Anatomy of a Run: The Terra Luna Crash

61 Pages Posted: 24 Apr 2023 Last revised: 16 Jun 2023

See all articles by Jiageng Liu

Jiageng Liu

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Igor Makarov

London School of Economics & Political Science

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

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Date Written: April 11, 2023

Abstract

Terra, the third largest cryptocurrency ecosystem after Bitcoin and Ethereum, collapsed in three days in May 2022 and wiped out $50 billion in valuation. At the center of the collapse was a run on a blockchain-based borrowing and lending protocol (Anchor) that promised high yields to its stablecoin (UST) depositors. Using detailed data from the Terra blockchain and trading data from exchanges, we show that the run on Terra was a complex phenomenon that happened across multiple chains and assets. It was unlikely due to concentrated market manipulation by a third party but instead was precipitated by growing concerns about the sustainability of the system. Once a few large holders of UST adjusted their positions on May 7th, 2022, other large traders followed. Blockchain technology allowed investors to monitor each other's actions and amplified the speed of the run. Wealthier and more sophisticated investors were the first to run and experienced much smaller losses. Poorer and less sophisticated investors ran later and had larger losses. The complexity of the system made it difficult even for insiders to understand the buildup of risk. Finally, we draw broader lessons about financial fragility in an environment where a regulatory safety net does not exist, pseudonymous transactions are publicly observable, and market participants are incentivized to monitor the financial health of the system.

Keywords: Cryptocurrencies, DeFi, Blockchain

JEL Classification: G23, G01, E5

Suggested Citation

Liu, Jiageng and Makarov, Igor and Schoar, Antoinette, Anatomy of a Run: The Terra Luna Crash (April 11, 2023). MIT Sloan Research Paper No. 6847-23, Available at SSRN: https://ssrn.com/abstract=4416677 or http://dx.doi.org/10.2139/ssrn.4416677

Jiageng Liu

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Igor Makarov

London School of Economics & Political Science ( email )

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Antoinette Schoar (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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