The collapse of Terra’s UST stablecoin was a result of the inherent flaws in its algorithmic stability mechanism, combined with market dynamics that exploited these weaknesses. UST was designed to maintain its peg to the US dollar through an algorithmic relationship with Terra's native token, LUNA. This model used a mint-and-burn mechanism: when UST demand increased, LUNA was burned to mint more UST, and when UST was sold or redeemed, it was burned to mint LUNA. This system aimed to control UST's supply and maintain its $1 peg through arbitrage opportunities.

The mechanism failed due to a sudden, massive sell-off of UST that overwhelmed the system's capacity to stabilize its value. When UST started to de-peg, the minting of excessive LUNA to defend the peg led to hyperinflation of LUNA's supply, drastically reducing its price and market confidence. The rapid drop in LUNA’s value meant that the collateral backing UST lost its effectiveness, accelerating the de-pegging process. As trust eroded, a feedback loop ensued where more UST was sold off, further inflating LUNA and exacerbating the collapse.

The fallout of Terra's collapse had significant ramifications on the broader stablecoin and DeFi landscape. It undermined confidence in algorithmic stablecoins, leading to greater scrutiny and skepticism from users and regulators. This event prompted a shift in the market toward more asset-backed stablecoins, like USDC and USDT, which are seen as more secure due to their reserve structures. Additionally, it spurred discussions on better risk management practices and the need for transparency in collateralized stablecoin models. The Terra incident highlighted the risks associated with algorithmic designs and emphasized the importance of robust, transparent, and adequately collateralized mechanisms to ensure stability.