Ledger LandISSUE #52 of 90

algorithmic stables · the terra postmortem

BlockyVSDouble-Spend Dan

Blocky saysAlgorithmic stablecoins try to hold a peg with code alone — and Terra showed how they break.

Pure algorithmic stables hold their peg by minting/burning a paired token rather than holding reserves. In 2022, Terra's UST/LUNA design entered a "death spiral": as UST lost its peg, the mechanism minted ever more LUNA, collapsing both to near zero and erasing ~$40B. The lesson: a peg backed only by reflexive token economics is fragile under stress and bank-run dynamics.

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Peg held by mint/burn of a paired token
No real reserves backing it
Terra/UST death spiral (2022, ~$40B lost)
Reflexive designs are fragile under stress

Double-Spend Dan attacks — common mistakes

Treating high algo-stable yields as safe
Ignoring death-spiral/bank-run dynamics
Assuming "stable" in the name means stable

Boss battleExplain the death-spiral feedback loop in one or two lines.

Example code

<!doctype html><html><head><meta charset="utf-8"></head>
<body style="background:#06040d;color:#e6e0ff;font-family:monospace;padding:20px"><pre>UST loses peg → protocol mints more LUNA →
LUNA price crashes → more minting → both → ~0
no reserves to stop it</pre></body></html>

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