How did the Luna stablecoin incident collapse?

Answer: The collapse of the Luna stablecoin event was mainly due to flaws in its economic model, which caused a vicious cycle of UST decoupling and LUNA price plummeting under the dual impact of changes in the external market environment and institutional short selling. The specific process is as follows:

- The economic model has flaws: LUNA and the stablecoin UST have a "two-way burn and mint" relationship. UST uses an algorithmic stabilization mechanism, minting UST by burning LUNA, and vice versa, to maintain the peg of UST to the US dollar. However, this mechanism operates under the premise that LUNA must have value, and the Anchor project provides UST with a fixed deposit annual yield of up to 20%, attracting a large number of users to deposit UST, resulting in most UST remaining uncirculated, relying on burning LUNA to inject liquidity. However, the yields from Anchor are difficult to sustain, and reserves are gradually depleting. Once the yield decreases, users may redeem UST in large amounts, breaking the balance.
​
- External shocks triggered a decoupling: On May 8, 2022, Terra withdrew 150 million UST from the fund pool due to a new plan, leading to a temporary decline in UST liquidity. At this point, some major institutions began to sell off UST on a large scale, with 2 billion USD of UST flowing out of Anchor that day, breaking the market supply-demand balance, and the UST price began to decouple from the US dollar.
​
- Panic selling led to a price crash: After UST decoupled, a large number of users exchanged UST for LUNA, causing a surge in LUNA supply, and the price dropped from $90 to $60. The decline in LUNA price further affected market confidence in UST, triggering more people to sell UST, creating a vicious cycle of falling UST and LUNA prices, ultimately leading to a sharp drop in both LUNA and UST prices, with their market value nearly reaching zero.