What Was TerraUSD (UST)?

TerraUSD, commonly called UST, was a cryptocurrency stablecoin created by Terraform Labs, the blockchain company founded by Do Kwon and Daniel Shin. It officially launched in 2020 as part of the Terra blockchain ecosystem and quickly became one of the biggest stablecoins in the crypto market. At its peak in early 2022, TerraUSD had a market value of more than $18 billion, making it one of the top five stablecoins in the world.

To understand why TerraUSD attracted so much attention, it is important to first understand what stablecoins are.

Stablecoins were created to address cryptocurrency volatility by maintaining a stable value, usually pegged to the U.S. dollar. Ideally, 1 stablecoin should always equal $1.

However, TerraUSD was very different from traditional stablecoins like USDT or USDC.

Most major stablecoins are backed by actual reserves such as cash, bank deposits, U.S. Treasury bills, or other financial assets.

TerraUSD did not work like that.

Instead of using cash reserves, TerraUSD used an algorithmic stabilisation system connected to another cryptocurrency called LUNA. This made UST an “algorithmic stablecoin,” which means its price stability depended mainly on software rules, trading incentives, and market behaviour rather than real-world dollar reserves.

The Terra ecosystem was designed so users could always exchange 1 UST for $1 worth of LUNA, or $1 worth of LUNA for 1 UST.

This conversion system was supposed to help maintain UST’s $1 price peg automatically.

What made TerraUSD especially popular was that it promised stable digital dollars, fast blockchain transactions, low fees, decentralisation, and high passive income opportunities.

One major driver of UST adoption was the Anchor Protocol, a decentralised finance (DeFi) platform built on the Terra blockchain. Anchor became famous because it offered nearly 20% annual yields on UST deposits.

As a result, huge numbers of retail investors moved funds into UST.

At its height, billions of dollars worth of UST were locked inside decentralised finance applications.

Why was TerraUSD (UST) Depegged?

On Monday, 9th May 2022, TerraUSD (UST) fell from $1 to $0.2998 after it was depegged. UST is an algorithmic stablecoin supported by a system in which traders swap between UST and LUNA when the value of UST goes under or above the 1:1 ratio to preserve its stability and equality to dollar value. Each time $1 worth of LUNA is burned, $1 worth of UST is bought, and vice versa.

Burning in crypto trading refers to removing tokens from circulation to balance supply and demand. In the case of UST, burning lowers supply to keep the token valuable and stable. Unfortunately, a significant amount of capital was pulled from UST after arbitrageurs sold LUNA. As a result, UST fell sharply, affecting the entire crypto market.

Before it crashed on Monday, UST was one of the largest stablecoins, and it was never meant to deviate from its dollar-equivalent value. However, Do Kwon, the founder of Terraform Labs (TFL), the organisation backing UST and Luna Foundation Guard (LFG), has announced a strategy to pull the stablecoin back up.

In a tweet, he stated, "I understand the last 72 hours have been extremely tough on all of you — know that I am resolved to work with every one of you to weather this crisis, and we will build our way out of this, together." He also said, "Before anything else, the only path forward will be to absorb the stablecoin supply that wants to exit before $UST can start to repeg."

Luna Foundation Guard (LFG) is currently negotiating to raise over $1 billion from investors. The investors will buy LUNA tokens at a 50% discount with a two-year vesting schedule. But seeing as LUNA has crashed below the level it was positioned at, it is unclear whether investors will follow through with the deal.

At the time of writing this article, LUNA was trading at $0, and TerraUSD (UST) was trading at $0.1.

The Possible Future of Stablecoins

With TerraUSD's depeg, the unreliability of algorithmic-backed stablecoins has become more apparent. It has also highlighted the need to tighten up the structure of stablecoins.

Another thing to consider is the regulations being deliberated on by market powers such as the U.S. government. These regulations will affect not just Stablecoins but other cryptocurrencies as well.

Currently, the regulations are in the point of definition. That's to say, economists and financial regulatory bodies are still deciding which asset class to place stablecoins in. Will stablecoins be categorised as securities or currency? How are they going to be taxed? What measures will be implemented to address losses from events like the TerraUSD crash?

Stablecoins have the potential to become one of the strongest pillars not just of the cryptocurrency market but of finance in general. This is because they can be used (and are used) like fiat currency to conduct transactions. They have grown in popularity over the past years and, till now, shown little sign of slowing down.

Stablecoins are unlikely to fade from mainstream crypto trading. If anything, they can become more robust assets, provided the cryptocurrency ecosystem applies the innovation it is known for to restructure stablecoin as both a concept and a currency.

Stablecoin Predictions for 2026 and Beyond

The following is a re-analysis in 2026, following the advancements in crypto since 2022.

1. Stronger Global Regulation Will Become the Norm:

Stablecoins are no longer treated as experimental crypto assets. They are now widely used for payments, remittances, trading, and savings across different regions. Because of this, governments are tightening oversight.

Future stablecoin regulations are expected to focus on:

• fully verifiable reserves,
• regular independent audits,
• clear redemption guarantees,
• strict anti-money laundering (AML) and KYC rules,
• and stronger consumer protection frameworks.

2. Fiat-Backed Stablecoins Will Continue to Dominate:

After the TerraUSD crash exposed the risks of algorithmic models, trust shifted strongly toward fiat-backed stablecoins.

In 2026 and beyond, stablecoins like USDT, USDC, and similar assets are expected to remain dominant because they are backed by:

• cash reserves,
• short-term government securities,
• and other liquid financial instruments.

Algorithmic stablecoins may still exist, but they are likely to remain niche unless they can solve the trust and stability issues revealed by TerraUSD.

3. AI Will Become Central to Stablecoin Risk Monitoring:

One of the biggest shifts in the stablecoin ecosystem is the rise of AI-powered risk analysis.

AI systems are increasingly used to monitor:

• liquidity changes,
• reserve fluctuations,
• exchange inflows and outflows,
• whale wallet movements,
• and social sentiment trends.

This type of real-time monitoring helps detect early warning signs of depegging risks.

For regions like Africa, where stablecoins are widely used for savings, remittances, and business payments, AI-based tools will become especially valuable for protecting users from sudden market instability.

4. Stablecoins Will Deepen Financial Inclusion in Africa:

Stablecoin adoption in Africa is expected to grow even faster in the coming years due to ongoing economic challenges such as inflation, currency volatility, and limited access to foreign exchange.

In countries like Nigeria, Ghana, Cameroon, and Kenya, stablecoins are increasingly used for:

• cross-border payments,
• freelance income settlement,
• international trade,
• and dollar-based savings.

In the coming years, stablecoins are likely to become a mainstream financial tool for individuals and small businesses who need stable access to global currencies.

However, users are also becoming more cautious, focusing more on reserve-backed stablecoins and trusted platforms rather than high-risk projects.

5. Transparency Will Matter More Than Hype:

The TerraUSD collapse permanently changed how users evaluate stablecoins. Marketing alone is no longer enough to build trust.

Future stablecoin success will depend heavily on:

• transparent reserve reporting,
• frequent audits,
• clear regulatory compliance,
• and proven liquidity during market stress.

Projects that fail to provide clear financial backing will struggle to maintain user confidence, regardless of popularity or incentives.

6. Stablecoins Will Integrate More With Traditional Finance:

Another major trend is the gradual integration of stablecoins into traditional financial systems.

Banks, payment providers, and fintech platforms are increasingly exploring stablecoin infrastructure for:

• cross-border settlements,
• payroll systems,
• and global remittance networks.

This means stablecoins will likely become less of a “crypto-only” tool and more of a hybrid financial instrument used across both crypto and traditional finance ecosystems.

Stablecoin Risks African Users Should Understand

1. Depegging Risk (Loss of $1 Value):

The most important risk is depegging. A stablecoin is supposed to stay equal to $1, but this is not always guaranteed.

During extreme market conditions, panic selling, or liquidity shortages, a stablecoin can temporarily or permanently drop below $1.

Even well-known stablecoins like USDC have experienced temporary depegging during major financial stress events.

For African users who rely on stablecoins to store value, even a short depeg can lead to real financial loss.

2. Reserve Transparency and Trust Issues:

Not all stablecoins are backed in the same way. Some are fully backed by cash and government securities, while others rely on complex financial structures or partial reserves.

If a stablecoin does not clearly show:

• what assets back it,
• where those assets are held,
• and whether independent audits are conducted,

then users are exposed to hidden risk.

African users should prioritise stablecoins with clear, regularly updated reserve reports.

3. Exchange and Platform Risk:

If users keep their stablecoins on unreliable exchanges or platforms, they face risks such as:

• platform insolvency,
• withdrawal restrictions,
• hacking incidents,
• or sudden shutdowns.

This is especially important in regions where users rely heavily on centralied exchanges for access to crypto.

A safe stablecoin stored on a weak platform can still result in losses.

4. Regulatory Risk in Different Countries:

Crypto regulations in Africa are still developing and vary widely between countries.

Some governments are open to digital assets, while others have restrictions or unclear policies. Changes in regulation can affect:

• access to exchanges,
• ability to convert stablecoins to local currency,
• and overall usage of crypto services.

This means users may face sudden changes in how easily they can use or withdraw their funds.

5. Scam Projects and Fake “Stablecoin” Schemes:

After the TerraUSD crash, many fraudulent projects appeared claiming to be “stablecoins” or “high-yield stable assets.”

These scams often promise:

• fixed daily or monthly returns,
• unrealistic interest rates,
• or guaranteed profits with no risk.

In reality, stablecoins do not generate guaranteed profits on their own. Any project promising unusually high returns is usually a warning sign.

African users, especially beginners, should be extra careful with platforms that lack transparency or verified backing.

6. Liquidity Risk During Market Stress:

Liquidity refers to how easily a stablecoin can be bought or sold without affecting its price.

During market panic, liquidity can dry up quickly. If too many users try to exit at once, it can become difficult to convert stablecoins back into cash or other assets at the expected value.

This is exactly what happened during the TerraUSD collapse, in which large-scale withdrawals accelerated the system's breakdown.

Low liquidity increases the risk of price instability and withdrawal delays.

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FAQs

Q1. What caused the TerraUSD crash?

The TerraUSD crash happened because its algorithmic stabilisation system failed during massive market withdrawals and panic selling.

Q2. Is TerraUSD still active?

The original TerraUSD ecosystem collapsed in 2022, losing most of its value.

Q3. Are stablecoins safe now?

Some stablecoins are safer than others. Fiat-backed stablecoins with transparent reserves are generally considered lower risk than algorithmic stablecoins.

Q4. Which stablecoins are most commonly used today?

The most widely used stablecoins include USDT, USDC, and DAI.

Q5. What are algorithmic stablecoins?

Algorithmic stablecoins use software-based mechanisms and supply adjustments rather than direct fiat reserves to maintain price stability.

Q6. Can stablecoins lose their peg?

Yes. Stablecoins can temporarily or permanently lose their peg due to liquidity problems, reserve concerns, or panic selling.

Q7. How does AI help stablecoin risk analysis?

AI systems can monitor liquidity, reserve data, whale movements, and market sentiment to detect early warning signs of possible depegging events.

Q8. Why are stablecoins popular in Africa?

Stablecoins help many Africans access dollar-based value, cheaper transfers, and easier cross-border payments.

Q9. What is the biggest lesson from the TerraUSD crash?

The biggest lesson is that stablecoins need transparency, strong reserves, and sustainable economic models.

Q10. Will stablecoins replace banks?

Stablecoins may improve payments and financial access, but they are more likely to work alongside banks rather than completely replace them.

Disclaimer: This article was written by the writer to provide guidance and understanding of cryptocurrency trading. It is not an exhaustive article and should not be taken as financial advice. Obiex will not be held liable for your investment decisions.