The cryptocurrency world was rocked in May 2022 when TerraUSD (UST)—the world's third-largest stablecoin—experienced a catastrophic depegging event. What followed was a financial domino effect that wiped out $28 billion in market capitalization within days. This article examines what happened, why it matters, and what the industry can learn.
The UST Collapse: A Timeline of Events
- May 7–8: UST suddenly depegged from its $1 parity, dropping as low as $0.30 after a whale sold ~$200 million UST
- May 9: Luna (Terra's governance token) market cap fell below UST's, triggering a "death cross"
- May 10: US Treasury Secretary Janet Yellen warned Congress about stablecoin risks amid the crisis
Three Generations of Stablecoins
1. First-Gen: Centralized (e.g., USDT, USDC)
- Backed 1:1 by fiat reserves
- Issued by centralized entities
2. Second-Gen: Decentralized (e.g., Dai)
- Overcollateralized with crypto assets
- Uses smart contracts
3. Third-Gen: Algorithmic (e.g., UST)
- Peg maintained via mint/burn mechanisms
- No direct collateral
Why UST Failed: Endogenous vs. Exogenous Risks
UST's fatal flaw was its endogenous risk structure—its stability depended entirely on Luna, creating a dangerous feedback loop:
- UST depegs → Luna price falls
- Falling Luna → More UST depegging
- Repeat → Death spiral
👉 Learn how to identify risky stablecoins
Key Lessons
1. Diversify Reserve Assets
- Need exogenous (uncorrelated) reserves
- Avoid single-point failures
2. Transparency Matters
- Blockchain enables real-time auditing
- Public ledgers build accountability
3. Regulation Is Coming
- Expect stricter stablecoin oversight
- Consumer protections needed
FAQ
Q: Can UST recover?
A: Extremely unlikely—the death spiral has destroyed market confidence.
Q: Are all algorithmic stablecoins risky?
A: Most carry similar endogenous risks. Diversified models may emerge.
Q: What should investors do now?
A: Stick to well-audited stablecoins with transparent reserves.
👉 Explore safer stablecoin options
The crypto industry will learn from this crisis—but the lessons came at tremendous cost.