The price of Terra's algorithmic stablecoin UST collapsed severely in May 2022, declining by over 95 percent in the span of a few days. This came as a surprise to many, given the promise the stablecoin held. Simply put, Terra claimed to have created a smart contract system that can keep the price of its (stable)coin more stable than that of other digital currencies. It would do so by using an algorithm that automatically sacrifices ("burns") LUNA tokens - the cryptocurrency of the same Terra blockchain - in order to create new UST coins. This is a big deal for Decentralized Finance or DeFi, as some of the most valued segments in DeFi rely on price stability in order to function. The concept of an algorithm that automatically adds or removes supply, irrespective of sentiment, is different from other popular stablecoins such as Tether (USDT), which are either backed by the fiat currencies like the U.S. dollar or external crypto assets. As of May 19, 2025, the price of UST is approximately 12.55.

In May 2022, over ***** billion Terra Classic – the 1.0 version of LUNA - tokens were issued and went into active circulation in a few days. The cryptocurrency’s built-in algorithm triggered this correction following the coin’s significant price drop that month. Terra’s algorithm would "burn" (permanently destroying) LUNA so that it created something else instead: TerraUSD (UST), a stablecoin within the same blockchain. This automated system was meant to keep the price of UST level, potentially avoiding economic sentiment. Because of this initial promise of stability, Terra and its two coins initially played a significant role in crypto lending. The poster child of algorithmic stablecoins Up until May 2022, TerraUSD (UST) was the biggest stablecoin that functioned with an algorithm. At the end of April 2022, the market cap of TerraUSD – now TerraClassicUSD – was *** times larger than what it was one month later, comparable in size to Binance USD. Algorithmic stablecoins are relatively new and, as most stablecoins, have an external asset as collateral. Several of the biggest stablecoins in the world, for example, are backed by real-world U.S. dollar assets, such as cash or securities. Others – such as DAI – rely on the backing of other cryptocurrencies, such as Ethereum (ETH). TerraUSD had little to no backing, relying on a closed ecosystem. Reset or revival: The LUNA (2.0) aftermath Terra got reset on May 28, 2022: A new *** coin released – taking over the Terra (LUNA) name - whilst the "original" crypto was abandoned and became Terra Classic (LUNC). TerraUSD (UST) remained but became TerraClassicUSD (USTC). Several of the *** LUNA holders, however, hoped for a different solution, rather seeing the (***) coin’s supply be bought back by the company who issued them. The company would then burn them, hopefully restoring the price of the original LUNA. Do Kown, the CEO of the Terra system, stated his company did not have the funds for such a big undertaking. He instead shared a blockchain address on Twitter where individuals could burn their tokens themselves. By June 2022, roughly **** LUNA tokens were destroyed that way – a burn rate of roughly ***** percent compared to the overall circulating supply.

The market cap of the top 10 stablecoin initially multiplied over time, reaching a combined value of over 221 billion USD in May 2025. Note this value does not include TerraUSD (UST), the algorithmic stablecoin tied to the LUNA crypto which declined severely in May 2022. Up to then, estimates reveal that the market cap had more than tripled within five months - likely following growing interest worldwide in cryptocurrencies, after sudden price spikes in a coin like Dogecoin (DOGE). Stability above all, or what does a stablecoin do? Stablecoins are cryptocurrencies - like the commonly known Bitcoin (BTC) and Ethereum (ETH) - but their value is determined differently. Whilst the price of Bitcoin mainly follows supply - how many coins are being mined or are available to purchase - and demand - how many investors want to buy the coin - stablecoins are synthetically connected to the price of an altogether different asset. Tether's USDT, for instance, is connected to the price development of the U.S. dollar (USD): if the U.S. dollar falls in the FX market, so does the USDT. Compare this to the "regular" price history of a cryptocurrency like Ripple (XRP) and stablecoins reveal themselves to be a relatively less volatile digital currency to either use or invest in than their counterparts in the free market. A test ground for digital payments This stability of these particular cryptocurrencies is important for two areas in digital payments that do not prefer volatility. For instance, these coins are a popular choice within the world of Decentralized Finance or DeFi - an online financial market without the supervision of central bank that relies on cryptocurrencies for payments and loans. Because of that reliance, it is a market that can rapidly change in size due to price fluctuations or changing transaction fees of certain cryptocurrencies - something that is less likely to occur when using stablecoins. Additionally, stablecoins are considered the inspiration for so-called CBDC or Central Bank Digital Currencies - such as China's e-CNY currency or the "digital euro" that is being researched in the EU-27. In terms of how advanced countries worldwide are into researching their own cryptocurrency, China ranked third in 2020, behind Cambodia, and The Bahamas.

Tether and USD Coin form the majority of the overall stablecoin market, whilst algorithmic stablecoins are but a fraction of their size. Estimates are that Tether (USDT) alone - the most well-known stablecoin pegged to the U.S. dollar - makes up nearly **** of the stablecoin market cap in June 2022. The top three of these digital assets are all connected to the performance of the U.S. dollar, with Dai (DAI) being pegged to a different cryptocurrency, its so-called governance token MKR or Maker. Algorithmic stablecoins - cryptocurrencies that do not use fiat currencies or other cryptocurrencies as their backing but instead rely on an algorithm to keep their price stable, similar to the design of TerraUSD (UST) and Terra (LUNA) - do not feature in the top five. FRAX combines elements of an algorithmic design but still contains a partial backing by collateral.

Luna's network activity on the Ethereum blockchain was highest in late January 2022, with a brief spike in early March 2022. The latter could possibly be attributed to the Russian invasion in Ukraine, as Luna was one of the cryptocurrencies during that moment which did not see a price decline. The digital coin ranked among the most traded virtual currencies on the market during this time. One reason for this interest is the currency's close relation to Decentralized Finance (DeFi) and the Anchor Protocol, specifically. This crypto lending platform - which is built off the Terra blockchain, which Luna uses as well - promised large returns when investors staked some of their coins there.

The share of stablecoins within the overall crypto market was below that of Ethereum (ETH) and Bitcoin (BTC). This would mark a significant rise of the digital asset, as earlier calculations from December 2021 indicated a stablecoin market share of ***** percent. What may play a part in these figures is that "regular" cryptocurrencies such as Ethereum saw a significant decline in price between May and June 2022 - leading to their market cap to decline as well. Fiat-backed stablecoins like Tether, USD Coin and Binance USD, on the other hand, were not as impacted. That said, the crash of algorithmic stablecoin TerraUSD and its token Terra (LUNA) led to much uncertainty on whether non-fiat backed stablecoins could work.

As of Q1 2025, roughly ***** percent of all Tether coins were backed up by cash, cash equivalents, short-term deposits, and commercial paper. This is common for centralized "off-chain collateralized stablecoins", a type of stablecoin that uses traditional reserve assets to stabilize their price. Typically, the issuers of the stablecoin are real-world companies and use fiat-currency bank deposits or short-term debt as collateral. Users can buy stablecoins from these issuers against the same fiat currency. Important to note here is that the backing is not found on the blockchain and essentially assumes that the issuer actually has the money somewhere in a (physical) vault. Therefore, the likes of Tether or USD Coin fall under the scrutiny of a real-world custodian. This "fiat-money" approach to stablecoins is a far cry from two other approaches that exist: On-chain collateralization - which means the coins are backed with other crypto assets like Ethereum (ETH) or decentralized crypto loans - and algorithmic stablecoins - stablecoins with little or no backing but that use an algorithm to automatically adjust the number of tokens in circulation based on demand, to keep their prices level. The most well-known example of an algorithmic stablecoin was TerraUSD (UST), which used its sister coin Terra or LUNA as support.

The market size of decentralized finance market size declined to less than ** billion U.S. dollars come April 2023. This is a significant change from 2021, when the size of the decentralized finance market reached heights it had not reached before. The DeFi market was especially impacted by the crash for Terra (LUNA) and its stablecoin TerraUSD (UST) in May 2022 - with uncertainty still being present in June 2022 when coins such USDD lost their peg to the U.S. dollar. Moreover, a declining crypto market also impact DeFi. As Ethereum is the main blockchain powering transactions for decentralized finance, price developments of this particular cryptocurrency can have a big impact.