Terraform Labs

What did it do?

Terraform Labs developed the Terra blockchain and payments platform, built around algorithmic stablecoins. TerraUSD (UST), meant to hold its peg to the dollar, was kept in balance not by collateral but by a mint-and-burn mechanism with the LUNA token. Anchor Protocol, part of the ecosystem, paid 19.45 per cent interest to anyone who deposited UST.

Why did it shut down?

In May 2022 mass withdrawals from Anchor, broader worries about the crypto market and a fall in Bitcoin together broke UST's dollar peg. As users swapped UST for LUNA, the supply of LUNA exploded and its price fell to almost zero. Luna Foundation Guard's intervention with its Bitcoin reserves failed to restore the peg, and around USD 45 billion of market value was wiped out in a week. In February 2023 the SEC charged Terraform Labs and Kwon with fraud; the company filed for bankruptcy in the US in January 2024. Kwon pleaded guilty to two fraud charges in August 2025 and was sentenced to 15 years in prison in December 2025.

The story

On 9 May 2022, UST, which was always supposed to be worth one dollar, slipped below a dollar and never came back. Within a week UST had fallen to 10 cents, and its sister token LUNA had dropped from a peak of USD 119.51 to almost zero. Around USD 45 billion of market value was wiped out, and behind the collapse stood Terraform Labs.

The company was founded in Seoul in 2018 by Do Kwon and Daniel Shin; the company behind Terra was registered in Singapore. It raised more than USD 200 million from funds including Arrington Capital, Coinbase Ventures, Galaxy Digital and Lightspeed Venture Partners. Terra was built on stablecoins held in balance by an algorithm rather than by collateral: when UST lost value, users could swap it for LUNA, and that mechanism was supposed to keep the price at one dollar. The ecosystem's star, Anchor Protocol, paid 19.45 per cent interest on UST deposits, and some critics were already questioning whether that yield was sustainable in the spring of 2022. Even so, before the collapse UST had become the third-largest stablecoin by market value.

In January 2022 Luna Foundation Guard, of which Kwon was a director, began building up reserves to defend UST; by early May it held 80,394 Bitcoin worth around USD 2.4 billion. But once mass withdrawals from Anchor and the wider market slide began, that reserve was not enough. As more holders swapped UST for LUNA, LUNA's supply exploded, its price melted and the spiral accelerated. At the end of May the community voted to launch a new LUNA and abandon UST; the new token, dubbed Terra 2.0, also lost value in its first days.

Then the law stepped in. In February 2023 the SEC charged Terraform Labs and Kwon with fraud. In March 2023 Kwon was arrested in Montenegro while trying to travel on forged documents, and in New York he faced eight charges. Terraform Labs filed for bankruptcy in the US in January 2024. Kwon pleaded guilty to two fraud charges in August 2025 and was sentenced to 15 years in prison in December 2025.

Terra's story shows how quickly a mechanism that looks elegant on paper can fall apart in the face of human behaviour. What really held the peg up was trust; once trust went, there was no real reserve left to carry it.

Lessons for founders

• If high yield is your product's main draw, work out and publish which reserve will fund that yield, and for how long.
• Pegging a product's value to another asset you also issue can sink both together under stress; run the stress test before the crisis arrives.
• Even in a project governed by community votes, the founder's statements create legal liability; keep your promises in writing and measured.

Sources

1. Terra (blockchain) (Wikipedia)
2. Terraform Labs files for bankruptcy protection in the US (Reuters, 2024-01-21)
3. SEC charges Do Kwon, Terraform with fraud in connection with Terra collapse (CNBC, 2023-02-16)
4. Crypto mogul Do Kwon sentenced to 15 years in prison for $40 billion stablecoin fraud (CNN Business, 2025-12-11)
5. TerraUSD: 'Cryptocrash king' Do Kwon pleads guilty to fraud (BBC News, 2025-08-13)

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