New Evidence Surfaces: Was Terra’s Downfall Engineered

The cryptocurrency market was recently reminded of the Terra (LUNA +0.56%) chaos when a real-world asset (RWA) project, Mantra’s OM token (OM -15.31%), plummeted 90% in value within hours without any catalyst.

In the case of Mantra, the market is accusing the project team of a rug pull scam, which its co-founder has addressed by saying, “We are here and not going anywhere.” He ascribed the crash to “reckless forced closures initiated by centralized exchanges.”

While these comments seem to have assuaged the community concerns, for now, as can be seen in the price bounce, even the 200% spike in OM price is eerily similar to what LUNA witnessed after its 99% crash in May 2022.

Post-crash, LUNA saw a brief recovery but couldn’t reclaim its key price levels, which then triggered a more intense and longer downtrend.

It’s been nearly three years since the UST depegged and Luna plunged, but the market has yet to forget the chaos and collapse that ensued in the days, months, and even years following that.

Interestingly, a new study has discovered something new about the Terra saga. But before we get into that, let’s go back and take a brief look at the history!

The Rise and Fall of Terra (LUNA)

While it only took a few days in May 2022 for the Terra network to crumble into nothing, the story of the project started several years before that. It actually began during the bear market prior to the recent one caused, in part, by Terra itself.

In Jan. 2018, Do Kwon co-founded the Terra network with plans to develop an e-commerce payments application Chai, and a stable cryptocurrency to facilitate transactions. During this year, Terraform Labs was incorporated in Singapore. The firm was responsible for the development of the Terra blockchain.

In 2018, the firm held an initial coin offering (ICO) for LUNA. It was sold for $0.80 per token and raised $62 million. 

Terra actually had multiple funding rounds, including a pre-seed round, a seed round, a private sale, and a venture round. As for its investors, that included Binance Labs, Jump Crypto, Galaxy, Hashed, Pantera Capital, Polychain Capital, Arrington XRP Capital, Coinbase Ventures, Huobi Ventures, OKX Ventures, Hashed, and others, according to ICO Drops.

In 2020, Nicholas Platt, the head of research at Terra, introduced Anchor, a decentralized platform built on Terra for investors to earn a high yield on their deposits and borrow against their crypto holdings. 

In Sept. 2020, the algorithmic stablecoin USDT (USDT -0.01%) was publicly announced. During the bull market that followed, LUNA’s price went on to hit a record, surpassing $90 in Dec. 2021.

Then came 2022, in its first two months, Do Kwon launched the Luna Foundation Guard (LFG) which was “mandated to build reserves” to support the $UST peg as well as allocate resources for the ecosystem’s development through grants. The organization raised $1 bln by selling LUNA tokens to Jump Crypto and Three Arrows Capital among others. 

The funding was to buy Bitcoin (BTC -0.2%) for UST’s reserve system and as the firm purchased BTC, LUNA’s price rallied and went above $106 in late March.

During this same month, crypto trader GiganticRebirth (GCR) bet $10 million that the price of LUNA will be below $88 by March of next year.

As LFG continued to buy BTC, LUNA kept on surging, hitting $119 in early April. Before the month ended, UST became the third-largest stablecoin, and LUNA’s circulating supply hit its lowest at 346 million as LUNA tokens were burned to keep up with the rising demand for UST. 

Then came May, and with that, early signs of panic started to emerge. As the market started to see capital moving out of UST, with people dumping their UST on Anchor and Curve, it lost the peg with value dropping to $0.985.

As deposits continued to decline, UST struggled to recover to $1. On May 9, the value of UST plunged to $0.35, and Do Kwon made his infamous tweet: “Deploying more capital – steady lads.” The attempts to save UST’s peg sent LFG’s BTC reserve from around 80,000 BTC to just 313 BTC.

At one point, the Terra blockchain was halted. Do Kwon shared a “Revival Plan” to issue 1 billion new tokens and later proposed to fork Terra without UST. At the end of May, Terra 2.0 was launched. 

In the aftermath, tens of billions were wiped out from the market. This included not just Terraform and Anchor but a crypto market-wide crash that resulted in bankruptcies at firms like Celsius and Voyager. This intensified global regulatory scrutiny of stablecoins as well as the broader crypto space.

Both Terraform Labs and co-founder Do Kwon were then wanted in South Korea and the US on allegations of fraud and financial crimes.

In Feb. 2023, the U.S. Securities and Exchange Commission (SEC) charged Terraform and Kwon with fraud. The agency alleged that between April 2018 and May 2022, they raised billions of dollars from investors “offering and selling an interconnected suite of crypto asset securities.”

According to the SEC Chairman Gary Gensler:

“We allege that Terraform and Do Kwon failed to provide the public with full, fair, and truthful disclosure as required for a host of crypto asset securities, most notably for LUNA and Terra USD. We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.”

Kwon was caught in March 2023 in Montenegro while trying to depart for Dubai using a forged passport but continued to claim his innocence. His extradition to the US was approved in Dec. 2024.

In Jan. 2024, Terraform Labs filed for Chapter 11 bankruptcy protection in order to try and preserve some value. CEO Chris Amani called it a “strategic” decision.

Academic Analysis Deconstructs the Collapse

Much has been written about the Terra-Luna collapse over the last few years. Several research projects have investigated this case to try to understand what happened and how.

A year after the project’s complete disintegration, a paper titled “Anatomy of a Run: The Terra Luna Crash” was posted on the Harvard Law School forum on corporate governance. It provided a detailed analysis, aiming to provide insights into the dynamics of runs in the absence of regulatory oversight and faults in the DeFi architecture.

“Our analysis suggests that it was not the result of targeted market manipulation by a single entity, but rather stemmed from growing concerns about the sustainability of the system,” stated the research, which used detailed data from the Terra blockchain and trading data from CEXs to show that the run on Terra happened across multiple chains and assets.

The study further stated that having free access to blockchain does not level the playing field for investors if there are substantial differences in their ability to process and interpret information.

The research highlighted Alameda Research’s role here, the sister firm of the now-bankrupt CEX FTX exchange whose CEO Sam Bankan-Fried is currently serving 25 years in prison sentence for fraud and related crimes.

Alameda, as per the study, conducted the largest amount of UST-LUNA swaps among Anchor depositors. While swap fees and uncertainty about the execution price discouraged other depositors from using the native swaps as an exit strategy, Alameda’s preferential access to the FTX gave it a competitive advantage over others.

Moreover, when it comes to complex systems like Terra-Luna, there is a limitation in transparency, as it doesn’t mean that retail investors actually understand what they are seeing. Also, by underplaying the risks, insiders likely contributed to the false belief about the system's safety. It stated:

“Ultimately, the sustainability of the DeFi ecosystem will depend on the ability of investors to make informed decisions and hold projects and their promoters accountable for their actions.”

A few months before this, researchers from the Department of Computer Science at University College London published the “Anatomy of a Stablecoin’s failure: The Terra-Luna case”¹ study.

This particular research used network science, which is for complex networks, and herding approaches to recognize dependency structures and reported Terra's “vicious” reliance on the DeFi application Anchor protocol.

As per the paper, algorithmic stablecoins are prone to failure due to two main reasons. First, these stablecoins, which use algorithms to maintain a stable price, are built on a very tenuous foundation that depends on uncertain historical variables. This means algorithmic stablecoins require the support of baseline demand, participation of willing arbitrageurs, and an environment of informational efficiency, and none of these factors are certain. In fact, they all have proven to be highly fragile during periods of extreme volatility. 

The other reason is that algorithmic stablecoins must have intrinsic worth to survive a crash. This means “genuine economic transactions,” which was not the case with Terra, whose stablecoin was primarily used to get high interest through Anchor. Fiat currencies, on the contrary, are able to survive similar kinds of attacks, as per the study, because they have intrinsic value, being a means of exchange or storing value.

A research paper from the Department of Industrial Engineering, Seoul National University, came a few months after that. The paper, Dissecting the Terra-LUNA crash: Evidence from the spillover effect and information flow, studied the crash using transfer entropy and spillover index.

For this, the researchers used the hourly prices from April 2022 to May 2022, Google Trends, and StockTwits to analyze the crash. They then confirmed that the Terra crash had a major effect on the market’s connectedness, investor attention, market sentiment, and the overall crypto space.

Mathematicians Now Uncover Hidden Patterns

Even now, after all this time, experts continue to investigate the project more deeply and uncover just what went wrong. Given that the collapse of Do Kwon’s beloved project sent the broad crypto market into a spiral, the need to understand the situation makes sense.

Mathematicians from Queen Mary University of London have actually found some hidden patterns in it. The investigation's findings were published² in the peer-reviewed scientific journal of the ACM on April 3rd, 2025.

As the paper noted, while existing research analyzes crash events in the crypto sector, fundamental questions remain about the optimal time scale for analysis, differentiation between short-term and long-term trends, and the identification and characterization of shock events within these decentralized systems.

To address these issues, the paper examines crypto assets traded on the Ethereum blockchain with a special focus on the crash of the algorithmic stablecoin TerraUSD (UST) and the sister token LUNA designed to stabilize it. 

The research made use of a multi-layer temporal graph for the assessment that allowed studying the correlations between the layers, which represented currencies and the evolution of the system across varying time scales. 

The tool provides a flexible and powerful framework for capturing the dynamic nature of relationships and patterns in complex systems by considering temporal evolution and multi-faceted perspectives.

According to the researchers, using temporal, cross-chain graph analysis to investigate the crypto collapse is a unique approach. Not only does it emphasize the importance of temporal analysis for studies on web-derived data, but the methodology also demonstrates just how a graph-based analysis can boost traditional econometric results. 

By using multi-layer temporal graph analysis, the study highlights strong interconnections between stablecoins before the crash and drastic transformations that took place after the crash. The researchers wrote:

“We identify anomalous signals before, during, and after the collapse, emphasising their impact on graph structure metrics and user movement across layers.” 

What the team actually uncovered in the case of the Terra-Luna collapse is proof of an extensive amount of suspicious trading activity that suggests a coordinated effort to undermine the ecosystem. 

Led by Dr. Richard Clegg, the study found a series of calculated trades executed as part of a coordinated attack by traders betting against the system. This practice is known as “shorting,” where a trader profits if the market value of an asset falls, as opposed to “longing,” where a trader bets that the asset price will increase.

“What we found was extraordinary. On the days leading up to the collapse, we observed highly unnatural trading patterns. Instead of the usual spread of transactions across hundreds of traders, we saw a handful of individuals controlling almost the entire market. These patterns are the smoking gun evidence of a deliberate attempt to destabilize the system.”

– Dr. Clegg

As per the researcher’s analysis, on key dates, as few as five or six traders were responsible for almost all of the trading activity. 

Each of these traders controls nearly the same market share, which makes the situation suspicious. In a normal trading environment, such a high level of coordination is virtually impossible; as such, it suggests that these traders may be working together to engineer the collapse.

For this, the team developed a new tool in collaboration with Pometry, a company spin-out from Queen Mary University and working to simplify graph analytics by eliminating data silos. This new tool to analyze crypto markets uses graph network analysis to first visualize the complex trading data and then interpret it.

The team believes the tool could be invaluable for researchers and investors seeking to understand and mitigate risks in the wild and volatile world of cryptocurrency. According to Dr. Clegg:

“Cryptocurrencies are often seen as the Wild West of finance, with little oversight and even less accountability. Our work shows that by applying rigorous mathematical techniques, we can uncover the hidden patterns and behaviors that drive these markets. This isn’t just about understanding what went wrong in the past — it’s about building a safer, more transparent financial system for the future.”

The researchers say the study's implications go far beyond the crypto field. The method could be applied to not just financial markets but also social networks and other complex systems. Even regulatory agencies can use it as part of their suite of analysis tools to safeguard users against systemic risks and protect the broader economy.

The Aftermath: Latest Progress in Terra-Luna Case

While studies continue to investigate, the legal proceedings around the Terra-Luna case are also making progress.

2025 started with Do Kwon pleading not guilty to U.S. criminal fraud charges. The South Korean crypto builder has been charged with securities fraud, commodities fraud, wire fraud, and money laundering conspiracy and is facing up to 130 years in prison if convicted.

This comes after Kwon agreed last June to pay a civil fine and be banned from crypto transactions as part of a $4.55 billion settlement that he and Terraform reached with the US SEC.

Just a few weeks ago, the New York Attorney General’s office also filed for a $200 million settlement it reached with Galaxy Digital and its related companies. A similar settlement was reached with a subsidiary of Jump Crypto late last year.

Galaxy was accused of promoting LUNA without disclosing its interest in the asset. The complaint pointed out Galaxy Digital CEO Michael Novogratz promising on X to get a tattoo if LUNA hit $100 and then tweeting “pictures of his tattoo and expressed his Luna bullishness to the public,” while the firm sold millions of tokens “at many multiples of its initial cost without disclosing that it was selling.”

Meanwhile, Terraform Labs recently announced the launch of a Crypto Loss Claims Portal that will enable investors impacted by the UST collapse to seek compensation. The portal is managed by Kroll Restructuring Administration LLC.

So, as we saw, the Terra-Luna story continues to unfold even now, three years after it first collapsed and took down the entire crypto market with it. Given its vast and deep impact, it serves as a pivotal case study in failed technology and reckless governance. At the same time, it is giving rise to new tools that can help expose the hidden mechanics of financial systems.

Overall, Terra-Luna reminds us just how important transparency, due diligence, and accountability are in the open, permissionless, and decentralized crypto space!

Studies Referenced:

1. ​Lee, S., Lee, J., & Lee, Y. (2023). Dissecting the Terra-LUNA crash: Evidence from the spillover effect and information flow. Finance Research Letters, 53, 103590. https://doi.org/10.1016/j.frl.2022.103590

2. Ba, C. T., Steer, B., Zignani, M., & Clegg, R. (2025). Investigating the Luna-Terra collapse through the temporal multilayer graph structure of the Ethereum stablecoin ecosystem. ACM Transactions on the Web, Accepted manuscript online April 3, 2025. https://doi.org/10.1145/3726869