Terra Luna Crashes 98% in 24 Hours: What Happened to LUNA and UST?
The cryptocurrency world reeled this week as Terra Luna (LUNA) experienced a catastrophic collapse. But what exactly happened, and why did LUNA plummet 98% in just 24 hours? This article breaks down the events leading to the crisis.
The Terra Luna Crash: A Timeline of Events
The Terra blockchain, which features the UST (TerraUSD) stablecoin powered by the LUNA token, came to a halt for the second time in 24 hours amid the crisis. The Terra blockchain's stablecoin UST lost its peg this week, crashed, and brought the whole cryptocurrency market into a catastrophe long unseen. Billions were wiped from the market as a result.
The Initial De-Peg: The Terra (LUNA) collapse sparked when the price of UST (Terra USD) dropped from an all-time high of $1.09 to $0.985 after a series of large dumps of UST. This initial de-pegging from its intended $1 value triggered a cascade of events.
Large UST Sell-Offs: Leading up to the major crash, significant amounts of UST were being sold off. On May 7th 2025, the attacker swapped $85 million worth of UST into USDC on a decentralized exchange. The attacker (s) then continued to swap tens of millions of dollars worth of USDC. These large sell-offs put immense pressure on UST's peg.
Why Did UST Lose Its Peg?
UST is an algorithmic stablecoin, meaning it relies on algorithms and code to maintain its $1 peg, rather than being backed by reserves like traditional stablecoins. It's designed to maintain its value through an arbitrage mechanism involving LUNA. When UST's price falls below $1, users are incentivized to burn UST and receive $1 worth of LUNA, theoretically reducing the UST supply and pushing its price back up. Conversely, when UST's price rises above $1, users burn LUNA to mint more UST.
However, when panic selling set in and the market lost confidence in UST, this mechanism failed. The large-scale selling overwhelmed the system, and the amount of LUNA being minted to stabilize UST hyperinflated the LUNA supply, driving its price down dramatically. The rapid increase in LUNA supply caused the token to plummet.
Terra Blockchain Halts Operations
On May 16, the Terra blockchain halted its operations after an overnight 100% drop in the token’s price. How did this happen? For one, the broad crypto market has been experiencing volatility, and this undoubtedly contributed to the uncertainty surrounding UST and LUNA. However, the core issue was the flawed stabilization mechanism and the lack of sufficient backing to maintain the peg during extreme market conditions.
The Aftermath and What's Next
The collapse of LUNA and UST has raised serious questions about the stability and sustainability of algorithmic stablecoins. The broader implications for the cryptocurrency market are still unfolding, with increased regulatory scrutiny and a renewed focus on risk management likely to follow. Investors are urged to exercise extreme caution and conduct thorough research before investing in any cryptocurrency, especially those with complex or experimental mechanisms.