Luna's Crash Triggered Death Spiral: A Comprehensive Review of the UST De-Pegging Crisis

When Luna’s price broke below a key support level, no one anticipated what would happen in the next 3 hours. A seemingly “well-known” risk ultimately evolved into the most dramatic chain reaction in the crypto market.

Liquidity Trap: The Minefield Laid by Anchor

The root of the problem isn’t Luna itself, but the entire UST liquidity structure. As of May 5, the total assets locked in Anchor Protocol reached $18 billion, accounting for nearly all UST in circulation. What is hidden behind this number?

During market downturns, everyone rushes to the safety of stablecoins. The 20% APY offered by Anchor became the last straw—massive amounts of assets were converted into UST and deposited into Anchor. What seemed like prosperous growth actually concealed enormous hidden risks within the system.

Even more dangerous, some players engaged in Loop operations to amplify leverage, further draining Anchor’s risk buffer. The combination of high APY and high TVL creates a nightmare scenario for any stablecoin.

Crisis Ignition: The Sunday in May

May 8th, on-chain data monitoring accounts on Twitter started issuing frantic alerts. Whales began dumping UST en masse, with each transaction reaching millions of dollars. UST started to detach from its dollar peg, and liquidity in the UST-3Crv pool rapidly tilted. The LFG team quickly intervened to stabilize the situation, but this was just the beginning.

May 9th, the situation spiraled out of control. Funds began fleeing from Anchor on a large scale, and UST’s peg pressure surged. LFG had to launch a series of aggressive rescue measures:

• Lending out $750 million worth of BTC to OTC trading platforms to maintain UST peg
• Deploying a $1.5 billion BTC/UST liquidity pool (each side with $750 million) to absorb selling pressure
• Publicly pledging not to liquidate BTC holdings

May 10th, the situation seemed momentarily stable. But panic in the crypto market continued to spread, and the entire industry was bleeding.

The Death Spiral Begins

For Luna, the real disaster came from the on-chain liquidation mechanism. According to on-chain data, Luna would trigger large-scale liquidations at key price points of $42, $35, $33, and $29.

Early morning on May 10th, Luna fell below $42, initiating the first wave of liquidations. Half an hour later, Luna dropped below $35 again, triggering a second wave, and UST instantly broke through its previous low of $0.85. Currently, Luna’s price has fallen to around $29, with even larger-scale liquidations imminent, involving hundreds of millions of dollars.

This is the long-anticipated death spiral—Luna price declines → triggers liquidations → selling accelerates → price continues to fall, creating an irreversible cycle.

Devastating Impact on the Ecosystem

This time, the impact is more deadly than ever:

• Terra ecosystem TVL collapse: The entire ecosystem’s locked assets plummeted 40% within hours, reaching $13 billion. Major protocols’ TVLs were collectively “cut in half.”
• UST market cap evaporates: Nearly $4 billion disappeared within hours, dropping from about $18 billion to $14 billion.
• Anchor reserves in distress: Deposits are now only $7 billion, meaning $7 billion worth of UST is “homeless” in the market and could be sold off at any time.
• APY raised again: To absorb circulating UST, Anchor was forced to increase interest rates back above 20%.

Losing the Race Against Time

Will history repeat itself? Actually, this isn’t Luna’s first experience with a death spiral. On May 19, 2021, UST briefly fell to $0.85, but timely intervention by LFG allowed the ecosystem to continue. Afterwards, Do Kwon’s team introduced a new backing mechanism—using BTC and native tokens of other top chains to support UST.

This approach itself was not flawed, but the market didn’t give enough time for a smooth transition. Before the new mechanism was fully implemented, the crisis struck. This time, Luna truly lost the race against time.

Now everyone is waiting to see what decision LFG will make. Can UST regain market confidence? Can Luna recover from this blow? Everything remains uncertain.