TerraUSD (UST) [CapiPedia]

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======TerraUSD (UST)======
TerraUSD (UST) was an [[algorithmic stablecoin]] that existed on the [[Terra]] [[blockchain]]. A "stablecoin" is a type of [[cryptocurrency]] designed to hold a stable value, usually by pegging itself to a real-world asset like the [[US Dollar]]. In theory, one UST was always supposed to be worth exactly $1. Unlike other stablecoins backed by actual cash or assets in a vault (like [[USDC]]), UST maintained its peg through a complex algorithm and its relationship with a sister token, [[LUNA]]. The project's spectacular collapse in May 2022 serves as one of the most dramatic cautionary tales in modern finance, wiping out over $40 billion in investor capital in a matter of days. For [[value investing]] purists, the story of UST is a textbook case of speculative mania, highlighting the critical difference between price and [[intrinsic value]].
===== How It Was Supposed to Work: The Algorithmic Balancing Act =====
Imagine a see-saw. On one end is UST, and on the other is LUNA. The algorithm's job was to keep the see-saw perfectly level, ensuring UST's price stayed at $1. It did this by creating an [[arbitrage]] opportunity for traders, incentivizing them to balance the see-saw themselves.
The mechanism worked like this:
  * **If UST's price fell below $1:** A trader could "burn" (destroy) one UST and, in exchange, "mint" (create) $1 worth of new LUNA tokens. By buying the cheap UST and selling the newly created LUNA for $1, the trader pockets a small, risk-free profit. This action increased demand for UST (pushing its price back up to $1) and increased the supply of LUNA (pushing its price down).
  * **If UST's price rose above $1:** The process worked in reverse. A trader could burn $1 worth of LUNA to mint one new UST token, which they could then sell for a profit. This action increased the supply of UST (pushing its price back down to $1) and reduced the supply of LUNA (pushing its price up).
This elegant, self-correcting system was the engine of the Terra ecosystem. Its stability depended entirely on two things: continuous demand for UST and unwavering faith in the value of LUNA.
===== The Allure: A 20% Yield on "Stable" Money =====
Why did anyone buy UST in the first place? The answer was a decentralized finance (DeFi) application built on the Terra blockchain called the [[Anchor Protocol]]. Anchor was essentially a savings and lending platform that offered an almost unbelievable return: an annual percentage yield (APY) of nearly 20% on UST deposits. This was the bait.
In a world of near-zero interest rates, a 20% yield on a supposedly "stable" asset was irresistible. Millions of investors, from crypto-natives to ordinary people seeking better returns, piled into UST purely to deposit it into Anchor. This practice of moving funds around to find the highest returns is known as [[yield farming]]. The immense demand created by Anchor made the UST/LUNA system seem incredibly robust, as LUNA's price soared, further bolstering confidence.
===== The Collapse: The 'Death Spiral' =====
In May 2022, the music stopped. A few large investors, perhaps sensing a weakness, began selling hundreds of millions of dollars' worth of UST on the open market and withdrawing it from the Anchor Protocol. This sudden, massive selling pressure pushed UST's price slightly below $1, causing it to [[de-peg]].
This triggered a panic, much like a classic [[bank run]].
  - **Panic Spreads:** Seeing the peg wobble, ordinary investors rushed to exit their positions in Anchor to sell their UST before it lost more value.
  - **Algorithm Overload:** The algorithm kicked into high gear. To bring UST's price back to $1, it began minting LUNA at an exponential rate. People were burning their failing UST to get $1 worth of LUNA, but as LUNA's supply exploded, its own price started to crash.
  - **The Death Spiral:** A vicious feedback loop ignited. The more LUNA was minted, the more its price fell. The more LUNA's price fell, the more new LUNA had to be minted to absorb the UST selling pressure. This hyper-inflationary spiral destroyed confidence completely. In a few days, LUNA's price fell from over $80 to a fraction of a cent, and UST, the "stablecoin," collapsed to nearly zero. The see-saw didn't just tip; it shattered.
===== A Value Investor's Post-Mortem =====
The TerraUSD saga is a goldmine of lessons for a prudent investor. It perfectly illustrates the dangers that value investors have warned about for decades.
  * **No Intrinsic Value:** UST was not backed by anything tangible. Its value was derived from an algorithm and faith in another speculative digital token (LUNA). It had no underlying assets, no cash flow, and no earnings. For a value investor, an asset without intrinsic value is a speculation, not an investment.
  * **Ignoring Your Circle of Competence:** The UST/LUNA mechanism was highly complex. Many who invested probably did not fully understand the risks of an algorithmic peg or the conditions under which it could fail. Investing in what you don't understand is a cardinal sin. It's crucial to stay within your [[circle of competence]].
  * **The Absence of a Margin of Safety:** The entire system was built on confidence and perpetual growth, with no room for error. There was no [[margin of safety]]. Once a few key assumptions were violated, the entire structure imploded. A value investor always demands a buffer against miscalculation or bad luck.
  * **"Too Good To Be True":** A 20% yield on a "safe" asset should have been the biggest red flag of all. Such extraordinary returns almost always carry extraordinary, and often hidden, risks. As the old saying goes, //"There's no such thing as a free lunch."//