The pitch — name stripped
A dollar-pegged 'stablecoin' with no dollars behind it. The peg holds through an arbitrage loop with a sister token — to mint one dollar-coin you burn a dollar's worth of the volatile token, and to redeem you burn one dollar-coin to mint fresh sister token. Adoption is bought with a lending protocol that pays a fixed ~19.5% yield on deposits, a rate subsidized out of a reserve rather than earned from real borrowers. The whole thing is presented as decentralized money that scales without limit — as long as the sister token's market cap stays larger than the coins it is supposed to backstop.
Kasspian’s cold read on Terra / LUNA (Terraform Labs)
Fatal flawThat a $1 peg can be held by arbitrage against a volatile sister token — and that a fixed 19.5% yield paid out of a finite reserve is a growth engine rather than a countdown timer.
Terraform Labs was founded in January 2018 by Do Kwon and Daniel Shin. Its product was a pair of linked tokens — a dollar-pegged 'stablecoin' called TerraUSD (UST) and a volatile token called LUNA. There were no dollars in a vault. The peg was held by an arbitrage loop: a user could always burn one dollar of LUNA to mint one UST, or burn one UST to mint one dollar of LUNA. The money came in — a roughly $25M Series A co-led by Galaxy Digital in early 2021, then a $150M ecosystem fund in July 2021 backed by Pantera Capital, Arrington XRP Capital, Galaxy Digital and BlockTower. At the peak, LUNA was worth more than $40B and UST was the third-largest stablecoin on the market.
Adoption was bought, not earned. The Anchor Protocol, the flagship app in the ecosystem, paid depositors a fixed yield of around 19.5% on their UST. That rate was not generated by borrowers — it was subsidized out of a reserve. By April 2022 the subsidy was burning roughly $6M a day, and an estimated three-quarters of all UST sat parked in Anchor doing nothing but collecting the yield. On May 1, 2022, the community passed a proposal to begin tapering the rate, because the math had stopped working. The deposits were not customers. They were yield tourists standing on a trapdoor.
On May 7, 2022, two large holders pulled 375M UST out of Anchor and started selling. The peg cracked on May 9, with UST sliding to about $0.75. Then the mechanism meant to defend the peg became the weapon that destroyed it. Holders rushed to redeem UST for LUNA, which minted enormous new quantities of LUNA — supply exploded from around 345M tokens into the trillions, and the price fell from roughly $80 to a fraction of a cent. The Luna Foundation Guard spent its multi-billion-dollar Bitcoin reserve trying to hold the line and failed. Inside a week, roughly $45B of market value was gone and the chain was halted.
The legal reckoning followed. A US jury found Terraform Labs and Kwon liable for civil fraud in April 2024, and in June 2024 they agreed to a $4.47B settlement with the SEC. Kwon himself had fled — arrested in Montenegro in March 2023 carrying a forged passport, then extradited to the United States on December 31, 2024. On August 12, 2025, he pleaded guilty in the Southern District of New York to conspiracy and wire fraud and agreed to forfeit more than $19M. On December 10, 2025, Judge Paul Engelmayer sentenced him to 15 years in prison for a fraud that erased something on the order of $40B to $50B.
The lesson is older than crypto. A stablecoin with no collateral is not stable — it is a confidence game with a clock on it. The peg was never backed by dollars, it was backed by belief that LUNA would stay valuable, and LUNA was valuable mostly because UST existed. Two assets propping each other up is not a backstop, it is a mirror. The 19.5% yield did not buy a business — it bought time, and time ran out the moment the first big holder decided to leave.
Strip the name off and this is a pitch for a dollar with nothing behind it. The riskiest assumption — the one the whole structure stands on — is that the sister token will always be worth more than the stablecoins it is supposed to redeem. Kasspian would flag that on the first read. It is true in a rising market and false in a panic, and a peg only matters in a panic. You have built a fire exit that works every day except the day there is a fire.
The premise was broken in the math, not the execution. The mint-and-burn loop is reflexive — when UST falls, you print LUNA to absorb the selling, which crushes LUNA, which destroys the only thing backing UST, which makes UST fall further. That is a death spiral wired into the design, not a bug you patch later. And the 19.5% yield was the tell: a fixed return paid out of a reserve instead of earned from borrowers is not interest, it is a subsidy with an expiry date. A flawed premise doesn't get less flawed with more capital — the $150M and the billions in Bitcoin reserves just raised the body count.
The cheap test was one question on a whiteboard: what backs the dollar when nobody wants the sister token? Nobody could answer it, because there was no answer. Before you pay a billion dollars in yield to grow deposits, prove the peg survives a bank run — model the redemptions when 10% of holders head for the door at once, and watch the spiral fall out of the spreadsheet for free. Capital can buy reach, it can't buy a unit that makes money, and a yield paid out of reserves is the precise opposite of a unit that makes money. Prove the peg before you scale the deposits.
Why did Terra / LUNA (Terraform Labs) fail?
That a $1 peg can be held by arbitrage against a volatile sister token — and that a fixed 19.5% yield paid out of a finite reserve is a growth engine rather than a countdown timer.
What actually happened to Terra / LUNA (Terraform Labs)?
Terraform Labs was founded in January 2018 by Do Kwon and Daniel Shin. Its product was a pair of linked tokens — a dollar-pegged 'stablecoin' called TerraUSD (UST) and a volatile token called LUNA. There were no dollars in a vault. The peg was held by an arbitrage loop: a user could always burn one dollar of LUNA to mint one UST, or burn one UST to mint one dollar of LUNA. The money came in — a roughly $25M Series A co-led by Galaxy Digital in early 2021, then a $150M ecosystem fund in July 2021 backed by Pantera Capital, Arrington XRP Capital, Galaxy Digital and BlockTower. At the peak, LUNA was worth more than $40B and UST was the third-largest stablecoin on the market.
What can founders learn from Terra / LUNA (Terraform Labs)?
Strip the name off and this is a pitch for a dollar with nothing behind it. The riskiest assumption — the one the whole structure stands on — is that the sister token will always be worth more than the stablecoins it is supposed to redeem. Kasspian would flag that on the first read. It is true in a rising market and false in a panic, and a peg only matters in a panic. You have built a fire exit that works every day except the day there is a fire.
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