The 2022 crypto collapse, explained: how a 'stable' coin lost its peg, and a major exchange lost customer funds.

A Stablecoin is a type of Cryptocurrency designed to hold a steady value, usually pegged one-to-one with the US dollar, which makes it useful as a stable place to park money within crypto markets without cashing out entirely. Most major stablecoins maintain their peg by holding actual dollar reserves, cash or similarly safe assets equal to the coins in circulation. TerraUSD took a different, algorithmic approach: instead of holding cash reserves, it maintained its $1 peg through a built-in trading relationship with a separate token called Luna, designed so that arbitrage incentives would automatically keep TerraUSD's price near $1.

That design worked as long as confidence in the system held, but it had no cash reserve as a backstop if confidence broke. In May 2022, large withdrawals from TerraUSD triggered exactly that kind of break: as the coin's price slipped below $1, the mechanism meant to restore the peg instead created a self-reinforcing collapse, sometimes described as a death spiral, dragging both TerraUSD and Luna down toward zero within days and wiping out roughly $40 billion in combined value. It was one of the largest single collapses in crypto history and badly shook confidence in the broader sector.

That shaken confidence set the stage for an even bigger event later that year. FTX had built a reputation as one of the most trusted crypto exchanges, but in November 2022 it emerged that customer funds deposited on the exchange had been used improperly by Alameda Research, a trading firm run by the same person, Sam Bankman-Fried, who founded FTX, leaving the exchange unable to cover customer withdrawals. FTX filed for Bankruptcy on November 11, 2022, and Bankman-Fried was later criminally convicted of fraud. Together, the Terra collapse and the FTX failure taught the crypto industry two distinct but related lessons: understand exactly what backs an asset that claims to be 'stable,' and understand exactly how, and by whom, an exchange actually holds the assets you deposit with it.

Key takeaways

• •TerraUSD tried to hold a $1 peg algorithmically, through a linked token called Luna, rather than by holding actual cash reserves.
• •That mechanism failed in May 2022, wiping out roughly $40 billion in combined value within days once confidence broke.
• •FTX, a major crypto exchange, collapsed in November 2022 after customer funds were found to have been improperly used by a related trading firm.
• •FTX filed for bankruptcy on November 11, 2022, and its founder was later convicted of fraud.
• •The two events highlight the difference between an asset's claimed backing and its actual backing, and the risk of an exchange controlling customer funds.