On May 9 2022, UST (the algorithmic stablecoin of the Terra ecosystem) lost its peg. It dropped to about $0.95. This was caused by massive sales of UST through a Curve Pool.
The following day, UST continued to lose value as the Luna Foundation Guard continued to deploy capital in a futile attempt to defend the peg. Shortly thereafter, everything seemed to come crashing down. On May 11, UST was trading at less than $0.30.
This, in turn, created a massive arbitrage opportunity due to the way the algorithm behind the stablecoin works. As long as UST trades below $1, users can burn it for $1 worth of LUNC – a means to keep the cryptocurrency below market prices in perpetuity until the peg is restored. This created an infinite loop of printing LUNC and diluting the existing supply to a point where a few days later, LUNC was essentially worth $0.
Billions have been swept from the market, while exchanges have largely dumped trading pairs linked to both cryptocurrencies. The Luna Foundation Guard had previously purchased up to $1.5 billion in BTC for its reserves, an amount that has now been completely emptied.
This dragged the entire market down. $500 billion was erased from total capitalization. It will go down in history as the DAO Hack Moment of the Terra Ecosystem.
