The collapse of Terra (LUNA) and the stablecoin TerraUSD (UST) in May 2022 is one of the most significant and controversial events in cryptocurrency history, and the question of whether it was a fraud or not still generates heated debates. There is no definitive and unanimous answer, but I can offer you an analysis based on the information available until March 2025, without inventing or improvising.
The Terra ecosystem, created by Terraform Labs under the leadership of Do Kwon, promised an algorithmic stablecoin (UST) that would maintain its parity with the U.S. dollar through a balancing mechanism with the LUNA token. The idea was innovative: when the price of UST fell below $1, users could "burn" UST to mint LUNA, reducing the supply of UST and theoretically restoring its value. If UST rose above $1, the opposite occurred. This system relied heavily on investor trust and a delicate balance, without traditional backing such as fiat reserves or other assets.
The collapse began in May 2022 when a massive sell-off of UST, possibly triggered by large players or a coordinated attack, caused the stablecoin to lose its parity. This created a "death spiral": the more UST was burned to mint LUNA, the more LUNA was issued, diluting its value and leading to a sharp decline in both tokens. UST fell to cents, and LUNA, which had once been worth over $100, dropped to fractions of a cent, evaporating about $40 billion in market value.
Evidence of fraud?
Legal accusations:
The U.S. Securities and Exchange Commission (SEC) sued Do Kwon and Terraform Labs in February 2023, alleging fraud. They claim that Kwon misled investors about the stability of UST and omitted manual interventions (such as a UST purchase by a trading company in 2021 to restore parity) that masked flaws in the algorithm. In April 2024, a jury in New York found Kwon guilty of fraud in a civil case by the SEC, and the company accepted a $4.47 billion settlement in June 2024.
In the U.S., he is facing a criminal trial set for January 2026, with charges including securities fraud, wire fraud, and money laundering. Kwon has pleaded not guilty.
Exaggerated promises:
The Anchor protocol, the main use case for UST, offered yields of 20% per year, something unsustainable without constant capital inflows. Critics point to this as a disguised Ponzi scheme, as it relied on new investors to pay the old ones. Do Kwon defended that he believed in the model, but admitted in interviews (such as with Coinage in August 2022) that he underestimated vulnerabilities.
Theories of internal or external attack:
There are speculations that the collapse was a planned attack by large investors or even an "inside job." Kwon suggested in 2022 that an insider might have exploited vulnerabilities, but he took responsibility for these weaknesses. There is no concrete evidence of an orchestrated attack, but the transparency of the blockchain allowed mass sell-offs to amplify the panic.
Counterarguments:
Failure, not fraud: Kwon argued in an interview with the Wall Street Journal in June 2022 that "there is a difference between failing and operating a fraud." He claimed to have lost almost all his wealth in the collapse and insisted that he believed in the system despite its flaws.
Old predictions: Experts like Cyrus Younessi (Maker DAO) warned in 2018 that the algorithmic model was unsustainable, predicting a "death spiral" similar to that of the stablecoin Nubits. This suggests that the collapse may have been the result of flawed design, not necessarily intentional bad faith.
Lack of definitive evidence: So far, investigations have not presented irrefutable evidence that the project was conceived as a fraud from the beginning, unlike cases such as FTX, where direct manipulation was proven.
What is known today:
The collapse appears to have been a combination of a risky economic model, excessive confidence from the creators, and a liquidity crisis that the system could not withstand. The fraud allegations are based on claims that Kwon and Terraform Labs lied about the robustness of UST and omitted crucial information, which would be illegal under securities laws. However, the line between gross negligence and intentional fraud is thin and is still being judged.
In summary, there is no absolute consensus that the collapse was a deliberate fraud. For some, it was an ambitious experiment that failed catastrophically; for others, a deceptive scheme that benefited insiders until it collapsed. The 2026 trial may bring more clarity, but for now, the question remains open, depending on how you interpret the actions and intentions of Do Kwon and his team.