Two key takeaways from Nansen’s report on the UST stablecoin de-pegging from the US dollar

Two key takeaways from Nansen’s report on the UST stablecoin de-pegging from the US dollar

As the dust settles from the Terra ecosystem debacle, an on-chain analysis by blockchain analytics firm Nansen highlights two important points.

The cryptocurrency ecosystem was awash with various speculative theories surrounding the cause of Terra’s algorithmic stablecoin, UST, decoupling from its peg of one dollar. The “who” and “why” seemed a mystery, but the result was catastrophic, as UST fell well below its parity of one dollar.

Nansen undertook an investigation leveraging on-chain data from the Terra ecosystem on the Ethereum blockchain in an effort to trace the chain of events that led to the decoupling of UST.

It should be noted that the report does not include possible off-chain events that could have aggravated the situation, the impact on investors, the breakdown of net losses between wallets, and what happened to the Bitcoin (BTC) reserves that support UST.

Attackers took advantage of Curve’s shallow liquidity to generate arbitrage opportunities

The first and most important conclusion was Nansen’s identification of a small set of addresses or actors that identified vulnerabilities in the Terra ecosystem. These players took advantage of the relatively scarce liquidity of the Curve pools that support the TerraUSD (UST) peg with other stablecoins and rushed to take advantage of arbitrage opportunities.

The report describes how these actors withdrew UST funds from Anchor Protocol on Terra. These funds were then moved from Terra to Ethereum using the Wormhole bridge.

Next, Huge amounts of UST were traded with various stablecoins in Curve liquidity pools. Nansen then speculated that during the decoupling process, some of the identified wallets took advantage of discrepancies between price sources on Curve, as well as decentralized and centralized exchanges, taking buy and sell positions between exchanges.

Nansen’s report refuted a speculative narrative that a single attacker or hacker worked to sabotage UST parity.

Seven wallets are behind the UST decoupling

Nansen’s blockchain analysis took a grounded theory approach that identified relevant transaction volume data between May 7 and May 11, the time period in which UST lost its $1 peg.

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The firm reviewed social media and forum threads to narrow down that specific time period, highlighting the prominent transaction flow in Curve’s liquidity pools, which led to its three-stage analytical approach.

The first phase involved analysis of Curve lending protocol inbound and outbound transactions, which allowed Nansen to compile a list of wallets whose activities suggest a significant impact on UST decoupling.

The second phase was somewhat more complicated, as Nansen observed transactions across the Wormhole Bridge that could have influenced the unbinding event. The firm reviewed UST withdrawals from the Anchor protocol on a shortlist of wallets. Next, the sale of UST and USDC on centralized exchanges was investigated.

The final phase involved triangulating the on-chain evidence to form a narrative of the events surrounding the UST decoupling. Highlighted below is a list of seven wallets believed to have been instrumental in the collapse of the Terra ecosystem.

Nansen’s report offers some interesting data based on blockchain analysis. However, the main “why” remains a mystery, as the firm chooses not to speculate on the possible goals or motivations behind the top seven addresses that played a significant role in triggering the depeal of algorithmic stablecoin UST.

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