What Happened to LUNA Coin? A Chronological Explanation

2025-05-19
What Happened to LUNA Coin? A Chronological Explanation

The rise and dramatic fall of the Terra network and its leader, Do Kwon, represent one of the most significant and devastating events in cryptocurrency history. Over four years, the ecosystem built around the LUNA coin and its algorithmic stablecoin, TerraUSD (UST), captivated the crypto world, only to collapse in a catastrophic $60 billion wipeout that sent shockwaves through the global digital currency market. This event triggered a severe liquidity crunch and left a lasting scar on the crypto community.

To understand this monumental crash, it's crucial to differentiate between the two central components: the TerraUSD (UST) stablecoin and the LUNA coin itself. Their intertwined mechanics ultimately led to their simultaneous demise.

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What Exactly Was LUNA Crypto?

What Happened to LUNA Coin? A Chronological Explanation

Before its collapse, the Terra network comprised several key elements. Terra Network is a blockchain network, similar in function to Ethereum or Bitcoin, established in 2018 by Do Kwon and Daniel Shin of Terraform Labs. This network served as the foundation for the LUNA token. TerraUSD (UST) is an algorithmic stablecoin created by Terraform Labs with the ambitious goal of maintaining a $1 peg without being backed by traditional fiat currencies. Instead, its value was algorithmically linked to its sister token, LUNA. LUNA is The native token of the Terra blockchain, fulfilling several critical roles:

  • Transaction Fees: Used to pay for transactions within the Terra network.

  • Stablecoin Peg Mechanism: Crucial in the algorithmic process designed to maintain UST's $1 value.

  • Staking: Employed in Terra's Delegated Proof of Stake (DPoS) system to validate network transactions.

  • Governance: Allowed holders to participate in platform governance by proposing and voting on network changes.

Also Read: Luna Coin Review: News, Price Analysis & 2025 Forecast

The Meteoric Rise of LUNA Value

The LUNA coin experienced a remarkable surge in value. From trading below $1 in early 2021, it soared to approximately $116 by April 2022, creating a wave of crypto millionaires and elevating Do Kwon to a cult-like status among some retail investors. Stories of ordinary individuals achieving significant wealth through LUNA investments became widespread.

This dramatic growth was largely fueled by the Anchor Protocol, a decentralized money market built on the Terra blockchain. Anchor offered an enticing 20% annual yield for UST holders who deposited their tokens. This high yield became the primary driver of demand for UST, with as much as 72% of all UST being deposited on the platform at one point. However, many analysts voiced concerns about the sustainability of this rate, with some even labeling it a Ponzi scheme due to the unclear source of these high returns.

The Crucial Role of Stablecoins and UST Unique Design

Stablecoins are cryptocurrencies designed to maintain a stable value, typically pegged to a fiat currency like the US dollar. Popular stablecoins like Tether (USDT) and USD Coin (USDC) achieve this by being backed by real-world assets. They act as a safe haven within the volatile crypto market, allowing investors to park their funds during periods of uncertainty.

UST, however, took a different approach. It was an algorithmic stablecoin, meaning its $1 peg was maintained through complex algorithms and its relationship with LUNA, rather than direct fiat backing. To create UST, LUNA tokens had to be "burned" (removed from circulation). For instance, when LUNA was trading at $85, one LUNA could be exchanged for 85 UST. This deflationary mechanism was intended to support LUNA's long-term growth.

The peg was theoretically maintained by allowing users to always exchange 1 UST for $1 worth of LUNA. If UST's price dipped below $1, traders could buy discounted UST and exchange it for LUNA at the $1 equivalent, creating arbitrage opportunities that should, in theory, push UST back to its peg.

Why Did the LUNA Ecosystem Collapse?

The catastrophic failure of the LUNA ecosystem unfolded rapidly:

May 7

Over $2 billion worth of UST was unstaked from the Anchor Protocol, and a significant portion was immediately sold off. The reasons for this initial sell-off remain debated, with theories ranging from a response to rising interest rates to a deliberate attack on the Terra blockchain. This massive sell pressure caused UST to lose its peg, dropping to $0.91.

The De-pegging Spiral

As UST fell below its $1 target, panic set in. Traders began exchanging their devalued UST for $1 worth of LUNA. This mechanism, designed to maintain the peg, backfired spectacularly. The mass exchange of UST for LUNA led to a massive increase in the circulating supply of LUNA.

Hyperinflation of LUNA

With an exponential influx of new LUNA tokens, the law of supply and demand took hold. The price of LUNA plummeted towards zero as its supply became virtually infinite.

Exchange Delistings

As the value of LUNA and UST spiraled out of control, major cryptocurrency exchanges began delisting trading pairs involving these tokens, further isolating them from the market.

LUNA Becomes Worthless

Within a short period, the LUNA coin, which had once traded at over $100, became virtually worthless, trading at a fraction of a penny.

Also Read: Stake Your LUNA | Earn LUNA Staking Rewards

The Aftermath of the LUNA Crash

The collapse of LUNA and UST had a profound and far-reaching impact on the broader cryptocurrency market, which was already experiencing a period of volatility. The estimated $300 billion loss in market capitalization triggered a domino effect:

Bankruptcies

Several prominent crypto lenders, including Voyager Digital and Celsius Network, filed for bankruptcy, citing the LUNA crash as a significant contributing factor.

Hedge Fund Liquidation

The hedge fund Three Arrows Capital (3AC) was forced into liquidation after suffering substantial losses related to its LUNA holdings.

Personal Financial Ruin

Countless individuals who had invested heavily in LUNA, many of whom were fervent supporters ("Lunatics"), reported devastating financial losses, including the loss of their life savings. Online forums became filled with heartbreaking stories of financial hardship.

Limited Winners

The few who profited from the crash were primarily those who exited their positions before the collapse. Notably, Pantera Capital reported a 100x return on their early investment by liquidating their LUNA holdings prior to the meltdown.

What Happened to Do Kwon, the LUNA Founder?

In the immediate aftermath, Do Kwon proposed a recovery plan for the Terra network, and there was a brief period of optimism. However, the new LUNA coin ultimately failed to regain significant value.

Subsequently, legal troubles mounted for Kwon. In September 2022, a South Korean court issued an arrest warrant for him and five other individuals associated with Terraform Labs, alleging violations of local market laws. South Korean authorities sought to revoke Kwon's passport and believed he was residing in Singapore. Investors who suffered losses also filed complaints accusing Kwon of fraud and illegal fundraising. It is estimated that around 280,000 people in South Korea had invested in LUNA.

Investing in the Cryptocurrency Space of LUNA

The LUNA debacle serves as a stark reminder of the inherent risks associated with investing in the cryptocurrency market, particularly with highly volatile assets and novel algorithmic mechanisms. Key takeaways for investors include:

Understand the Risks

Recognize that significant potential returns often come with significant potential losses.

Do Your Own Research (DYOR)

Never invest based solely on hype or endorsements. Thoroughly understand the technology, mechanics, and risks of any project.

Be Skeptical of Unsustainable Yields

If an investment promises returns that seem too good to be true (like Anchor's 20% APY), exercise extreme caution.

Diversify Your Portfolio

Avoid putting all your capital into a single asset, especially a volatile one. Consider spreading your investments across different asset classes and within the crypto space.

Consider Risk Management Tools

Explore strategies like portfolio protection mechanisms to mitigate potential losses.

Also Read: How Much is the Luna Coin Price Today? Current Chart

Conclusion

The collapse of the LUNA ecosystem was a catastrophic event that highlighted the fragility and interconnectedness of the cryptocurrency market. While some may view it as an isolated "black swan" event, it underscores the critical importance of understanding the underlying mechanisms and risks associated with digital currencies. For those who remain optimistic about the long-term potential of crypto, a prudent approach involves limiting exposure to highly volatile assets and prioritizing thorough research and risk management.

FAQ

What was the LUNA coin?

LUNA was the native cryptocurrency of the Terra blockchain network. It had multiple functions, including paying for transaction fees, maintaining the peg of the TerraUSD (UST) stablecoin, staking for network validation, and participating in governance.

What was TerraUSD (UST)?

TerraUSD (UST) was an algorithmic stablecoin on the Terra network. Unlike fiat-backed stablecoins, its $1 peg was intended to be maintained through algorithms and its relationship with the LUNA token.

Why did LUNA and UST crash?

The crash was triggered by UST losing its peg to the US dollar on May 7. This led to a mass exchange of UST for LUNA, causing hyperinflation of the LUNA supply and a rapid devaluation of both tokens.

Disclaimer: The content of this article does not constitute financial or investment advice.

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