On 12 May 2022 Terra’s algorithmic dollar, UST, was trading as a broken peg — prints well below a dollar, depending on the venue — and LUNA, the token that was supposed to absorb the stress, had been inflated toward worthlessness. Terraform Labs talked about burning UST in community pools and staking newly minted LUNA to fend off a governance attack. The Luna Foundation Guard’s bitcoin reserve, assembled to defend the peg, was largely gone. The chain would halt around this window to stop the printer. This page is dated to that Thursday, after a weekend of Curve pool stress (from 7 May) and a Monday (9 May) when the peg broke in public.
UST was not a bank deposit. It was a design: when UST traded below $1, arbitrageurs were meant to buy it and redeem it for $1 of newly minted LUNA, then sell the LUNA. That works while someone wants LUNA. When they do not, you get a death spiral: more LUNA, worse price, worse peg. Anchor’s high yield on UST deposits had been a large share of why anyone held the token. Yield is demand you rent.
What happened
Large UST sales into thin on-chain pools started the wobble. Outflows from Anchor continued it. Bitcoin sold from LFG did not restore a dollar. Other dollar tokens wobbled in sympathy on 12 May; that is correlation in a panic, not proof that every stablecoin is UST. Tether is a different design with a different issuer. Do not mash them.
Why it matters
If you held UST as “cash”, you held a mechanism. If you held LUNA as the equity of that mechanism, you held the shock absorber. Credit desks that had treated both as collateral are how this becomes June’s lender crisis. See stablecoins: useful, not magic. See how to read a crypto headline without getting played when someone says the next algorithmic dollar has “learned the lesson”.
What happens next
A forked chain, a new ticker, lawsuits, and a credit unwind. We will not forecast LUNA or UST. Nothing here is an instruction to buy, sell, or hold either, or to rotate into another dollar token.
