After the Terra (LUNA) disaster, this blockchain analyst takes stock

After the Terra (LUNA) disaster, this blockchain analyst takes stock

whale story – How to explain, with supporting evidence, thecollapse to zero of the value stablecoin terraUSD (UST) and LUNA ? This firm tries to distinguish the true from the false by analyzing Terra’s on-chain data.

Collapse of the UST stablecoin: the 7 mercenaries rather than the lone pirate

The blockchain analytics company Nansen conducted a study on the loss of anchorage of the TerraUSD to the US dollar. The analyzes aim to put an end to the one striker myth who would have succeeded in causing this catastrophe in the Terra ecosystem.

For Nansen, 7 large wallets would be the cause of this loss of TerraUSD’s peg to the dollar. The concerned would have got rid of their UST against USD Coins or against other digital assets.

What are the reasons which pushed these investors to carry out these massive sales of UST? Nansen has abstained “any comments on the objectives of the 7 portfolios”.

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Beginning of de-peg: on the trail of guilty USTs, from Anchor to Curve

The massive exchanges to the detriment of the UST, which would have taken place from May 7 to 11, 2022would have been made via the liquidity pool curve. The loss of the stablecoin’s peg would also be part of the protocol – Curve is a DEX on Ethereum (ETH).

“In reviewing on-chain activity, we discovered that a small number of wallets and a likely even smaller number of entities behind those wallets caused imbalances in Curve liquidity protocols. They regulated the parity between UST and other stablecoins. »

Nansen Declaration

Going into details, the wallets have withdrew their funds from Anchor. The latter is one of Terra’s most popular decentralized applications. It offers a generous reward on UST deposits in the protocol.

The portfolios concerned then transferred their UST to Ethereum via the Wormhole Bridge. They finally traded their UST for other digital assets on Curve.

When the UST began to lose its peg, Nansen believes some investors exploited arbitrage opportunities. It was then a question of buying the asset cheaper on one protocol to sell it more expensive on another, when the latter display different prices for the same asset.

All of these factors created an infernal spiral that led to the collapse of the value of the UST.

UST, Terra, and Bitcoin: an infernal triangle as the basis of an algorithmic stablecoin

UST is an algorithmic stablecoin that is paired with LUNA, Terra’s native cryptocurrency. When the price of UST drops below 1 dollar, the mechanism that guarantees its peg to the dollar send UST to Terra. The latter returns in exchange for LUNA.

Terra burns the received UST, decreasing the supply of the stablecoin and increasing its value to $1. The supply of LUNA will on the contrary increase, since Terra issues new ones.

But what happens in the event of a massive liquidation of UST, as was the case recently? Excess LUNA emission to burn the most UST will explode the offer of LUNA at a level well above market demand. The price of LUNA is therefore in danger of collapsing – and this collapse has actually taken place.

However, a fall in the price of the LUNA also worries the holders of UST. The 2 tokens being linked, one in fact guaranteeing the value of the other. Worry can thus lead to further mass liquidations of UST – thus creating a downward spiral.

To avoid such a scenario, the Luna Foundation Guard must protect the parity of the UST with the dollar. It can intervene in buying back the USTs massively sold. The Foundation has a reserve of bitcoin (BTC) that it can sell to buy these USTs.

However, by selling a large quantity of bitcoins, the Luna Foundation Guard exerts strong downward pressure on them. She decreases so the value of its own reserves remaining bitcoins.

The fall in the price of Bitcoin then put the Foundation in theinability to redeem enough UST liquidated en masse to rebalance the price of the stablecoin – to avoid UST burns which, in return, lead to a fall in the LUNA and which fuels the spiral described above.

Nansen also specified that the Luna Foundation Guard had indeed tried to “remove” the significant amount of UST sold by the 7 wallets.

However, the Foundation simply could not absorb them all given the size of the liquidation. The fall in the price of Bitcoin paradoxically due to the sale of BTC reserves in an attempt to save the UST did not help the foundation.

Terra rises from its ashes with a new blockchain and a LUNA 2.0 airdrop. Have the project and other stablecoin issuers learned the right lessons from this earthquake that shook the crypto industry?

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