UST Collapse: What Happened and Why It Still Matters

When UST collapse, the sudden de-pegging of TerraUSD from the US dollar in May 2022 that triggered one of the largest crypto crashes in history. Also known as TerraUSD failure, it wasn’t just a price drop—it was the implosion of a system built on math, not collateral. UST was supposed to stay worth exactly $1 by balancing supply with its sister token, LUNA. But when confidence slipped, the whole house of cards fell in hours.

This wasn’t some small experiment. At its peak, over $18 billion in UST was in circulation, used everywhere from DeFi lending to crypto exchanges. People trusted it because it was cheap, fast, and promised high yields. But behind the scenes, it relied on a fragile feedback loop: when UST dropped below $1, users were supposed to burn it and mint LUNA to profit. That worked—until too many people tried to exit at once. The system couldn’t handle the rush. LUNA’s value cratered, and UST sank to 10 cents. Algorithmic stablecoin, a type of digital currency that maintains its value through supply adjustments instead of holding reserves. Also known as seigniorage stablecoin, it’s a concept many still believe in—but the UST collapse proved how easily trust can vanish. The event exposed how DeFi’s interconnectedness turns small risks into total disasters. One broken peg triggered cascading liquidations across lending platforms, wiping out billions in collateral.

The fallout was brutal. Investors lost life savings. Exchanges froze withdrawals. Regulators took notice—suddenly, stablecoins weren’t just a niche tech experiment anymore. The DeFi failure, a systemic breakdown in decentralized finance caused by flawed incentives, lack of reserves, or over-reliance on untested mechanisms. Also known as crypto crash, it became the textbook case of what not to do. Even now, years later, the UST collapse still shapes how new projects are built. No one dares launch a stablecoin without real reserves. No one trusts a yield that seems too good to be true. And every time a new token claims to be "like UST but safer," people remember what happened.

What you’ll find below are deep dives into the aftermath: how the collapse exposed flaws in cross-chain bridges, how composability turned a single failure into a market-wide meltdown, and why even the most popular DeFi tools can’t protect you from systemic risk. These aren’t just stories about lost money—they’re lessons in how crypto really works when the pressure’s on.