UST held its peg through a mint-and-burn link with LUNA, and demand came largely from a lending protocol advertising about 20% yield on UST deposits. That yield was subsidised rather than earned, so the deposit base was mercenary and could leave quickly.
In May 2022 large UST sales broke the peg, and the arbitrage mechanism responded by minting LUNA. LUNA's supply exploded from roughly 350 million to trillions of tokens within days while its price fell to effectively zero, so each additional redemption backed UST with less and less. A reserve of bitcoin bought to defend the peg was spent without stopping it.
The lessons generalise beyond one project: advertised yield that exceeds any plausible source of revenue is being paid out of token issuance, a peg without redeemable reserves is a confidence game, and contagion spreads because leveraged funds held the same assets. Several lenders and a large hedge fund failed in the following months.
Related: algorithmic-stablecoin, depeg, real-yield, exchange-insolvency-risk