TerraUSD (UST) was an algorithmic stablecoin that relied on its sister token LUNA to hold a $1 price. It lost that peg in May 2022. Holders redeemed UST for newly minted LUNA, which flooded the market with LUNA and crashed both tokens within days. The case is now largely settled. On 11 December 2025 a US federal court sentenced Terraform Labs co-founder Do Kwon to 15 years in prison for fraud connected to the collapse, and in South Korea he still faces a separate prosecution.
Latest: Do Kwon's sentence and what is still open
- 11 December 2025. Judge Paul A. Engelmayer of the US District Court for the Southern District of New York sentenced Kwon to 15 years in prison for wire fraud and conspiracy to commit securities fraud, commodities fraud and wire fraud. He was also ordered to forfeit more than $19 million, including his interest in Terraform and its cryptocurrencies (US Attorney's Office, SDNY). Prosecutors say the crash wiped out more than $40 billion in investor assets.
- 12 August 2025. Kwon pleaded guilty to two counts. In his plea he admitted making false statements about how UST's peg was restored after it slipped in May 2021, and admitted that he did not disclose a trading firm's role in that restoration (Reuters, via The Korea Times).
- 31 December 2024. Kwon was extradited to the United States from Montenegro (SDNY).
- South Korea. Seoul prosecutors obtained an arrest warrant for Kwon in September 2022. They say he could face a separate trial there, including charges under the Capital Markets Act (Decrypt, 15 December 2025). Under the plea deal, US prosecutors agreed not to oppose a request to transfer him under the International Prisoner Transfer Program once he has served half his sentence. We found no verified report of a transfer or a Korean trial date as of October 2026.
How UST was supposed to hold $1
Fiat-backed stablecoins are meant to be backed by cash and short-term assets. UST worked differently and was backed by no reserve of dollars. Its peg relied on a swap built into the Terra blockchain's "market" module. Users could always exchange one dollar's worth of LUNA for one UST, and one UST for one dollar's worth of LUNA. The coins offered in a swap were burned and the asked-for coins were minted (Terra Classic market module specification).
The design depended on arbitrage:
- UST above $1: traders burned LUNA to mint UST and sold it, which added UST supply and pushed the price down.
- UST below $1: traders bought cheap UST and burned it for $1 of newly minted LUNA, which reduced UST supply and pushed the price up.
The weak point was the second case. Restoring the peg meant minting LUNA, so redemptions could only hold up while the market would absorb the new LUNA at a stable price. Once LUNA's price fell, each UST redeemed needed more LUNA to be minted. That increased supply further and pushed the price lower still. The result was a self-reinforcing spiral.
Anchor's 20% yield
Most of the demand for UST came from the Anchor Protocol, which the SEC says was marketed as paying returns of up to 20% on UST deposits (SEC, 16 February 2023). A large share of all UST sat in a single protocol, so a rush of withdrawals from Anchor could quickly turn into heavy selling of UST.
From depeg to prison sentence
Step through the dated events from UST's May 2022 run to Do Kwon's December 2025 sentence, and see what is still unresolved.
- 7 May 2022The run on Anchor beginsdone
A few large UST holders moved their positions and other large traders followed. Anchor, marketed as paying up to 20% on UST deposits, was at the centre of the run, and on-chain visibility sped it up.
- 9 to 12 May 2022UST redemptions flood the market with LUNAdone
UST stayed below $1 and holders redeemed it for newly minted LUNA. By 12 May LUNA had lost more than 99% of its value and traded at about $0.0148, while UST was at about $0.37.
- 12 May 2022Validators halt the Terra blockchaindone
The chain stopped for about two hours, with no new blocks after height 7,603,700. Terra said the halt was meant to prevent governance attacks.
- 25 May 2022Proposal 1623 splits the chaindone
The original chain became Terra Classic with the LUNC token. A new chain kept the Terra name and LUNA ticker, had no UST, and airdropped new LUNA to holders of the old tokens.
- 16 February 2023The SEC sues Terraform and Kwondone
The SEC alleged they misled investors about UST's stability and falsely claimed a Korean mobile payment app settled transactions on the Terra blockchain.
- 21 January 2024Terraform files for Chapter 11done
Terraform filed in Delaware (Case No. 24-10070).
- 5 April 2024Jury finds Terraform and Kwon liabledone
A jury found both liable for securities fraud in the SEC case.
- 13 June 2024SEC settlement announceddone
The SEC's case page puts Terraform's total at $4,473,828,306, to be treated as satisfied through payments to harmed investors and creditors in the bankruptcy. Kwon was required to transfer at least $204,320,196 to the estate.
- 19 September 2024Wind-down plan approveddone
The court approved Terraform's wind-down plan. Terraform estimated it could pay roughly $184.5 million to $442.2 million to crypto purchasers and other stakeholders.
- 31 December 2024Kwon extradited to the USdone
Kwon was extradited to the United States from Montenegro.
- 12 August 2025Kwon pleads guilty to two countsdone
He admitted making false statements about how UST's peg was restored after it slipped in May 2021, and not disclosing a trading firm's role in that restoration.
- 11 December 2025Kwon sentenced to 15 yearsdone
Judge Paul A. Engelmayer sentenced Kwon to 15 years in prison and ordered him to forfeit more than $19 million. Prosecutors say the crash wiped out more than $40 billion in investor assets.
- Not yet datedSouth Korean prosecution and bankruptcy payoutsuncertain
Seoul prosecutors say Kwon could face a separate trial there, including Capital Markets Act charges. No verified report of a transfer, a Korean trial date, a final recovery rate or a payout date was found as of October 2026.
This lists only the dated events reported in the article; it does not estimate any individual's losses or recovery, and the South Korean case and bankruptcy payouts were still unresolved when written.
The collapse, day by day
- 7 May 2022. A few large UST holders moved their positions and other large traders followed. The run centred on Anchor. Investors could watch one another's moves on the public blockchain, which sped it up (Liu, Makarov and Schoar, NBER Working Paper 31160, April 2023).
- 9 to 12 May 2022. UST stayed below $1 and holders redeemed it for LUNA, which drove LUNA's supply up and its price down. By 12 May LUNA had lost more than 99% of its value and traded at about $0.0148, while UST was at about $0.37 (TechCrunch, citing CoinMarketCap).
- 12 May 2022. Validators halted the Terra blockchain for about two hours. No new blocks were produced after block height 7,603,700. Terra said the halt was meant to "prevent governance attacks" because the inflated LUNA supply had made such an attack much cheaper (TechCrunch).
- Late May 2022. Governance Proposal 1623 passed on 25 May. The original chain was renamed Terra Classic and its token became LUNC. A new chain kept the Terra name and the LUNA ticker but had no UST stablecoin, and the new LUNA was airdropped to holders of the old tokens (Decrypt).
The NBER study estimates the ecosystem lost about $50 billion in value in three days. It found little evidence that the crash came from a targeted attack by one outside party. Its conclusion is that growing doubts about whether the system could last set off the run. The authors also found that wealthier, more sophisticated investors exited first and lost less, while smaller investors exited later and lost more.
The legal aftermath
SEC fraud verdict and settlement
The SEC sued Terraform and Kwon on 16 February 2023. It alleged they misled investors about UST's stability and claimed falsely that a Korean mobile payment app settled transactions on the Terra blockchain. On 5 April 2024 a jury found both liable for securities fraud. Under the settlement announced on 13 June 2024, the amounts were:
- Terraform: $3,586,875,883 in disgorgement, $466,952,423 in prejudgment interest and a $420,000,000 civil penalty.
- Kwon: $110,000,000 in disgorgement and $14,320,196 in prejudgment interest, both joint and several with Terraform, plus an $80,000,000 civil penalty.
The SEC's case page puts Terraform's total at $4,473,828,306. The payments were to be treated as satisfied through payments to harmed investors and creditors in Terraform's bankruptcy. Kwon was required to transfer at least $204,320,196 to the bankruptcy estate.
Bankruptcy and investor claims
Terraform filed for Chapter 11 in Delaware on 21 January 2024 (Case No. 24-10070). The court approved its wind-down plan on 19 September 2024. Terraform estimated it could pay roughly $184.5 million to $442.2 million to crypto purchasers and other stakeholders, and called the total of eligible crypto losses "impossible to estimate" (Reuters). Investors who suffered losses can also contact the SDNY victim database about remission from forfeited assets (SDNY case page). Our checks did not turn up a final recovery rate or a payout date from an official source.
What the crash showed about algorithmic stablecoins
- The peg is only as strong as the backing token. Defending UST meant creating more LUNA. When confidence fell, the stabiliser itself became the source of selling.
- Yield attracts deposits that can leave quickly. Anchor's advertised returns concentrated UST in one place, and those deposits could leave all at once.
- On-chain transparency works in both directions. Anyone could see large holders leaving, and that visibility sped up the run.
- What was disclosed and what happened were different. Kwon admitted in court that the May 2021 peg recovery, which was credited to the protocol, involved an undisclosed trading firm.
Limitations: price figures come from contemporaneous reports citing market data, and the South Korean case and bankruptcy payouts were still unresolved when this was written.
