One of the major catalysts of the “Crypto Winter” that began in 2022 was the collapse of Terraform Labs’s native token LUNA (Luna), and its “stablecoin” TerraUSD (UST) in May 2022. Nearly two years and a dozen crypto-related bankruptcies later, Terraform Labs Pte. Ltd. (Terra) has filed for Chapter 11 protection on Jan. 30, 2024, as cryptocurrency markets continue a historic bull run to new all-time highs. Does this mean the Crypto Winter” of 2022 is well behind us? Many certainly hope so.

Prior to its collapse, in early May 2022, Luna was trading above $80 per token and had a market capitalization of approximately $14 billion. Luna was the backbone of UST, which was designed as an algorithmic “stablecoin” that was intended to be pegged one-to-one with the U.S. dollar. However, on or about May 6, 2022, UST experienced a significant “de-pegging” event (i.e., it decreased in value relative to the U.S. dollar to which it was pegged). UST’s de-pegging was brought on by “sudden and heavy selling of UST by a small number of market participants [that] caused UST to de-peg from the U.S. dollar and its price to decline steeply.” These market participants sold off approximately $2 billion of UST in a matter of minutes, which caused UST’s price to drop down to $0.91. At the same time, within the span of approximately one week Luna’s price fell from eight-two dollars and 55 cents ($82.55) to one hundred-thousandth of a cent ($0.000001) per token, eliminating somewhere between $18 billion—$50 billion of Luna’s and UST’s market capitalization. UST became the antithesis of a “stable” coin with its value plummeting to one ($0.01) cent by the beginning of June 2022. The collapse of Terra’s token set off panic across cryptocurrency markets creating a “run on the bank” resulting in over $450 billion in cryptocurrency asset value being destroyed between May and June. As panic ensued and customers sought to withdraw their cryptocurrency holdings across various exchanges, several cryptocurrency companies experienced severe liquidity crises – a domino effect that spread throughout the cryptocurrency industry.