Two key takeaways from Nansen’s UST stablecoin depeg report

Because the dust settles around the cataclysmic collapse from the Terra ecosystem, an on-chain deep-dive transported out by blockchain analytics firm Nansen highlights two major takeaways.

The cryptocurrency ecosystem was awash with different speculatory theories around the reason for Terra’s algorithmic stablecoin UST’s decoupling from the $1 peg. The who and why appeared a mysterious however the effects were catastrophic, with UST shedding well below $1 while the need for Terra’s stablecoin token plummeting in value consequently.

Nansen began an analysis leveraging on-chain data in the Terra ecosystem towards the Ethereum blockchain in order to chart the chain of occasions that brought towards the UST depeg. 

It’s important to note the report doesn’t include potential off-chain occasions that may have exacerbated the problem, effect on investors, introduction to internet losses between wallets, and just what became of Bitcoin (BTC) reserves backing UST.

Attackers preyed on shallow Curve liquidity to take advantage of arbitrage possibilities

The foremost and greatest takeaway was Nansen’s identification of the small group of addresses or players that identified vulnerabilities within the Terra ecosystem. These actors preyed around the relatively shallow liquidity of Curve pools backing the TerraUSD (UST) peg with other stablecoin and gone to live in take advantage of arbitrage possibilities.

The report outlines how these actors withdrew UST funds in the Anchor protocol on Terra. These funds were then bridged from Terra to Ethereum utilizing the Wormhole infrastructure.

Massive levels of UST were then swapped with assorted stablecoins in Curve’s liquidity pools. Nansen then speculated that in the depegging process, a few of the identified wallets exploited discrepancies between prices sources on Curve in addition to decentralized and centralized exchanges if you take exchanging positions across exchanges.

Nansen’s report refuted a speculative narrative that the single attacker or hacker labored to destabilize UST.

Seven wallets central to UST’s depeg

Nansen blockchain analysis adopted a grounded theory approach that identified relevant transaction volume data between May 7 and 11 – the time-frame by which UST lost its $1 peg.

The firm reviewed social networking and forum threads to narrow lower that specific time period, highlighting prominent transaction flow on Curve liquidity pools – which brought to the three-phase analytical approach.

Phase one involved analysis of transactions interior and exterior the bend lending protocol, which permitted Nansen to compile a summary of wallets whose activities advise a significant effect on the UST depegging.

Phase two was a little more complicated, as Nansen observed transactions over the Wormhole bridge that could have influenced the depeg event. The firm reviewed outflows of UST in the Anchor protocol involving a narrowed-lower listing of wallets. It was adopted by investigating the purchase of UST and USDC on centralized exchanges.

Related: Exchanges back ‘Terra 2. revival plan’ via airdrops, listing, buyback and burning

The ultimate phase involved triangulating on-chain evidence to create a narrative from the occasions round the UST depeg. A summary of seven wallets ended up being highlighted which are thought to happen to be central within the Terra ecosystem collapse.

The Nansen report provides some interesting insights driven by blockchain analytics. The main ‘why’ remains a mysterious though – using the firm opting to not speculate around the potential objectives or motivations behind the seven primary addresses that performed a significant role in triggering the depeg from the UST algorithmic stablecoin.

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