The Algorithmic Stablecoin UST Collapses - A Perfect Storm or a Financial Hunt?
On May 13, Terra, the second largest economy in the world of decentralized finance, completely failed in this unprecedented crypto storm. In the five days from May 8 to today, Terra’s market value fell from nearly $25 billion to less than one billion. Terra’s main currency, Luna, fell from the original $80 to 0.00005, basically returning to zero. The Terra blockchain has been temporarily closed, and the algorithmic stable currency UST fell to $0.17.
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In our previous analysis "519 last year, 510 this year - from the perspective of on-chain analysis, will LUNA really fall into a death spiral?" The reasons for the Luna death spiral were introduced in detail. But was this incident really just an unpredictable perfect storm? Or a long-planned financial hunt? There are also a lot of discussions on this issue in the industry, but more are subjective guesses. Let us analyze objectively together, let the clues speak, and let the data speak.
1. Event Reduction and Doubt Analysis for the UST Death Spiral
Two very different voices in the market have accompanied the birth and development of UST. Those in favor believe it is a "jihad" to safeguard the freedom, while those against believing it is a huge "Ponzi scam" that would ultimately destroy the whole crypto world.
Objectively speaking, both views have their own basis. From the first day of UST's birth, there is a sword of Damocles hanging on its head. This sword of Damocles is not UST/Luna. mechanism, but rather the liquidity and pressure-bearing capacity of UST. If the liquidity of UST reaches a certain level, it will be difficult to beat (more than 4 billion US dollars), so UST, including other algorithmic stablecoins, is a confidence game in itself, winning by confidence and losing by confidence.
1) 84 million breaking the balance: LFG's first mistake and the first suspicion of a premeditated attack
Like most stablecoins, the central battleground for the 1:1 peg between UST and the U.S. dollar is the decentralized stablecoin exchange Curve. Previously, the peg between UST and the U.S. dollar was mainly based on the UST-3Crv pool on Curve. Since March, preparations have been made to create a $4 billion UST+USDT+USDC+FRAX 4pool on Curve).
On May 8, LFG’s pool address (0x6a97B6) withdrew $150 million in UST liquidity from the UST-3Crv pool.
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This address has been actively participating in the Luna and UST ecosystem since receiving initial funding from Coinbase on December 11, 2021.
This withdrawal of funds, although Terra was preparing for the construction of 4pool, also directly reduced the liquidity in UST-3Crv to about $700 million. According to Curve's liquidity mechanism, if someone uses half of TVL's UST (more than 300 million) to exchange for 3CRV (3pool), the UST liquidity in UST-3Crv will be exhausted, and it will return to zero in a short time.
About 10 minutes later, a new address (0x8d47F0) that only became active on May 8 sold more than 84 million UST to UST-3Crv, causing UST-3Crv to lose balance. This address was only activated 5 hours before the attack, and the new address was activated to hide the identity and transfer a large amount of funds. This is the first doubt (we know that the address of the giant whale is generally protected by mechanisms such as hardware wallets and multi-signatures. New addresses are enabled, and large transactions usually do not occur immediately).
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After realizing that UST-3Crv was out of balance, LFG withdrew 100 million UST from UST-3Crv through another fund pool address (0xe89DA2) to restore the balance of the liquidity pool without immediately replenishing liquidity.
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This leads to a further drop in the liquidity of UST-3Crv to around 500 million, and it only takes over $200 million to deplete the UST liquidity. This was the first mistake LFG made.
(2) Save the market: LFG made the second mistake and the second doubt
After LFG withdrew 150 million and 100 million in a row, including the chief security officer of Polygon and KOLs who opposed Terra immediately publicly expressed their doubts about LFG's two withdrawals. There were all kinds of rumors in the market, and there were overwhelming voices questioning LFG's cash out. Although Terra founder DK quickly made a statement: the first 150 million withdrawal is to prepare for 4pool, and the second 100 million is to balance liquidity, but the market is full of doubts about UST and Terra.
We conducted sentiment analysis on the Twitter messages about UST (50,000 pieces) 3 hours after the incident, and found that 78.32% of the messages were both questioning and negative, but historically the tweets supporting UST and questioning UST tended to tend to In the state of reciprocity, it can be seen from the data that the wind of public opinion has completely changed, and the balance is being quietly broken. This is the second doubt. Someone is manipulating or guiding public opinion.
Market sentiment has deteriorated as a result of the effect in public opinion. Since May 8, giant whales have been selling UST continuously, and the market's selling pressure on UST has increased sharply. LFG uses market maker Jump Trading to sell ETH on the open market and afterwards buys back UST until the address is exhausted.
At this time, LFG has already committed the second fatal mistake: starting the bailout without a strategy. The lack of strategy is reflected in two aspects. On the one hand, a single address exhausted funds to save the market, causing LFG to sell its assets to recover. Everyone is analyzing how much wealth LFG has. In one calculation, there are only more than 70,000 bitcoins (2 billion), and the UST in the market There are nearly 18 billion, which is simply unacceptable; on the other hand, the market public opinion has not been corrected in time. You may ask, what should I do if the selling pressure increases? Just buy it back calmly and leave no trace, and do positive PR to let everyone know that the market is solving the problem by itself.
Who to save? Only those who are sick and have problems need to be saved. The loss of market confidence is the real culprit that has dragged UST into the abyss, and it's all of LFG's own making.
(3) Selling BTC: LFG made the third mistake and the third doubt
After the de-anchoring event on May 8, the 18 billion UST locked in Anchor began to be dumped on the market due to the loss of confidence and the spread of panic.
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LFG officially announced the use of $700 million in Bitcoin reserves to maintain the stability of UST. However, there are 18 billion USTs in the market, 7 to 180, the market fear is further strengthened, and everyone starts to "run for their lives". Maybe DK also noticed that the funds were not enough, and sent a tweet: "More funds are being mobilized", you must know that more than 70,000 bitcoins have been prepared since March, and the $18 billion LFG will not be available in a short period of time. It may be raised, which is equivalent to telling everyone to speed up the "escape".
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However, $700 million in bitcoin was thrown into the market, causing the price of bitcoin to plummet, and the market began to liquidate in a sequence of events, including the sale of UST and Luna. This is LFG's third mistake. By May 10, LFG had realized that its strategy of selling Bitcoin had failed and that the market could not manage it, so it stopped saving the market and decided to let it evolve on its own.
We found a third suspect in this round of UST sell-offs. After the May 8 incident, a new address (0x59964a), which was also activated on May 8, began reverse operations and absorbed more than 600 million UST in the market.
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Then there was a one-time sell-off of 588 million USTs on May 10 and nearly 30 million USTs on May 11.
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It can be said that the sell-off of this new address on May 10 made the severe de-anchoring of UST on May 10 inevitable. In fact, the lowest point of UST fell to 0.6 on May 10, which was seriously de-anchored, and LFG had used most of their reserves and almost ran out of ammunition and food. The subsequent process and results can be imagined.
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2. Is it a Soros-style financial attack? Is it profitable?
The above three doubts make us have to suspect that this is a long-planned Soros-style financial attack (if you don’t know the operational logic of the Soros attack, you can check it out on the Internet, and I won’t go into details here),
The market is also full of such voices. Capital is profit-seeking. If it is financial hunting, it must be profitable. If this incident is an attack, will the attacker make money?
There are many voices in the market saying that some institutions raised 10w bitcoins for this attack. We use 10w bitcoins to estimate how much the attacker can gain if the incident is a financial attack.
1) Ambush: Assuming that the attacker's 10w bitcoins created a short position on March 22 when LFG started to accumulate bitcoin, the bitcoin price on March 22 was about $42,000, which is equivalent to creating $4.2 billion in bitcoin short position. Once the price of Bitcoin drops, the attacker will be rewarded. (And since March, Bitcoin has begun to show signs of decline, which also reduces the risk of shorts to a certain extent).
(2) Waiting for the opportunity: With the impact of the Fed’s interest rate hike, the Russian-Ukrainian war and other factors, the cryptocurrency market continued to decline, and the attacker’s attack time gradually began to mature.
(3) The time is ripe: the attackers set LFG to deploy 4pool to raise a large amount of funds from the existing liquidity pool as an opportunity to monitor the dynamics of LFG at all times. When the news is received on May 8 that LFG will start to allocate funds, it will start to transfer funds from Binance. $84 million was removed as attack principal to prepare for attack. On the same day, LFG moved out 150 million UST as scheduled and launched the attack 10 minutes later.
(4) Attack strategy: smash UST and influence public opinion. On May 8th, 84 million USTs were temporarily de-anchored and affected public opinion. On May 9th, we continued to observe market sentiment and UST dynamics. When a large number of giant whales were found to sell UST or extract UST from Anchor, the attack strategy took effect (if If there is no market panic, continue to go back to the previous step and wait for the opportunity).
(5) Fatal blow: The attackers began to use another 600 million US dollars to absorb the UST thrown from the market and prepare for the fatal blow. On the morning of May 10th, the attacker threw the UST to a low of 0.6. Anchor, market confidence was defeated.
(6) Take the money and leave: After that, the attacker only needs to wait for LFG to use the more than 70,000 bitcoins in the reserve to save the market, wait for the bitcoin to plummet and profit from the 4.2 billion bitcoin shorts (not the attacker here for the time being) Whether part of the funds shorted Luna).
Principal: 4.2 billion shorts + 84 million attack start-up funds + 600 million attack reserves, nearly $4.9 billion (if the $600 million UST smashing is not an attacker's behavior, but a market behavior, the principal is 4.3 billion).
Cost: According to Curve's fee mechanism and fully consider the price fluctuation of UST during the attack process. 84 million is calculated at 1%, the first attack cost is 840,000; the second 600 million US dollar attack cost is calculated at 10%, and the cost is 60 million US dollars (if 600 million is market behavior, the cost here is 0).
Gains: If the attackers closed their positions on May 10 when Bitcoin was at $32,000, the $4.2 billion Bitcoin shorts would have made $952 million in gains.
Summary: Less than 4.5 billion in principal and less than 100 million in attack cost, with a profit of nearly $1 billion. And because of the existence of the UST death spiral, this kind of attack opportunity is bound to appear constantly, and if you seize it once, it will destroy the entire ecology and make a profit.
3. The stablecoin war has just begun
Stablecoins are the liquidity checkpoint of decentralized finance, full of benefits and risks. The stablecoin war has just begun and is far from over:
(1) On May 10th, May 11th, and May 12th, the U.S. Treasury Department kept saying that it would supervise stablecoins, and the SEC claimed that it would investigate the UST project party at any time. UST is a project of the Korean DK, which reminds people of the IMF's intervention and impact on the Korean economy during the economic crisis a few years ago. This should be a wake-up call for any stable currency, how to develop, how to supervise, and think deeply about the value industry and the relevant financial departments of various countries.
(3) Market risk: As institutions continue to enter the market, the crypto market may gradually become a game for professionals and capitalists, and high-level financial games will continue to occur, and high returns will no longer be the norm. Issues that both projects and users have to face and think carefully about.
(3) What should be the security mechanism of stablecoins: whether it is anchored by real assets like USDT and USDC, or algorithmic stablecoins such as DAI and UST. Are algorithmic stablecoins necessarily insecure? In fact, it is not always the case. Taking UST as an example, if LFG's $4 billion 4pool is completed, it will cost at least $2 billion to successfully prevent it from breaking the anchor. attack, only time will tell. Regardless of the type of stablecoin, the security of the economic model and on-chain risk monitoring and early warning are essential.
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