Most of us are aware with the term "Inflation". Inflation is decrease in purchasing power of money. In layman terms, if you can buy an apple for a dollar today and the inflation rate is 5%, then you will need to pay $1.05 next year for the same apple (If it hasn't rotten yet). Inflation rate in US has sky-rocketed this year. It was record high 8.4% in march 2022. Average Interest rate for your idle money in saving account is 0.06%. What this means is that you lost almost 8.34% of your money's purchasing power by letting it sit idle in your bank account.

Maybe you could've invested the money in stocks or cryptocurrencies. But they are risky investments especially in this bearish market. Fixed deposits is another viable option but that requires you to lock your money for certain period of time. You could, however, invest smartly in crypto market though. Stablecoins are cryptocurrencies whose value is pegged/tied to some other assets like US Dollar or gold or whatever but they usually provide higher APY. Providing liquidity is also a comparatively safer option. There are various ways to peg a cryptocurrency to make it stable with the commodity.

Algorithmic stablecoin, you guessed it, do this algorithmically. Instead of keeping a 1:1 ratio of commodity to the stablecoin (i.e., keeping $1 in reserve for every stablecoin there is in the market), algorithmic stablecoin increase/decrease the supply depending on the market volatility. This can be done in many ways. Why Stablecoins? Well most of them offer better returns than the banks. And they are stable (if implemented correctly), so there is less risk.

SO what about UST
UST was Terra's algorithmic stablecoin. It worked like this:

• You could burn $1 worth of LUNA (native coin of Terra blockchain) to create 1 UST.
• You could also burn 1 UST to create $1 worth of LUNA.

The algorithm worked in such a way that with 1 UST you can always buy $1 worth of LUNA. Atleast it was meant to. But what happens if the price fluctuates?

• If the UST price increases compared to $1, then you could sell $1 worth of LUNA to get more UST. Say, 1 UST is trading at $2. Then you could burn $1 worth of LUNA to get 2 UST which you can then swap with other stablecoins and get an instant 2x profit. So, more UST are being created for less LUNA burned. This increases the supply of UST. However, the massive sell pressure of UST will drive the price down.
• Similarly, If the UST is trading for 10 cents. Then you can sell 1 UST to get 10x worth of LUNA which you can immediately sell. The massive sell pressure of UST (to get more LUNA) will decrease the UST coins in circulation. This will drive the price of UST up and eventually it will be stable again. 

In brief, the price of 1 UST will always be equal to $1 for the algorithm. The arbitrage allows you to maintain the equillibrium and it is also the downfall. The issue is that UST is heavily tied to LUNA. If the marketcap of UST is less than that of LUNA then you could easily maintain the said equillibrium by increasing/decreasing the supply of UST. But what if the UST has higher marketcap than LUNA? That leads to death spiral.

But why did people invest in UST instead of other stablecoins?
Well, you could get 20% interest on UST in Anchor protocol and there was no lock on your rewards. You could cash-out your rewards directly. The 20% interest is what attracted alot of people to buy UST. UST was pretty much stable for the time it was up until it wasn't. Getting 20% interest on Stable-looking-coin vs 0.06% interest in bank? Pretty much everyone would chose the former.

But how did they pay 20% interest to their users?
Suppose you are a millionaire who have millions in some other cryptocurrency which gives staking rewards. COSMOS has 10% staking rewards, Algorand has approx 10% APY for its quarterly governance and so on. So, your 1 million dollar in these crypto's will yield approximately $100,000. If I could get many millionaires like you, who are heavily invested in some other cryptocurrencies and then use their yeild to reward my users, then I could easily provide 20% APY.

But why would you, a millionaire, allow me to reward UST users with your staking rewards like a robinhood?
Because they offered you a part of the protocol itself. Investor were provided with proportional number of ANC tokens using which they could govern the ecosystem and vote for new features to be implemented etc. To be fair, everyone knew that 20% interest rate will not be acheivable as the number of users grew. But apparently, Kwon had made up his mind that 20% is the interest rate for the forseeable future.

So, more and more people invested in UST and anchor protocol. As it was listed on more exchanges, it gain more popularity because of low fess, fast transaction speed and so on. As more and more UST was created, more and more LUNA was being burned. This decreased the supply of LUNA and therefore, increased its price.

But everyone was aware of the issue of depegging. A major one happened because of a DeFi protocol called Abracadabra. We will not be delving into that. However, the creators were aware that depeg is not good for the ecosystem and a failsafe needs to be there. Luna Foundation Guard was thus set-up. They decided to keep reserves of Bitcoins. These bitcoins would be used to buy back the UST if the price is less than a dollar. They held about $3.5 billion worth of Bitcoins before the tragedy along with many other cryptocurrencies.

The reserves were setup so that people will sell UST for corresponding amount of BTC and other crypto like AVAX etc from the reserves. This would reduce the sell pressure on LUNA. But it worked only on papers.

How did LFG get the money to buy Bitcoin and other crypto for reserve?
For every mint and burn in LUNA/UST pair, a small fees was charged. This fees was initially kept as a reserve. In first governance vote, it was decided to burn all the crypto collected as fees. Then most of it was converted to UST. Atlast it was decided to buy BTC for the reserve using the fees.

So what happened?
A massive amount of UST (approx 85 million) was sold that began the crash. People began to sell their UST for other stablecoin or for LUNA to make a quick buck. More and more UST was being burned, while more and more LUNA was being minted. This lead to decrease in LUNA's price which further lead to people selling off their LUNA which further decreased the price. So, more and more LUNA was being created and sold. Finally, the marketcap of LUNA was below that of UST and the death spiral began.

Luna Foundation Group began selling BTC to buy back more UST to restore the peg but there was no coming back. Within a week, approximately 45 billion dollars were wiped off of market. Apparently, Do Kwon dissolved Terraform Labs before the collapse of the currency. There are also speculations that the attackers also opened short positions on LUNA and BTC knowing that LUNA will go into death spiral and LFG selling BTC will decrease its price.

Here's a reddit post and another published in March where a user raised their concern regarding the pegging mechanism and the staking rewards and here's a reddit comment too regarding the same. Here's a tweet too. So many innocent people lost their money in Terra. Even though there were so many speculations, Do Kwon paid no attention. And the people invested, so called LUNAtics followed.

DYOR before investing in any crypto or stock or whatever commodity guranteeing you hefty returns for doing nothing. Only invest what you can afford to lose is the strategy to be followed.