Anatomy of a run: the Terra Luna Crash

Jiageng Liu, Igor Makarov and Antoinette Schoar

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We examine the dramatic collapse of the Terra blockchain in May 2022. Using granular blockchain data, we show that the run resulted from the interaction of three economic forces: subsidized money creation, real-time observability of transactions, and investor concentration. The early success of Terra’s algorithmic stablecoin, UST, was fueled by highly subsidized deposit rates, which attracted many investors but failed to engage them meaningfully with other services. Blockchain transparency allowed investors to observe Terra’s worsening fundamentals and monitor each other’s exits in real time. Larger and sophisticated investors reacted faster to adverse signals and served as catalysts for the run. These findings challenge the idea that blockchain transparency levels the playing field and highlight how greater observability and concentration can amplify financial fragility. Our results contribute to the understanding of the limits of private money creation and the dynamics of runs in fully digital financial systems.

Keywords: cryptocurrencies; DeFi; financial fragility; financial runs (search for similar items in EconPapers)
JEL-codes: D82 D84 G23 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2026-10-31
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Published in Journal of Financial Economics, 31, October, 2026, 184. ISSN: 0304-405X

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