Death Spiral

In crypto, a death spiral refers to a rapid, self-reinforcing collapse of a token—typically an algorithmic stablecoin—where falling value triggers redemption mechanisms or market reactions that further accelerate the decline.

What Is a Death Spiral?

In crypto, a death spiral refers to a rapid, self-reinforcing collapse of a token—typically an algorithmic stablecoin—where falling value triggers redemption mechanisms or market reactions that further accelerate the decline. It often results in a catastrophic loss of confidence and value.

Why It Matters in Crypto

1. Famous Example: Terra and UST/LUNA

In May 2022, the algorithmic stablecoin TerraUSD (UST) lost its dollar peg. Arbitrageurs rushed to redeem UST for LUNA, dramatically increasing LUNA’s supply and causing its price (and UST’s stability) to collapse—entering a classic death spiral. The event wiped out nearly $45 billion in market cap in days and serves as a textbook case.

2. Not Just Terra: Iron Finance

A similar meltdown happened with Iron Finance on Polygon, where the value of IRON and TITAN plummeted due to a bank-run-like cascade. This was another early crypto death spiral that led to massive losses.

3. Corporate Vulnerability: Bitcoin Treasury Firms

Some Bitcoin treasury companies (echoing “death spiral”) face existential risk if their share price fails to command a premium over net asset value—illustrating how fragile some business models remain amid volatile markets.

Key Features of Crypto Death Spirals

Feature

  • Rapid token redemption dynamics
  • Loss of confidence & liquidity
  • Algorithmic stabilization failure

Why It Escalates Collapse

  • Triggers cascading supply increase
  • Market spirals as trust evaporates
  • Mechanisms meant to fix stability actually break it