An algorithmic dollar, by design
Terraform Labs was co-founded in 2018 by Do Kwon and entrepreneur Daniel Shin, originally out of Seoul, with later operations tied to Singapore. It built the Terra blockchain and, by 2020, its flagship product: TerraUSD (UST), an algorithmic stablecoin meant to hold a one-dollar peg without holding a dollar of reserves. Instead, UST was kept near $1 by an arbitrage loop with a sister token, LUNA: a user could always burn $1 of LUNA to mint one UST, or burn one UST to mint $1 of LUNA. When UST traded below a dollar, arbitrageurs were incentivized to buy and redeem it, theoretically restoring the peg. The model promised a decentralized, capital-efficient dollar, and for a time markets believed it.
The 20% engine
Demand for UST was supercharged by Anchor Protocol, Terra's flagship savings product, which offered depositors a near-20% annual yield on UST, far above any traditional savings rate. The yield was not generated organically: deposits vastly outran borrowing, and the reserve subsidizing the rate had to be repeatedly topped up, including a $450 million UST injection by Terra in early 2022 as reserves neared depletion. Even Terra's own developers conceded such fixed yields were unsustainable. But the 20% rate did its job as a growth engine: it pulled billions into UST, whose market cap swelled past $18 billion, while LUNA's market value approached $40 billion at its April 2022 peak, making Terra one of the largest ecosystems in crypto.