Title: The story of 'LUNA's Death Spiral': How 40 billion dollars evaporated in a week?
The story:
Imagine there is a genius financial engineer named Do Kwon, who decided to solve the biggest problem in the world of cryptocurrencies: the need for a stablecoin that is not controlled by banks or governments.
The 'brilliant' idea:
He did not link his stablecoin, which he named TerraUSD (UST), to real dollars in a bank account. Instead, he created a smart algorithmic system that linked it to another volatile currency called LUNA.
The equation was deceptively simple:
You can always exchange 1 UST (which should equal 1 dollar) for 1 dollar worth of LUNA.
And you can always exchange 1 dollar worth of LUNA for 1 UST.
This mechanism theoretically guaranteed that the price of UST would always stay at 1 dollar. To make it even more enticing, they created a digital bank called Anchor Protocol, which offered an astronomical interest rate of up to 20% annually for anyone who deposited their 'stable' UST there.
Millions of people flowed, putting their life savings into this system that seemed like a money-making machine that couldn't fail. The market value of the Terra-LUNA system reached over 40 billion dollars.
The beginning of the disaster (May 2022):
One day, a 'whale' or a group of unknown whales sold a massive amount of UST in the market, causing its price to drop slightly to around 0.98 dollars.
Usually, this is not a serious matter. But it was the spark that ignited the 'Death Spiral.'
Death Spiral:
When people saw that UST no longer equaled 1 dollar, they began to panic. They rushed to sell their UST and exchange it for other currencies. Here, the 'brilliant' algorithm began to work in reverse and destructively:
Panic increases: the more people sell UST, the lower its price drops.
The algorithm intervenes: to raise the price of UST and bring it back to 1 dollar, the algorithm automatically began 'printing' huge and crazy amounts of LUNA and selling them on the market to buy UST.
The collapse of LUNA: This flood of new LUNA coins flooded the market, causing the price of LUNA to collapse tragically.
Complete loss of trust: When investors saw that the LUNA coin, which was the only collateral for UST, was collapsing and heading to zero, they realized that the entire system was dying. They rushed to sell whatever UST they had left at any price, even if it was 50 cents or 10 cents.
The cycle repeats: this hysterical selling of UST forced the algorithm to print more and more LUNA, causing its price to collapse faster... and so on in a terrifying feedback loop.
In just one week, the price of LUNA collapsed from around 80 dollars to less than a thousandth of a cent. The 40 billion dollars evaporated completely.
The painful true story here is about thousands of ordinary people who trusted the term 'stablecoin' and put their savings and retirements in the Anchor bank, only to watch everything disappear before their eyes in days. It is a cautionary tale about technological arrogance and how systems that seem perfect on paper can collapse catastrophically in the real world.