Terraform Labs: how an algorithmic stablecoin wiped out roughly $40 billion in days
TerraUSD was a stablecoin meant to hold $1 through an algorithm tying it to the Luna token, rather than through cash reserves. An affiliated platform paid close to 20% yields on it. In May 2022 large withdrawals broke the peg, the mechanism spiralled, and both tokens collapsed.
- Primary cause: Technology didn't deliver
- Fraud & misreported numbers
- Lost customer trust
- Founded
- 2018
- Ended
- 2022
- Headquarters
- South Korea / Singapore
- Sector
- Fintech & Crypto
- Capital raised
- Hundreds of millions in venture funding, plus ~$1B raised for reserves in 2022
What happened
TerraUSD lost its peg in May 2022, wiping out roughly $40 billion. A US jury found Terraform and co-founder Do Kwon liable for civil fraud in 2024; Kwon pleaded guilty to criminal fraud charges in 2025 and was sentenced to 15 years.
What Terraform Labs was
Do Kwon and Daniel Shin founded Terraform Labs in 2018. TerraUSD (UST) could always be swapped for $1 worth of Luna, and arbitrage was supposed to keep its price stable. The Anchor Protocol offered around 20% yields on UST deposits, drawing in billions.
In May 2022, large UST withdrawals pushed its price below $1. Holders swapped UST for newly minted Luna, flooding the market and crashing Luna's price, which destroyed confidence further. Within days both were nearly worthless.
Why it failed
- 1
A design that failed under stress
Algorithmic pegs run on confidence. When UST's price fell, the mechanism created more Luna, crashing its value and making the peg even harder to defend — a reinforcing 'death spiral'.
- 2
Subsidized yield drove the demand
Much of UST's demand came from Anchor's ~20% yield. People held UST for the return rather than as money, so demand vanished the moment confidence wavered.
- 3
Misleading claims about stability
In civil and criminal proceedings, US authorities said Terraform misled investors about UST's stability, including about how its peg had been restored after an earlier 2021 wobble.
The product lesson
Stress-test the failure mode, not just the normal case. Any system that is stable only while users are confident must answer: what happens when they all want to leave at once? If the answer is a reinforcing spiral, the product is fragile, however elegant the design.
Early warning sign to watch for
Growth is driven by a subsidized yield, and the stability mechanism has never faced a large, fast exit.
Compiled from public reporting, court records, and company statements. Figures are approximate. Where legal proceedings are mentioned, convictions are described as convictions and charges as allegations. Corrections welcome at hello@productmanagement.space.