Seeing the OKX CEO’s post about Binance and the APY rates being offered for
$USDe immediately brought the
#LUNA crisis to mind.
If you’ve been in the market for a while, you’ll remember this. There was an algorithmic stablecoin tied to LUNA: UST (TerraUSD). More precisely, its backing was not a traditional reserve, but rather LUNA’s market value and an arbitrage mechanism.
Right before the collapse, UST was offering APY rates well above the market average. These yields, primarily provided through the Anchor protocol, were extremely attractive to anyone looking for passive income. Major exchanges like Bybit made access to these returns very easy, which caused liquidity to flow into the system at a rapid pace.
Honestly, even back then, the whole setup didn’t make much sense to me. Despite many content creators enthusiastically promoting it, I stayed away. In hindsight, that was the right call—because the collapse came very quickly.
UST’s collateral was not a reserve in the conventional sense; as mentioned above, it relied on LUNA’s market capitalization. The system was built around a mint-and-burn mechanism designed to maintain UST’s 1-dollar peg. But once large amounts of UST started being sold on the market or withdrawn from the protocol, the peg broke.
From that point on, the arbitrage mechanism worked in reverse: more LUNA was minted, and as LUNA’s price fell, the system’s ability to support UST weakened even further.
What followed was the now-infamous “death spiral.” The peg was completely lost, LUNA’s supply spiraled out of control, and the system effectively collapsed.
That experience taught me a very clear lesson:
If a stablecoin is offering unusually high APY, the first thing to examine is where that yield comes from and how it’s generated. The collateral structure, sustainability, and how the system behaves under stress are just as important as the headline return.