Terra's algorithm turned a stablecoin run into a token collapse

Inherited archive entry · retained from the earlier edition. Its factual, legal and policy claims have not all been reverified for 19 September 2026. Research scope.

What the complaint records about the collapse

On 16 February 2023, the SEC filed a complaint against Terraform Labs PTE Ltd. and its chief executive, Do Hyeong Kwon, alleging that 'from at least April 2018 through May 2022,' the defendants sold crypto asset securities in a scheme that 'led to the loss of at least $40 billion of market value.' Two of those assets were UST, an algorithmic 'stablecoin,' and LUNA, its sister token. The complaint states UST was designed to hold a one-to-one dollar peg 'by virtue of an algorithm coded into the blockchain tying its value to LUNA,' and that by April 2022 LUNA ranked among the world's ten largest crypto assets by market value while UST's alone exceeded $17 billion. Terraform's Anchor Protocol, the complaint adds, promised 'to pay 19-20% interest' on UST deposits.

A run, not an exploit

The distinction worth naming precisely is that nothing was hacked. The complaint alleges 'UST and LUNA had no reserve of assets or any other backing' behind the peg — the mechanism depended on continuous demand for the algorithm to keep working, not on assets held anywhere. It also alleges that when UST first slipped below $1.00 in May 2021, Terraform 'secretly discussed with a third party' an arrangement to buy enough UST to restore the peg, while Kwon and Terraform then publicly credited an 'automatically self-heal[ing]' algorithm without disclosing the intervention. A year later, the complaint states, UST depegged again 'without secret intervention to save it,' and 'the price of UST and LUNA plummeted to nearly zero.' A design depending on a second, unbacked token to absorb every shock does not fail because its code breaks; it fails once enough holders leave at once, with no reserve to slow the exit.

What the complaint does and does not establish

A complaint is one party's pleading, not a judgment, and its more specific allegations — including that Terraform misrepresented a Korean payment app as processing transactions on its blockchain — are recorded here as allegations, not fact. What the same document establishes independently of that dispute is the mechanism's structure: a peg defended only by an algorithm and a second token, with no asset reserve of any kind. Terra's current documentation, retrieved 16 September 2026, describes a rebuilt chain oriented around applications, staking and governance, without foregrounding the algorithmic-peg design that defined 2022 — evidence the mechanism was abandoned rather than repaired.

Questions to carry forward

• Does a stablecoin hold assets equal to its claimed peg, or a promise backed by the price of a second, unbacked token?
• What happens to that promise if the second token loses value at the same moment demand to exit rises?
• Was a past 'recovery' the result of the stated mechanism, or an undisclosed intervention the mechanism could not repeat?

The mechanism did what its design allowed: it converted a stablecoin run into new supply of a second token, and that spiral is the central fact the complaint builds on. Calling the result a hack would misdescribe it; calling it a design outcome is closer to what the complaint alleges.