Twenty percent in Anchor
In 2021 a bank deposit paid less than one percent a year. Anchor, a savings program on the Terra blockchain, paid twenty. You put in the stablecoin UST, a digital dollar that was always worth one dollar, and a year later took out a fifth more. In spring 2022 Anchor held more than 10 billion dollars, and most of all the UST ever issued had been bought for that twenty percent (chapter “I Don’t Debate the Poor”). Anchor paid it out of reserves that its creator, Terraform Labs, topped up from time to time.
How UST held its dollar peg
Tether claims there is a dollar in reserve behind each of its tokens (chapter “The Dollar Nobody Has Seen”). UST did not pretend to that. Its price was held by the network’s second coin, LUNA, and an algorithm that at any moment let you burn one UST for a dollar’s worth of LUNA, and the other way round. If UST was worth a little under a dollar, it paid to buy it up and swap it for LUNA; if a little over, it paid to mint new ones. Mathematically it all added up as long as someone wanted to buy LUNA. People bought LUNA because UST was growing, and UST was growing because Anchor paid twenty percent (same chapter).
The mechanism first broke in May 2021, a year before the collapse. UST slipped below a dollar and came back a few days later, and Terraform said the algorithm had healed itself. According to the US Securities and Exchange Commission, the peg was restored by Tai Mo Shan, a subsidiary of Chicago’s Jump Trading, which quietly bought more than 20 million dollars of UST and in return got the chance to buy LUNA cheaply. In December 2024 Tai Mo Shan paid 123 million dollars without admitting or denying the charges (same chapter).
One week in May 2022
On 7 May 2022 several hundred million UST were pulled out of Anchor and sold within a few hours. The price slipped off the dollar, and the very mechanism the system was built on kicked in. Holders burned UST, received LUNA and sold it at once; LUNA got cheaper, and to buy back each next UST the algorithm had to print ever more LUNA. In a week the supply went from three hundred-odd million to 6.5 trillion, and the price fell from 80 dollars to fractions of a cent (same chapter). A bank run in old money takes days while people queue at the doors. Here the queue stood inside the program, and the program served it at the speed of a block.
The backstop fund, Luna Foundation Guard, had bought about 80,000 bitcoins in the spring, roughly 3 billion dollars’ worth, to defend the peg. Within days it sold nearly all of them into a falling market and dragged bitcoin down with it. You can see how the spiral winds up once enough people are running in the experiment “The LUNA spiral”.
Who went down with it, and how it ended
The money that vanished in Terra had been lent along a chain of funds and lenders. The hedge fund Three Arrows Capital had put about 200 million dollars into LUNA; in June it could not meet margin calls and went into liquidation, owing about 3.5 billion. The Voyager app had lent it 650 million dollars of its customers’ money and froze withdrawals in July. Celsius halted all withdrawals on 12 June, leaving 4.7 billion dollars of customer money locked in (same chapter). Everyone in the chain thought the money was with the next one.
Do Kwon, Terraform’s founder, was arrested in Montenegro in March 2023 with a forged Costa Rican passport. On the last day of 2024 he was flown to New York; in August 2025 he pleaded guilty, and on 11 December the judge called what happened an epic fraud and gave him fifteen years, more than the prosecution had asked for (same chapter). Back in April 2024 a jury in the SEC’s civil case had found Kwon and Terraform liable for fraud, and the company agreed to pay 4.47 billion dollars it no longer had.
