The algorithic stablecoin operates like an ETF. An ETF holds its "peg" against its index by trading shares of the ETF (UST) for packages of the underlying shares (Luna) and vice versa. The arbitrage concept is the same, but the difference is that the underlying shares have intrinsic value, whereas Luna' s only value comes from demand for it to stabilize Terra. That's a crucial difference and explains why Terra is subject to attack by any better ecosystem.

Banks fail when depositors flee to put their money elsewhere. Modern banking is set up so that "somewhere else" means outside the banking system. Before banks were so regulated, banks were independent, so a problem at one bank would send depositors to another, destroying the first. The cryptosphere is like banking in the nineteenth century. (Everything about crypto is obsolete wine in new bottles.) An algorithmic stablecoin can last until it has competition. Then it becomes fragile and, eventually, fails.

Credit-based money is the best way to finance a capitalist economy. It's not foolproof, but a (survivable) crisis every eighty years or so is actually a pretty good record. Crypto is just a payment method for credit-based fiat. It's a magic envelope into which a payer can put local currency and out of which a payee can take local currency. That's very cool. But it's not money and it's not finance. It's just a (possibly better) VISA. Until VISA issues a stablecoin.