The Fall of UST: Should Stablecoins be more regulated?

Nagaya Technologies
8 min readJun 11, 2022


It was deemed as the “Lehman Brother Incident” of the crypto space and brought a crash that wiped out more than $60 Million from the market in a couple of days. The fall of UST heavily impacted everybody in the crypto space as a stablecoin that was considered to be stable turned out to be otherwise. So what exactly happened with UST? Does this incident highlight the lack of regulation for stablecoins issued in the crypto space?

What happened to Terra Luna & UST?

The Crypto Space almost never failed to remind us that just because everything looks great at present time, it doesn’t mean it cannot come crashing down the next moment and this is exactly what happened to UST. Terra was at the peak of its growth with reserves and adoption increasing at a rapid pace reaching the top 5 in CMC rankings but it came to nothing in less than a week.

Terra Network was built by Daniel Shin and Do Kwon in 2018 under the registration of Terraform Labs, a South Korea based technology company and the duo are also the developers of the Anchor Protocol and Chai Corporation. Terra’s mainnet went live in April 2018 and managed to raise $47 Billion across its three ICO sessions, including many crypto VCs such as Jump Capital was amongst its early funders.

The idea behind Terra’s Network was to power a new generation of money or in simple terms to create a decentralized stablecoin. What is a stablecoin? A stablecoin uses real assets as collateral that is pegged to the number of tokens issued so the supply is held accountable and stability of value can be maintained. For example, Tether’s USDT, established in 2014 is pegged to the US Dollar which means for every USDT token issued there is an equivalent amount of US Dollars in its reserve.

This project has gained a massive amount of momentum and appreciation from the crypto space but it also receives its fair share of criticism from the traditional finance world. The crypto space was obviously built to be decentralized and creating a stablecoin that achieves this vision will finally establish the proper bridge between the traditional fiat money and the crypto space. This idea of an algorithmic stablecoin, although looks good on paper, never materialized in real life as we can see in the case of basis cash or iron finance which eventually all go to zero.


So how does UST actually work? Terra uses a segniorage system where there are two tokens which are involved in this process, Luna and UST. Luna is the native token of the Terra Ecosystem that is used for governance and to essentially maintain the peg of UST. The swap platform allows you to mint 1 UST by burning an equivalent amount of Luna and vice versa, this is done using algorithms to essentially keep the peg of UST at $1 and arbitrage traders.

If the price of UST falls below the $! peg, these arbitrage traders will then swap and burn their UST for an equivalent amount of Luna which they can then sell in the market for a profit. Same goes the other way around and it basically provides a win — win solution for the traders who basically can make profit regardless if the price of UST is falling or rising and also the developer who can maintain the peg of the stablecoin without the use of collaterals.

Terra’s UST, obviously with a working concept of a decentralized stablecoin seeks to diversify its utility beyond the Terra ecosystem as it seeks to partner up with other ecosystems like Avalanche and is listed on all top exchangers in the crypto space. This significant rise in demand along with the massive growth in the crypto space between 2020 and 2021 pushed the price of UST to above $1. This then incentivized traders to burn their Luna and mint more UST, as Luna’s supply decreased in the market, its price also skyrocketed. UST at its peak was the third largest stablecoin behind UST and USDC and ranked highest in Coin Market Cap with $18 Billion.

Evidently with all this utility build, Terra’s use case must be vastly diversified right? Not quite as at least 60% of UST in circulation was locked in the Anchor Protocol as people looked to take advantage of its 20% yield. A lot of question was asked as to how anchor protocol could provide that ridiculously high amount, as some reports say that it was distributed from the staking rewards of the whales which stake their crypto in Anchor but it is clear that these rates were not sustainable.

Anchor Protocol acts like a sponge that soaks the growing supply of Luna but just like UST’s segniorage system, these theories work well in a Bull Market. 2022 is clearly not in that case, as not only the pull-back effect of the Covid relief was felt by the market but also people are more risk averse due to the economic situation going on. As we know crypto is more a risk — on investment and 2022 has started in a bear market with most of crypto down 20% from its all time high in 2021.

UST had its third de — peg moment in January 2022 where it was caused by a platform called Abracadabra which takes advantage of Anchor Protocol massive yield using a degen box. This obviously serves as a lesson for the Luna Foundation Guard who began collecting BTC as the chosen reserve for UST. Luna Foundation Guard is a non — profit organization set up in Singapore with its sole purpose to maintain UST’s peg at $1 and on May 5th it achieved its target of backing up 20% of UST Reserves with BTC worth at $3 Billion, this will then be put to a non custodial wallet that can be redeemed for UST in circulation to take the selling pressure of Luna incase of a crash.

UST’s downfall began exactly 2 days after that on 7th of May 2022 where an unknown whale swapped 85 Million UST for USDC on Curve Finance while another 200 Million was sold in Binance. This was obviously enough to push UST slightly below its peg, this then triggered Celsius Network to also pull out its holdings from Anchor Protocol. This was then followed by other institutions which pulled out $9 Billion out of the $14 Billion locked in Anchor Protocol in less than 48 hours. This negative sentiment was enough to trigger selling pressure as more Luna were being minted to compensate for the offset of UST price, this also dragged down the price of Luna along with UST and as soon as Luna’s Market Cap fell below UST’s Market Cap, the death spiral followed. Luna had fallen from $98 to below $1 in less than 72 hours while UST bottomed out at 20 cents a piece.

Recovery attempts were made with the Terra blockchain being halted twice and the swap feature being disable in order to avoid massive swap occurring in the market, the Luna Foundation Guard also managed to sell close 80,000 BTC to protect its peg but although the price recovers for a moment, it was all too late.

So what does the future hold for Do Kwon and Terra? Terra announced its recovery plan to fork the blockchain with a new Terra 2.0 Network while also abandoning the UST project altogether. Do Kwon was administered to the supreme court while surprisingly Terraform Labs Corporation in Korea was dissolved just days before the crash, according to the court filings. Of course while Terra will continue to operate its new Terra 2.0, millions of people also lost their savings that day. So should stablecoin be more tightly regulated?

More Regulations on Stablecoin….

Stablecoin, whether its decentralized or centralized, serves its function in the crypto space as both a safe haven and currency but with its growing popularity it somehow leaves question as to why it is usually left unchecked sometimes. Yes the Market Cap of Stablecoins of $130 Billion still is far from its volatile counterparts but as we learn from the UST case, it can leave a massive blow to the crypto space when it crashes.

We need to learn from our fiat money as it already proved that when the supply of a currency increases exponentially, the purchasing power decreases because the amount of goods or services cannot keep up. This is also the case for UST, as increasing its supply exponentially at a rapid pace always bear repercussion in the future as long as there is no strong peg to back it up, in this the peg Luna also fails.


UST is not the only Stablecoins showing trouble as Tether or USDT have also faced the same doubts over the transparency of its reserves, it is also like UST heavily integrated in many different ecosystems and have serious issues if it doesn’t the equivalent reserves to back the supply. After all this, the SEC and many other countries are speeding up regulation concerning stablecoin to avoid the UST case from happening again.

Stablecoin as mentioned before forms the bridge between the fiat money and the crypto space even though it might be a great idea to create a decentralized stablecoin but its supply should always be controlled. There should be more regulation on the supply that a stablecoin should be allowed to issued and the transparency of its reserve because if that is not held accountable then what is the difference between our fiat money and a stablecoin then.

A developer cannot just inflate the supply of a stablecoin whenever they feel like it without some kind of working mechanism to keep it in control, of course in the case of UST it fails. Whether it is stablecoin or utility coin, it can operate in the decentralized world but to operate efficiently, it needs a proper regulation to which the developer can be held accountable to. Stablecoin is slowly gaining its importance in the crypto space because it is viewed as a stable option in a volatile market but when it fails to do so, then it is always going to be a problem.

We from Nagaya Technologies Pte. Ltd are really shocked by what happened to the crypto space and hope there is a lesson that could be learned by all of us from this incident. We understand in the development of Nagaya the importance of a collateral which is why we decided to back up each coin with gold to maintain the stability of its value while still allowing it to grow over the long run. This hybrid concept of cryptocurrency proves to be first of its kind in the space and we hope that it could deliver massive value to all of you. For more information regarding the latest updates on Nagaya and our whitepaper, you can visit us at nagaya,io

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