There were a few key factors that caused the extreme fluctuations and crash of the Terra LUNA cryptocurrency in May 2022:

• Death spiral with UST stablecoin – Terra’s algorithmic stablecoin UST lost its peg to $1 as sell pressure mounted. To maintain the peg, more LUNA had to be rapidly minted and sold, crashing its price.
• Highly correlated ecosystem – LUNA and UST were deeply integrated in a complex ecosystem of financial applications. Issues with UST quickly cascaded across the ecosystem.
• Bank run – Loss of faith in UST led to a rapid bank run as holders redeemed UST en masse for USD, draining reserves.
• Relied on growth – The UST peg was maintained largely through continued rapid growth in adoption. Once growth stalled, the peg became unstable.
• Failed recovery efforts – Attempts to restore the peg like large bitcoin purchases only created short-lived boosts before failing again.
• Speculation – Many investors bought UST seeking to profit from the 20% yields, amplifying sell pressure as the crisis unfolded.
• Lack of reserves – Despite claims of being fully backed, UST did not have sufficient reserves to maintain the $1 peg under heavy redemption volumes.
• Poor risk management – The risks and imbalances of having algorithmic stablecoins in the ecosystem were not well-managed.

The factors combined in a perfect storm, causing the Terra ecosystem to unravel within a few days, resulting in billions in losses. The event highlighted the risks of algorithmic stablecoins.