LibraryCredit and stable value2019Failure caseCorpus record
Terra Money: Stability and Adoption
Terra. Do Kwon.
Do Kwon's 2019 paper for a family of fiat-pegged tokens stabilised by an arbitrage relationship with a second, volatile token. It is included because it is a canonical design paper that was not in the historic library. It is included as a failure case, not as a model to ship.
Historical design only. TerraUSD broke its peg in May 2022. This page is not an endorsement and not a reconstruction guide.
Terra's paper tries to keep a fiat-pegged token stable by letting traders mint and burn it against a second, volatile token, with no exogenous collateral equal to the supply. It is included as a design that failed in public.
- Evidence
- Primary paper
- Re-measured
- No
- Assumptions
- 4
- Records linked
- 6
Code
Source, repository, and what is actually hosted
- Terra research archivehttps://agora.terra.money/
- The source URL is not a GitHub repository. No code remote is invented.
- Full text is not mirrored. Public availability is not a licence to copy the file onto this site.
- Add to a reading list
- Why this constructor will not template Terra
01 Claim ledger
What the paper is allowed to say
Each row is a sentence already in the study. The status is the same on every row: a model claim, not a live measurement.
Claim 01 · Paper model
The peg is an arbitrage story
If the stable token trades above the target, arbitrageurs are supposed to mint it by locking or burning the volatile token, and sell. If it trades below, they are supposed to buy it and redeem the other way.
Claim 02 · Paper model
Nothing fully collateralises the dollar token
The volatile token's market is the shock absorber. The paper does not lock a dollar of outside assets per dollar of stable supply.
Claim 03 · Paper model
Adoption is supposed to create demand
The text leans on a payments network to give the stable token a reason to exist, and on seigniorage to fund that adoption. That is a fiscal plan sitting on the arbitrage plan.
Claim 04 · Paper model
Contraction is the stressful case
When the stable token is below peg, the design expands the supply of the volatile token. That is the moment the volatile token's price is asked to absorb the damage.
Claim 05 · Paper model
This page is a warning, not a template
TerraUSD broke its peg in May 2022. We do not walk through a reconstruction, and we do not treat the paper as a recipe.
02 Three cuts
Observation, model, falsifier
A desk does not stop at the summary. Each claim is cut three ways, using only this study's own assumptions and checks. Nothing here is a new figure.
01 The peg is an arbitrage story
Observation
What the study says
If the stable token trades above the target, arbitrageurs are supposed to mint it by locking or burning the volatile token, and sell. If it trades below, they are supposed to buy it and redeem the other way.
Model
What has to hold
The volatile token remains liquid at a price that makes redemption meaningful. This assumption did not hold.
Falsifier
What would retire it
What happens to volatile-token supply when the stable token trades below the peg for a day?
02 Nothing fully collateralises the dollar token
Observation
What the study says
The volatile token's market is the shock absorber. The paper does not lock a dollar of outside assets per dollar of stable supply.
Model
What has to hold
Nothing in the design adds outside collateral equal to stable supply. Do not import that assumption from other stablecoins.
Falsifier
What would retire it
What happens to volatile-token supply when the stable token trades below the peg for a day?
03 Adoption is supposed to create demand
Observation
What the study says
The text leans on a payments network to give the stable token a reason to exist, and on seigniorage to fund that adoption. That is a fiscal plan sitting on the arbitrage plan.
Model
What has to hold
Payments demand is independent enough to stabilise the system. In the event, demand was not a separate pillar.
Falsifier
What would retire it
What happens to volatile-token supply when the stable token trades below the peg for a day?
04 Contraction is the stressful case
Observation
What the study says
When the stable token is below peg, the design expands the supply of the volatile token. That is the moment the volatile token's price is asked to absorb the damage.
Model
What has to hold
The volatile token remains liquid at a price that makes redemption meaningful. This assumption did not hold.
Falsifier
What would retire it
What happens to volatile-token supply when the stable token trades below the peg for a day?
05 This page is a warning, not a template
Observation
What the study says
TerraUSD broke its peg in May 2022. We do not walk through a reconstruction, and we do not treat the paper as a recipe.
Model
What has to hold
The volatile token remains liquid at a price that makes redemption meaningful. This assumption did not hold.
Falsifier
What would retire it
Is any later project citing this paper as a model? This page is not a licence to.
03 Sequence
One action, as an operating tape
- 01A trader sees the stable token above the stated peg and mints it against the volatile token under the paper's exchange rate, then sells the stable token into the market.
- 02A trader who sees the stable token below the peg buys it and redeems it for newly issued volatile tokens, which they sell.
- 03The protocol's stated hope is that the first trade increases stable supply and the second reduces it, pulling the price back.
- 04Seigniorage, when minting is profitable, is directed at the adoption plans the paper describes.
- 05If redemptions keep expanding the volatile token into a falling market, the arbitrage that is supposed to defend the peg becomes the path that floods the exit.
04 Load-bearing
The argument, and where a pitch drops it
Arbitrage is not a backstop
The cut
An arbitrage argument assumes a market on the other side. If the volatile token gaps down, the redemption value of the stable token gaps with it, and the incentive to defend the peg can reverse. The paper's proof of stability is conditional. The condition failed in public.
Why it carries weight
If this cut is skipped, the paper's name is being used without the mechanism that makes the name mean anything.
Where it is dropped
Public record after the paper: the TerraUSD peg failed in May 2022, and the design is widely treated as a failed algorithmic-stablecoin experiment.
Reflexivity was the design, not an accident
The cut
Demand for the stable token supports the volatile token, and confidence in the volatile token supports the stable token. That loop is not a hidden bug in an otherwise collateralised system. It is the system. Teaching it honestly means drawing the loop.
Why it carries weight
If this cut is skipped, the paper's name is being used without the mechanism that makes the name mean anything.
Where it is dropped
A paper's arbitrage proof is not evidence that a peg will hold when the volatile unit gaps down.
Compare it with a vault, not with a vibe
The cut
Maker names collateral, an auction and a shutdown. This paper names an arbitrage against its own token. The useful study is that contrast. It does not require a blow-by-blow of 2022, and it does not support a 'this time the parameters are better' rebuild on this page.
Why it carries weight
If this cut is skipped, the paper's name is being used without the mechanism that makes the name mean anything.
Where it is dropped
A paper's arbitrage proof is not evidence that a peg will hold when the volatile unit gaps down.
05 Register
What has to be true
Model · Not re-measured
The volatile token remains liquid at a price that makes redemption meaningful. This assumption did not hold.
Model · Not re-measured
Traders can perform the mint and burn when the peg slips. Congestion and closed markets break the story.
Model · Not re-measured
Payments demand is independent enough to stabilise the system. In the event, demand was not a separate pillar.
Model · Not re-measured
Nothing in the design adds outside collateral equal to stable supply. Do not import that assumption from other stablecoins.
06 Divergence
What happened after the paper
In May 2022 TerraUSD lost its peg, the volatile token collapsed as issuance expanded, and the episode became the canonical failure of this class of algorithmic stablecoin. Legal and insolvency history followed. None of that repairs the mechanism. The paper stays on the site so the design can be read in its own words, next to designs that name their collateral.
A later client, parameter set, or reward formula is a different object. Cite this paper for the mechanism. Cite a primary release for the network. This desk has not re-run the proof.
07 Pre-mortem
What to check before you use the idea
- 0 of 4 marked on this browser. A mark is a reading note, not a pass, a rating, or a recommendation.
08 Anatomy
The paper, in the order a builder needs
The problem it names
Collateralised stablecoins lock more than a dollar of assets to issue a dollar. Terra's paper proposes to issue a dollar token against a protocol token, and to maintain the peg by letting arbitrageurs mint and burn between the two.
What the design proposes
- A stable unit and a volatile unit. Minting one burns or stakes the other, under the paper's rules.
- Demand for the stable unit is supposed to come from payments, described in the paper through a partner network.
- When the stable unit is below peg, the design relies on contraction: arbitrage that reduces stable supply and expands the volatile supply.
How the mechanism is specified
- The peg is an arbitrage argument. It assumes someone will trade toward the target while the volatile unit still has a market.
- Seigniorage, in the paper, funds adoption. That is a fiscal story sitting on top of the peg story.
- Nothing in the mechanism adds exogenous collateral equal to the stable supply.
What this page does not treat as proven
- Public record after the paper: the TerraUSD peg failed in May 2022, and the design is widely treated as a failed algorithmic-stablecoin experiment.
- This page does not recount a blow-by-blow of that collapse and does not recommend any reconstruction of the mechanism.
- A paper's arbitrage proof is not evidence that a peg will hold when the volatile unit gaps down.
Why the desk still reads it
We keep the paper so a venture cannot pitch 'algorithmic stability' as if the primary document were obscure. Read it next to Maker. One design names collateral and a shutdown. This one names an arbitrage against its own token. That difference is the lesson.
09 Lexicon
Terms, opened into the record
- Algorithmic peg
- A target price defended by mint-and-burn rules rather than by a full reserve of outside assets.
- Seigniorage
- The value captured when the stable token is minted at a premium, which the paper spends on adoption.
- Contraction
- The below-peg case, in which stable supply is meant to shrink and the volatile token's supply expands.
- Reflexivity
- A loop in which confidence in one token depends on the price of the other, and feeds it.
10 Repository
Every linked record on this page
Underlined words open a page that already exists: a concept, a protocol profile, a failure record, or another paper. If a word is not underlined, this desk does not have a record for it.
This is Blockchain Lab's reading of a public design paper. It is not the paper, not a copy of it, and not an offer of tokens, equity, custody or a partnership. Later network behaviour can diverge from the text. Nothing here is investment, legal or technical advice.
Research status: Failure case. Last reviewed: 1 October 2026. This is a reading of a public paper, not investment, legal or security advice.