hardcore believers were putting money into digital assets. 
Among Terra’s earliest supporters was Delphi Labs, the development arm of leading crypto research firm Delphi Digital. The Delphi team incubated some of Terra’s most promising projects, and it endorsed LUNA in reports when it was still trading in the single digits.
While Terra remained a niche project through its early lifetime, it gained pace as other similar Layer 1 networks started to fly. Ethereum benefited from a mainstream NFT explosion in early 2021, but by the summer, speculative mania across the market meant that the network had become clogged. Because degen gamblers were looking to build their ETH stacks flipping JPEGs, regular users were now priced out. Solana, a smart contract blockchain that promised to do everything Ethereum could at a much higher speed and lower cost, went parabolic as a result, and Terra followed closely behind. Where Ethereum had led the first half of the year alongside Bitcoin, “alternative Layer 1” became the dominant trend in the space as traders turned their focus to “SOLUNAVAX”—a portmanteau of Solana’s SOL, Terra’s LUNA, and Avalanche’s AVAX tokens. 
Kwon basked in the glory as Terra started to shine. With LUNA reaching for the moon, there was little that could quell his confidence. Even when the SEC served him with a subpoena over the Terra-based Mirror Protocol’s synthetic asset products at a New York conference in September, he took it in his stride. Terraform Labs proceeded with a lawsuit against the SEC shortly after and LUNA kept on mooning. 
Kwon would always have a response to anyone who questioned Terra. Now comfortably a paper billionaire, he doubled down on his success, maximizing social engagement by selling his followers promises of a utopian future powered by decentralized money. His favorite insult for Terra skeptics was to point out that they were poor, or at least poorer than he was. “I don’t debate the poor on Twitter, and sorry I don’t have any change on me for her at the moment,” he said in response to the finance journalist Frances Coppola’s suggestion that an incentivized self-correcting mechanism like Terra’s could collapse under pressure. Crypto enthusiasts cheered him on as his popularity grew. 
Terra and the Bitcoin Standard 
Though Kwon would always appear bullish behind the screen, his actions hinted that he feared a snag. In early 2022, when Terra was up while the rest of the market struggled to hold momentum, he announced the launch of the Luna Foundation Guard, a non-profit that would focus on stabilizing UST and developing the Terra ecosystem. Like so much of the crypto space, “LFG” dealt in the currency of memes, borrowing from the “Let’s Fucking Go” cry that bulls cite to one another when charts are showing green candles. 
Led by Kwon and other Terra believers, LFG wanted to accumulate enough Bitcoin to rival Satoshi Nakamoto’s stash of 1 million coins. The aim was to establish a reserve fund to ensure UST would always sustain its peg. While LUNA acted as UST’s main stabilizer, it wasn’t as liquid or battle-tested as crypto’s digital gold. 
Because Bitcoin is the world’s biggest crypto asset, it tends to be less volatile than its successors. LFG planned to use it to back up its stablecoin, not unlike the gold standard that was used to back real dollars until 1971. If LFG had enough Bitcoin, it would always have a way of stabilizing UST if it ever dipped below $1, at least in theory. 
It initially laid out a plan to scoop up $3 billion worth of Bitcoin with a long-term view to growing its reserve fund to $10 billion. LFG began buying in batches of a couple hundred million dollars a go, helping the entire market rally after weeks of downward pressure. With Kwon leading LFG and Bitcoin looking bullish again, he became the community’s hero. 
Multiple prominent figures in the space praised Kwon on LFG’s Bitcoin accumulation plan. Anthony Pompliano, a pro-Bitcoin podcaster with more than two million social followers, put out a video discussing how LFG could transform the finance system. “Ultimately the goal from the Terra team is to take $10 billion and buy Bitcoin, become a persistent buyer in the market,” he said. “If the team successfully does this, they will show the playbook for central banks and stablecoins on how to back other assets with Bitcoin.” Eight weeks later, LUNA had crashed to zero, and LFG announced that it had rinsed most of its Bitcoin fund in an attempt to save UST. 
The Master of Stablecoin 
Both Kwon and Terraform Labs became more erratic as LFG’s Bitcoin accumulation plan gained pace. Terra briefly jumped to number six on the cryptocurrency leader board until LUNA suffered a dip below $100. Despite the waning sentiment, Terraform Labs put out a tweet from Terra’s official Twitter account, letting followers know that things were “gonna get spicy real soon.” It even added a warning for the traders who were planning to go short: “Beras beware.” Two days later, one of the company’s internal lawyers reached out to Crypto Briefing to request a call to discuss an April Fools’ Day article that told a fictional story that partly alluded to Terra’s flawed design. Crypto Briefing refused, so Terraform Labs’ external lawyers sent a letter demanding for the article to be deleted a couple of weeks later. 

Getting close … stay strong, lunatics

— Do Kwon 🌕 (@stablekwon) May 10, 2022

UST and LUNA kept on falling. While the LUNAtics watched their investments disintegrate and collectively asked where Kwon had gone, crypto degens looked on in amazement, debating whether there was an opportunity to make a quick dime from the unprecedented market conditions. By Thursday 12 May, UST had hit $0.36, and LUNA was worth less than a cent. Bitcoin, Ethereum, and other major assets also took a beating. Even USDT, the Tether-issued stablecoin with a market cap of $75.8 billion, temporarily lost its parity with the dollar as traders sought flight elsewhere. As Terra had wiped out about $30 billion of value in a few days, the network was suddenly much more susceptible to attacks. Terra validators took the decision to halt the chain twice, raising further questions about whether the network had ever been truly decentralized. 
The crypto community has been watching every move Terra, Terraform Labs, and Kwon make since the network imploded. Questions were raised about LFG’s Bitcoin reserves, but it’s since announced that most of its stash has disappeared. Binance CEO Changpeng Zhao has taken shots at the company, saying he was “disappointed” by the response and drawing a comparison to Sky Mavis’ handling of the $550 million Ronin Network hack. Countless others have urged Kwon to disappear from crypto forever. 
The Post-Terra Era
Callum says he’ll continue investing in crypto, but he plans to avoid risky gambles in the future. If he makes anything in size on the next bull phase, he’ll consider moving out of his parents’ place. 
Jackson is still mourning in Kuala Lumpur; he’s spent the days since the tragedy remembering his friend with other classmates he shares a WhatsApp group with. Though his friend is gone, LUNA didn’t financially ruin him; he made decent money on Ethereum when prices were soaring. 
Sam has accepted that they’ll never get their $500,000 back. They suggested they may be open to speaking again in the future under more positive circumstances. 
The LUNAtics are still counting their losses, some of them back to square one after seeing their net worths erode to dust. Instead of worshipping Kwon, many of them are questioning his leadership skills or have left Terra for good. 
The venture capitalists who went in hard on LUNA are also hurting. Though no official statements have surfaced barring Galaxy’s Q1 report, it’s believed that some must have got burned harder than they’re letting on. A widely-circulated May 11 note suggests that Arca took a big hit as the depeg started. Novogratz has not yet commented on his LUNA tattoo. 
Algod and Gigantic Rebirth stand to make a pretty penny off the collapse. Gigantic Rebirth will win whatever happens because they hedged their short position by spending $0.72 on a LUNA long. Cobie, who’s currently holding the committed eight-figure sum in an escrow wallet, says he’ll only release the funds on agreement from all parties. Kwon has not yet commented on whether his ready to give up on the bet. 
Terra developers are backing a plan to relaunch the ecosystem with Terraform Labs removed. Some of Terra’s most loyal LUNAtics are in favor of the idea. 
LFG says it spent most of its Bitcoin trying to stabilize UST, but it hasn’t provided any paper trail of the transactions. It has about $200 million in assets remaining, most of which is in rapidly depleting UST. It says it plans to reimburse UST users with a priority on smaller holders. 
Terraform Labs has stayed quiet, sharing occasional updates and promising a post-mortem analysis of the meltdown. Many community members have complained that the firm is falling short on transparency. “I can’t imagine anyone involved with LFG truly believes this is enough information right? If so, it’s insulting… This is beyond a joke,” one LUNAtic posted in response to its announcement of the depleted Bitcoin reserve fund. 
UST is still trading below its intended peg, and LUNA is basically worthless. There are over 6.5 trillion tokens in circulation now. 
The Terra blockchain may be forked with a new LUNA token. Kwon has put forward two proposals to revive the network so far. 
Kwon’s online tone has turned somber, ditching the hubris and telling the community that he is “heartbroken” at how Terra failed. He conceded that UST was not the future of decentralized money in its current form and said that he didn’t sell any coins on the crash. Some have suggested that lawyers are managing his account now, and he hasn’t yet apologized for his failings. He’s most likely lost the broader crypto community’s trust forever. 
Regulators across the world are paying close attention to the stablecoin market and working out ways to stop a similar disaster from happening in the future. The Treasury’s Janet Yellen has referenced Terra’s bank run on several occasions. 
The rest of the crypto community is still processing what happened, and how Terra made it so big then failed so spectacularly. Questioning who is accountable, most of them look back to Terraform Labs’ controversial central figure. People have been reminded of the importance of fundamentals and raising awareness when red flags like bad tokenomics and big egos surface. 
The full scale of Kwon’s black swan wipeout is not yet known, but it’s already been compared to other dark crypto moments like Black Thursday and the Mt. Gox hack. The industry bounced back in the fallout from those incidents, and global crypto adoption eventually grew. Markets have historically recovered from disasters, though healing usually takes time. As long as everyone watching remembers what went wrong at Terra, the industry has a shot at becoming more resilient for the decades ahead. 
Do Kwon and Terraform Labs had not responded to multiple requests for comment at press time. 
Some names in this feature have been changed to maintain confidentiality.  
The information and data presented in this feature was accurate as of May 17, 2022. 
Disclosure: At the time of writing, the author of this feature owned ETH, ATOM, and several other cryptocurrencies.