# Why some stablecoins recover and others collapse: UST (May 2022), USDC (March 2023), DAI (March 2020)

Research retrieval: 2026-09-25 (UTC). Historical research comparison only; not investment advice.
Labels used: **[Fact]** = stated in a cited source; **[Inference]** = my interpretation; **[Uncertain]** = conflicting or missing evidence. "Primary" = issuer, protocol, governance, regulator or court record. "Secondary" = press or third-party analysis.

## Executive summary

These three episodes were different kinds of crisis. They should not be treated as three versions of "a stablecoin depegged."

- **UST (May 2022): a failure of the token's design.** UST was backed only by the ability to swap it for newly minted LUNA, whose value depended on confidence in UST, plus a discretionary bitcoin reserve. When holders rushed to exit, minting LUNA destroyed its value. The reserve was gone within days and the peg never returned. Losses were **realized and permanent**. The SEC's figure of about $40 billion measures lost market value, not investor losses.
- **USDC (March 2023): a banking and custody shock.** The reserves existed, but 8% ($3.3B) were stuck at a failed bank over a weekend, when wire redemption was not running. The price recovered once US authorities guaranteed all SVB deposits and Circle resumed redemptions. The reserve loss was **temporary and never realized**. Holders who sold below $1 did realize losses.
- **DAI (March 2020): a contained failure of the liquidation system.** An ETH crash and network congestion broke Maker's auctions, and some vaults' ETH sold for zero DAI. About $4–5.7M of debt was left unbacked; estimates vary by source. DAI traded *above* $1, reportedly because borrowers needed DAI to repay. New MKR covered the shortfall. Liquidated vault owners bore **realized losses**. DAI holders took no haircut.

**Answer [Inference]:** Recovery depended on two things: backing whose value did not depend on the coin itself, and someone with enough capacity to absorb the loss. For USDC that was the US deposit guarantee; for DAI, MKR dilution. UST had neither. Its backstop, LUNA, depended on UST, and its reserve was finite.

## 1. UST / Terra, May 2022

**Design at the time.**
- **Backing:** no external collateral. The market module swapped 1 UST for $1 of newly minted LUNA, and the reverse, through a virtual constant-product pool ([Terra Classic docs](https://classic-docs.terra.money/docs/develop/module-specifications/spec-market.html), primary, undated). Capacity was capped by `BasePool` (docs default 250,000 SDR). Proposal 1164 put the live value at 50M SDR, about $293M a day ([CoinDesk, 2022-05-11](https://www.coindesk.com/business/2022/05/11/terra-founder-do-kwon-supports-communitys-ust-proposal-luna-drops-to-22), secondary). **[Uncertain]** I did not retrieve the on-chain proposal itself.
- **Demand support:** Anchor Protocol paid "as much as 20 percent" ([SEC, 2023-02-16](https://www.sec.gov/newsroom/press-releases/2023-32), primary, a regulator allegation).
- **Reserve:** the Luna Foundation Guard (LFG) held about 80,000 BTC that it could use at its discretion to defend the peg.
- **Governance:** LUNA stakers voted on chain. In practice Terraform Labs (TFL) and LFG acted at their own discretion.

**Timeline (UTC dates approximate to the day)**

| Date | Event | Source |
|---|---|---|
| 2022-05-07/08 | UST trades below $1 after large exits. LFG begins converting reserves (audit: from May 8) | JS Held audit for LFG, 2022-11-16, [Medium](https://medium.com/terra-money/lfg-technical-audit-report-ddaf3f51e7d)* |
| 2022-05-09 | LFG announces $1.5B of BTC and UST loans to defend the peg | [CoinDesk, 2022-05-09](https://www.coindesk.com/markets/2022/05/09/luna-foundation-guard-lens-15b-in-btc-and-ust-for-stablecoin-peg) (secondary) |
| 2022-05-11 | Do Kwon backs Proposal 1164 to expand mint/burn capacity | [CoinDesk, 2022-05-11](https://www.coindesk.com/business/2022/05/11/terra-founder-do-kwon-supports-communitys-ust-proposal-luna-drops-to-22) (secondary) |
| 2022-05-12 | End of the reserve-defense window in the audit | JS Held audit (as above) |
| 2022-05-16 | LFG says it has 313 BTC left, from about 80,000 | [CoinDesk, 2022-05-16](https://www.coindesk.com/business/2022/05/16/luna-foundation-guard-left-with-313-bitcoin-after-ust-crash) (secondary) |
| 2023-02-16 | SEC charges TFL and Kwon with fraud | [SEC 2023-32](https://www.sec.gov/newsroom/press-releases/2023-32) |
| 2024-06-13 | $4.47B settlement; TFL to wind down and distribute assets | [SEC 2024-73](https://www.sec.gov/newsroom/press-releases/2024-73) |

\*The audit is a primary record commissioned by LFG. Direct retrieval was blocked (HTTP 403), so its figures come from a [Bitcoin.com summary](https://news.bitcoin.com/terras-2-8b-defense-system-luna-foundation-guard-audit-says-group-spent-more-than-80000-bitcoin-defending-ust-peg/).

**Trigger and spread.** **[Fact]** By the end of May 2022, UST, LUNA and MIR were "essentially worthless" ([SEC 2023-32](https://www.sec.gov/newsroom/press-releases/2023-32)). **[Fact]** LFG spent 80,081 BTC plus 49.8M in stablecoins (about $2.8B) between May 8 and 12 (audit). **[Inference]** Stress spread three ways. The capped pool slowed arbitrage. Redemptions minted LUNA, which crushed its price and the backstop. Reserve sales bought too little UST. **[Uncertain]** Who made the first large exits, and whether they coordinated, remains unresolved in the primary record.

**Outcome and losses.**
- UST and LUNA holders suffered **realized, permanent** losses; the peg was never restored.
- LFG's reserve was spent.
- The SEC's "$40 billion" is **combined market value lost**, not net investor loss. It mixes paper wealth with realized losses.
- The 2024 settlement directs remaining TFL assets to victims. **[Uncertain]** Recovery rates not verified.
- **[Fact, retrospective]** Kwon pleaded guilty (August 2025) and was sentenced to 15 years ([DOJ SDNY](https://www.justice.gov/usao-sdny/pr/crypto-enabled-fraudster-sentenced-orchestrating-40-billion-fraud)). **[Uncertain]** The sentencing date is unconfirmed because the page did not render.

## 2. USDC, March 2023

**Design at the time.**
- **Backing:** cash and short-dated US Treasuries. After the crisis, Circle reported 77% T-bills ($32.4B) and 23% cash ($9.7B), with custody at BNY Mellon and management by BlackRock ([Circle, 2023-03-13](https://www.circle.com/pressroom/3-3-billion-of-usdc-reserve-risk-removed-dollar-de-peg-closes), primary).
- **Issuance and redemption:** Circle minted and redeemed 1:1 for account holders by bank wire. Most holders exited by selling on exchanges or DEXs.
- **Governance:** Circle as a regulated company. Centre (Circle and Coinbase) governed the token standard (**[Uncertain]** background knowledge, not primary-verified here).

**Timeline**

| Date | Event | Source |
|---|---|---|
| 2023-03-10 | SVB closed. Circle discloses that $3.3B of about $40B in reserves is at SVB | [The Block, 2023-03-10](https://www.theblock.co/news/business/2023-03-10-circle-says-3-3-billion-of-usdc-reserves-are-with-silicon-valley-bank-218971) (secondary quoting Circle's tweet) |
| 2023-03-11 | USDC falls as low as $0.88 (CoinGecko) | [CNBC, 2023-03-11](https://www.cnbc.com/2023/03/11/stablecoin-usdc-breaks-dollar-peg-after-firm-reveals-it-has-3point3-billion-in-svb-exposure.html) (secondary) |
| 2023-03-11 | Maker emergency vote cuts its USDC swap module (PSM) intake to 250M DAI and adds a 1% fee | [Maker executive, 2023-03-11](https://vote.makerdao.com/executive/template-executive-vote-emergency-parameter-changes-march-11-2023) (primary) |
| 2023-03-12 | Treasury, Fed and FDIC: SVB depositors "will have access to all of their money starting Monday, March 13" | [Federal Reserve, 2023-03-12](https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312b.htm) (primary) |
| 2023-03-13 | Circle: the $3.3B will be "fully available," and operations will resume through new banking partners | [Circle, 2023-03-13](https://www.circle.com/pressroom/3-3-billion-of-usdc-reserve-risk-removed-dollar-de-peg-closes) |
| 2023-03-14/15 | Domestic wires live on March 14. Backlog substantially cleared: $3.8B redeemed and $0.8B minted since Monday | [Circle update, 2023-03-15/16](https://www.circle.com/blog/march-15-update-on-usdc-operations) (primary) |

**Trigger and spread.** **[Fact]** The trigger was a bank failure, not a flaw in the token. **[Inference]** Over the weekend, wires could not clear. The secondary market was the only exit, so the price reflected the odds of recovering SVB deposits. Stress spread to protocols holding USDC. **[Fact]** DAI had about $3.1B of USDC exposure through the PSM ([Cointelegraph](https://cointelegraph.com/news/maker-dao-files-emergency-proposal-addressing-3-1b-usdc-exposure), secondary), and Maker cut its intake (executive vote above).

**Response and outcome.** The deposit guarantee removed the loss. Redemptions reopened and arbitrage restored $1. **[Inference]** Without that guarantee, recovery would have depended on uninsured-deposit recoveries. That counterfactual is unknowable.

**Losses.** The reserve impairment was **temporary and never realized**. Holders who sold below par had **realized** losses, and buyers below par gained; neither amount is documented. **[Uncertain]** The $0.88 low is one aggregator's figure from a thin weekend market.

## 3. DAI, March 2020 ("Black Thursday")

**Design at the time.**
- **Backing and issuance:** Multi-Collateral DAI (launched November 2019) accepted only ETH and BAT. USDC became the third collateral on 2020-03-17 ([Cointelegraph](https://cointelegraph.com/news/makerdao-governance-approves-usdc-stablecoin-as-collateral), secondary). Vaults minted DAI at a collateral ratio of at least 150%.
- **Exit:** DAI holders could not redeem except through Emergency Shutdown. The peg relied on arbitrage, the stability fee and the DAI Savings Rate.
- **Liquidation and bad debt:** keepers bid DAI for vault collateral in "flip" auctions ([flip.sol](https://raw.githubusercontent.com/makerdao/dss/master/src/flip.sol), primary code). Uncovered debt is paid by minting MKR "on demand in return for dai" ([flop.sol](https://raw.githubusercontent.com/makerdao/dss/master/src/flop.sol), primary code). **[Uncertain]** These are the code defaults and current repository versions. The live auction timings on 2020-03-12 were set by governance and were not verified here.
- **Governance:** MKR-holder polls and executive votes, with the Maker Foundation.

**Timeline**

| Date | Event | Source |
|---|---|---|
| 2020-03-12 | ETH falls about 43% ($194 to $111). Gas spikes and oracle lags. A keeper wins auctions with 0 DAI bids. A forum thread reports the surplus moved from +$500k to −$4M and says "Dai is off-peg" | [Maker forum, 2020-03-12](https://forum.skyeco.com/t/black-thursday-response-thread/1433) (primary); [Glassnode, 2020-03-17](https://research.glassnode.com/what-really-happened-to-makerdao/) (secondary on-chain analysis) |
| 2020-03-13 | Out-of-schedule executive vote changes auction parameters and targets the peg | [Linum Labs blog](https://medium.com/linum-labs/black-thursday-makerdaos-multi-collateral-dai-exploitation-and-the-plan-to-recover-c083c0b81875) (secondary) |
| 2020-03-17 | USDC added as collateral by emergency executive vote | [Cointelegraph](https://cointelegraph.com/news/makerdao-governance-approves-usdc-stablecoin-as-collateral) (secondary) |
| 2020-03-19 to 03-28 | Debt auctions sell 20,980 MKR for about 5.3M DAI | [The Block, 2020-03-31](https://www.theblock.co/news/defi/2020-03-31-mkr-auctions-conclude-with-crypto-venture-firm-paradigm-emerging-as-the-biggest-winner-60447) (secondary) |
| 2020-09-22 | MKR poll: about 65% vote for 0% compensation to vault owners | [CoinDesk, 2020-09-23](https://www.coindesk.com/tech/2020/09/23/makerdao-users-hosed-by-march-flash-crash-wont-get-mkr-payouts-say-mkr-whales) (secondary) |

**Trigger and spread.** **[Fact]** ETH crashed while Ethereum was congested. Gas prices rose by an order of magnitude and price feeds lagged ([Glassnode](https://research.glassnode.com/what-really-happened-to-makerdao/)). With few keepers able to get transactions through, a bidder won collateral for zero DAI over roughly 2–3 hours ([Maker forum](https://forum.skyeco.com/t/black-thursday-response-thread/1433)). **[Inference]** The liquidation market failed, not DAI's reserves. DAI faced *upward* pressure as vault owners needed DAI to repay debt. **[Uncertain]** I found no primary record of the premium, so I report no figure.

**Shortfall figures conflict [Uncertain]:** about $4M (Maker forum, same day), $4.5M (Glassnode), and 5.67M DAI, with 62,842.93 ETH (about $8.32M) sold for 0 DAI across 1,461 auctions ([Whiterabbit](https://medium.com/@whiterabbit_hq/black-thursday-for-makerdao-8-32-million-was-liquidated-for-0-dai-36b83cac56b6), independent on-chain analysis, undated). The debt auctions raised about 5.3M DAI. The gaps probably reflect cut-off times, buffer netting and ETH valuation timing.

**Losses.** Liquidated vault owners lost collateral beyond the penalty. This loss was **realized** and was not compensated after the September 2020 vote. MKR holders were diluted by 20,980 new MKR (**realized**). DAI holders took no haircut. A class action was filed in April 2020 ([CoinDesk, 2020-04-14](https://www.coindesk.com/tech/2020/04/14/makerdao-users-sue-stablecoin-issuer-following-black-thursday-losses), secondary). **[Uncertain]** Its outcome was not verified.

## Comparison table

| | UST (May 2022) | USDC (Mar 2023) | DAI (Mar 2020) |
|---|---|---|---|
| Backing | Endogenous: swap into newly minted LUNA, plus a discretionary BTC reserve | Cash and T-bills held off-chain | Overcollateralized ETH and BAT vaults |
| Issuance / exit | Protocol mint/burn against LUNA with a capped pool; secondary markets | Circle 1:1 mint/redeem by bank wire; secondary markets | Vault minting; no holder redemption outside shutdown; secondary markets |
| Governance | LUNA voting; TFL/LFG discretion | Company (Circle), Centre | MKR votes; Maker Foundation |
| Kind of crisis | Failure of the token's peg and design | Failure of the reserve bank and redemption rail | Failure of the liquidation and oracle system |
| Direction of peg deviation | Far below $1, permanently | Below $1 (low of $0.88 on CoinGecko), temporarily | Above $1, temporarily (figure not verified) |
| Response | Reserve spent; $1.5B loans; capacity proposal | Government deposit guarantee; new banks | Parameter changes; USDC collateral; MKR debt auction |
| Outcome | Collapsed | Recovered within days | Recovered; system recapitalized |
| Loss bearers | UST and LUNA holders, LFG (realized) | Sellers below par (realized); reserve loss avoided | Liquidated vault owners and MKR holders (realized) |

## Five lessons for evaluating stablecoin designs [Inference, grounded in the cases above]

1. **Ask whether the backing is independent of the coin.** LUNA fell because UST fell, so it was not a backstop. T-bills and ETH could fall in price, but not because of the coin.
2. **Map every exit path and when it operates.** USDC's weekend wire gap and Terra's capped swap pool both left thin markets to set the price. Check hours, caps and who is eligible to redeem.
3. **Identify the loss absorber and its size.** MKR dilution and the deposit guarantee were larger than the loss. LFG's reserve was spent in about five days.
4. **Stress-test infrastructure, not just collateral.** DAI broke on congestion, oracles and keepers. USDC broke on bank concentration: 8% of reserves at one bank.
5. **Read figures by measurement type.** Market-value wipeouts, single-venue lows and same-day deficit estimates are not realized losses.

## Unanswered questions
- Who executed the initial UST exits, and did they coordinate?
- How much have Terra creditors recovered through the bankruptcy?
- What was the exact DAI premium in March 2020, and what was the reconciled final deficit?
- How much USDC was sold below par, and by whom?

---

## Source list (retrieved 2026-09-25 UTC)

**Primary:**
- SEC 2023-32 (2023-02-16)
- SEC 2024-73 (2024-06-13)
- DOJ SDNY sentencing release (date not confirmed)
- Terra Classic market module docs (undated)
- LFG/JS Held audit (2022-11-16; not directly loaded)
- Circle pressroom (2023-03-13)
- Circle March 15 update (2023-03-15/16)
- Federal Reserve joint statement (2023-03-12)
- Maker executive vote (2023-03-11)
- Maker forum Black Thursday thread (2020-03-12)
- Maker `dss` contract source, flip.sol and flop.sol (current repository versions; undated for this purpose)

**Secondary:** CoinDesk, The Block, CNBC, Cointelegraph, Glassnode, Bitcoin.com, Whiterabbit, Linum Labs. Links appear inline above.

## Data appendix: measurement notes
- **Terra settlement:** $4.47B total from TFL (disgorgement, interest and penalty), plus about $204M from Kwon ([SEC 2024-73](https://www.sec.gov/newsroom/press-releases/2024-73)).
- **UST $40B:** SEC's combined market value of UST, LUNA and MIR lost by the end of May 2022. It is not net realized investor loss.
- **LFG $2.8B:** audit figure valuing 80,081 BTC and 49.8M stablecoins at execution prices, May 8–12, 2022.
- **USDC $0.88:** CoinGecko aggregate low on 2023-03-11, as reported by CNBC. It depends on the venue.
- **DAI deficit:** $4M to 5.67M DAI depending on source and cut-off time; 5.3M DAI raised; 20,980 MKR sold.
- Structured data is in `cases.json`.