Terra

Terra is a proof-of-stake blockchain built with the Cosmos SDK and Tendermint consensus, launched in 2019 by Terraform Labs, a Singapore company co-founded by Do Kwon and Daniel Shin. Its staking and governance token was LUNA, and it issued algorithmic stablecoins, chief among them TerraUSD (UST), which were meant to hold their peg through a mint-and-burn swap with LUNA rather than through reserves of cash.¹² In May 2022 UST lost its dollar peg and both tokens fell close to zero, wiping out at least US$40 billion of market value according to the SEC.³ The original chain continues as Terra Classic (LUNC), and a new chain without UST was launched under the Terra and LUNA names.⁴⁵ Kwon later pleaded guilty to fraud in the United States and was sentenced to 15 years in prison.⁶

HistoryReport an error

Founding and Chai

Daniel Shin, who founded the South Korean e-commerce company Ticket Monster (TMON) in 2010, co-founded Terraform Labs with Do Kwon in 2018.⁷ In August 2018 the project announced US$32 million in funding from investors including Binance Labs and Polychain Capital, presenting Terra as a payments currency for Asian e-commerce partners.⁸

According to the SEC, Kwon and Shin launched Chai, a Korean mobile payment service, in or around June 2019. Chai and Terraform shared offices and staff until early 2020, though Kwon stayed on Chai's board until about May 2022.³ Chai integrated Terra's won-pegged stablecoin in 2019 and says it had no relationship with Terraform Labs after early 2020. According to DL News, Shin left Terra in late 2019.⁷ The SEC alleged that Terraform and Kwon falsely claimed Chai payments were settled on the Terra blockchain, when Chai transactions were instead copied onto the chain to make them appear to run there.³

Launch and growth

Kwon and others published the white paper "Terra Money: Stability and Adoption" in April 2019, and the blockchain launched on or about 24 April 2019 with one billion LUNA tokens.³ Besides UST, Terra issued stablecoins tracking other currencies, such as TerraKRW (KRT).⁹¹⁰

Terraform launched the Anchor Protocol in March 2021 and advertised returns of 19–20% on UST deposits.³ Liu, Makarov and Schoar found that Anchor was not self-sustaining: its yield reserve was topped up by Terraform Labs (US$71 million in July 2021) and by the Luna Foundation Guard (US$510 million in February 2022). Of about 18.5 billion UST outstanding before the crash, about 12 billion sat in Anchor.¹⁰

On 23 May 2021 UST fell to nearly US$0.90 before recovering, and Terraform said the algorithm had restored the peg.³ The SEC later found that Tai Mo Shan, a subsidiary of Jump Trading, had bought more than US$20 million of UST under an agreement in which Terraform vested Tai Mo Shan's existing option to buy LUNA at a discount, and that this trading negligently misled the market about the mechanism. Tai Mo Shan settled in December 2024 for about US$123 million without admitting or denying the findings.¹¹¹² Kwon later admitted in his US plea that he made false statements about why the peg recovered.⁶

Columbus-5

The Columbus-5 upgrade took effect on 30 September 2021. It moved Terra to Cosmos SDK v0.43 and added IBC support. From then on, all seigniorage from minting stablecoins was burned, instead of most going to a community pool.¹³¹⁰

Mirror Protocol subpoena

Terraform launched Mirror Protocol in 2020. It let users trade "mAssets" that tracked the prices of US stocks.¹⁴ On 20 September 2021 SEC staff served Kwon with a subpoena at Messari's Mainnet conference in New York, and in October Terraform and Kwon sued the SEC, arguing the subpoenas were improperly issued and served.¹⁵ The SEC asked a federal court in Manhattan to enforce them on 12 November 2021.¹⁴ On 8 June 2022 the Second Circuit upheld the subpoenas.¹⁶

Luna Foundation Guard

In January 2022 Kwon announced the Luna Foundation Guard (LFG), a non-profit meant to build reserves backing the UST peg.¹⁰ The SEC said LFG had no employees, was controlled by Kwon, and was funded with a gift of 50 million LUNA from Terraform.³ LFG raised US$1 billion by selling LUNA, with Jump Trading and Three Arrows Capital as lead investors, and held its reserves mostly in bitcoin.¹⁰ By 7 May 2022 it held 80,394 BTC, which Fortune reported made it the second-largest known bitcoin holder after MicroStrategy.¹⁷

Stablecoin mechanismReport an error

Terra's stablecoins had no cash backing. The protocol's market module let users swap US$1 worth of LUNA for 1 UST, and 1 UST for US$1 worth of LUNA, using oracle prices. If UST traded above US$1, arbitrageurs could burn LUNA to mint UST and sell it; below US$1, they could buy UST cheaply and burn it for US$1 of new LUNA. Either trade pushed the price towards the peg.¹¹⁰ LUNA holders also staked it with the top 130 validators, who produced blocks under Tendermint consensus.¹

Liu, Makarov and Schoar compare UST to convertible debt of unlimited maturity backed by LUNA. Redeeming UST inflates LUNA's supply. If holders expect that dilution to push LUNA down, they have a reason to sell first, which can produce a "death spiral" in which both tokens fall together.¹⁰

CollapseReport an error

The run

Liu, Makarov and Schoar date the start of the run to 7 May 2022. That day Terraform Labs removed 150 million UST from the UST-3Crv pool on Curve, a planned move to a new pool. Soon after, a large wallet withdrew 85 million UST from Anchor and sold it on Curve in one trade, other large sales followed, and UST's discount on Curve widened to 2.5%. The authors argue that the pool change was not harmful in itself but could have served as a coordinating event when confidence was already weak.¹⁰ The SEC described the trigger as large UST sales by one or more sophisticated trading firms.³

Terraform and LFG tried to defend the peg. According to a post-collapse audit cited by Liu, Makarov and Schoar, they spent about US$2.5 billion, including 80,071 BTC, buying UST and LUNA. Late on 9 May UST fell to about US$0.75, and by the end of 13 May less than 2 billion UST remained in Anchor.¹⁰ On 16 May LFG said it had 313 BTC left.¹⁷ As UST was redeemed, LUNA's supply rose above 25 billion tokens.¹⁸ By 12 May LUNA had lost more than 99% of its value and UST traded around US$0.37.¹⁹

Chain halts

On 12 May 2022 validators halted the chain at block 7,603,700. Terraform Labs said this was to prevent governance attacks after severe LUNA inflation. Block production resumed later that day.¹⁹¹⁸ Late on 12 May US time (13 May UTC) Terra halted again, at block 7,607,789, so validators could plan to rebuild the network.¹⁸

Terra 2.0 and Terra Classic

On 25 May 2022 holders passed governance proposal 1623, creating a new chain. Its mainnet, phoenix-1, launched at 06:00 UTC on 28 May 2022²⁰⁵ without an algorithmic stablecoin, and new LUNA was airdropped to holders of the old chain's tokens based on snapshots taken before and after the depeg.⁴⁵ (Terra's documentation gives 27 May.)⁴ The original chain was renamed Terra Classic, with its tokens trading as LUNC and USTC, while the new chain took the LUNA name.^5212223

Contagion

Liu, Makarov and Schoar say the crash set off failures at other firms, including Celsius and Three Arrows Capital, and contributed to the later fall of FTX.¹⁰ Celsius had rushed to withdraw its funds from Anchor during the collapse. It paused withdrawals in mid-June 2022 and filed for Chapter 11 on 13 July 2022.²⁴

Three Arrows Capital had bet on LUNA, and its co-founder Su Zhu later said the firm failed to see that LUNA could fall to almost zero within days.²⁵ On 27 June 2022 the broker Voyager Digital issued a default notice to Three Arrows over a loan of 15,250 BTC and 350 million USDC.²⁶ Voyager filed for Chapter 11 in early July 2022, and Three Arrows entered liquidation in the British Virgin Islands.²⁴

Academic analyses

Liu, Makarov and Schoar (NBER working paper, 2023; later published in the Journal of Financial Economics) argue that the run was probably not caused by concentrated manipulation by a third party but by growing doubts about whether the system could last. Wealthier and more sophisticated investors ran first and lost less; poorer and less sophisticated investors ran later and lost more. Blockchain transparency let investors watch each other, which sped up the run.¹⁰

Briola, Vidal-Tomás, Wang and Aste traced the trigger events in hourly and transaction data, argued that Terra's heavy reliance on Anchor made it fragile, and found no evidence of herding across 61 large cryptocurrencies during the crash.²⁷

Legal proceedingsReport an error

South Korea

Prosecutors in Seoul obtained an arrest warrant for Kwon in September 2022,²⁸ and South Korea asked Interpol to issue a red notice for him that month.²⁹ On 25 April 2023 prosecutors indicted Shin and nine others on charges including violations of the Capital Markets Act, alleging that they made 463 billion won in profit and that Terra was a "fictitious" project.³⁰ Prosecutors also alleged that Shin sold pre-issued LUNA without proper disclosure and that Chai misused customer data.⁷ The defendants deny the charges. Shin's lawyers say he split from Kwon in 2020 and blame Kwon's later management for the collapse.³⁰³¹ In December 2025 the first-instance trial had been running for nearly three years without a verdict.³¹

Korean prosecutors estimate that about 200,000 local victims lost about 300 billion won. They want to try Kwon in South Korea, and one said a conviction there could bring a sentence of more than 30 years.²⁸³²

Arrest in Montenegro and extradition

On 23 March 2023 Kwon and Han Chang-joon, Terraform's former chief financial officer, were arrested at Podgorica airport in Montenegro while trying to fly to Dubai on forged Costa Rican passports.³³³⁴³⁵ The same day, US prosecutors in Manhattan charged Kwon with securities fraud, wire fraud, commodities fraud and conspiracy.³⁴ On 19 June 2023 a Podgorica court sentenced both men to four months in prison for the forgery.³⁵³⁶

The United States and South Korea both sought Kwon's extradition. Montenegrin courts ruled for the US in February 2024, switched to South Korea in March 2024, and then went through further appeals. In late December 2024 Justice Minister Bojan Božović ordered extradition to the US, and Kwon was handed to FBI agents on 31 December 2024.³⁷

SEC civil case

The SEC sued Terraform and Kwon on 16 February 2023, alleging that they sold crypto asset securities in unregistered transactions, marketed UST as a "yield-bearing" stablecoin paying up to 20% through Anchor, and misled investors about a Korean payment app's use of the chain.² On 28 December 2023 the court found them liable for unregistered offers and sales, and on 5 April 2024 a jury found them liable for fraud.³⁸

In June 2024 they settled for about US$4.5 billion, and Judge Jed Rakoff approved the settlement.³⁹ Terraform agreed to pay about US$3.59 billion in disgorgement, US$467 million in interest and a US$420 million penalty, and to wind down. Kwon agreed to pay US$110 million in disgorgement plus interest, jointly with Terraform, and a US$80 million penalty.³⁸

Terraform Labs bankruptcy

Terraform Labs filed for Chapter 11 in Delaware on 21 January 2024.⁴⁰ On 19 September 2024 the court approved its wind-down. Terraform estimated it would pay stakeholders between US$184.5 million and US$442.2 million, and the SEC agreed to recover only after harmed investors and other unsecured creditors were paid in full.⁴¹

In December 2025 the estate's plan administrator, Todd Snyder, sued Jump Trading, its co-founder William DiSomma and former president Kanav Kariya for US$4 billion, alleging that Jump profited from and accelerated the collapse. Jump called the suit a "desperate attempt" to shift blame from Terraform and Kwon.⁴²⁴³ In February 2026 Snyder sued Jane Street and three individuals, alleging insider trading linked to Terraform's Curve pool withdrawal on 7 May 2022.⁴⁴⁴⁵ In April 2026 Jane Street moved to dismiss, calling the case an attempt to make it "foot the bill" for Terraform's own fraud.⁴⁶⁴⁵ No ruling on either suit had been reported as of April 2026.

US criminal case

In January 2025 a superseding indictment charged Kwon with nine counts, including securities, wire and commodities fraud and money laundering conspiracy.⁶ On 12 August 2025 he pleaded guilty to one count of conspiracy to commit commodities fraud, securities fraud and wire fraud, and one count of wire fraud. He agreed to forfeit more than US$19 million, and prosecutors agreed not to seek more than 12 years. His lawyer said Kwon "takes responsibility for misleading the Terra community".⁴⁷

On 11 December 2025 Judge Paul Engelmayer sentenced Kwon to 15 years, more than prosecutors had sought. The defence had asked for five years, arguing that third-party firms were partly to blame for the crash.⁴⁸⁶ Under the plea agreement, US prosecutors will not oppose a transfer to South Korea once Kwon has served half his sentence.⁶ Korean prosecutors said in December 2025 that they intend to try him there if he is returned.²⁸

TimelineReport an error

See alsoReport an error

• Tether and USDC, fiat-backed stablecoins
• FTX, whose fall followed the 2022 contagion
• Bitcoin, the main reserve asset of the Luna Foundation Guard

ReferencesReport an error