Blockchain analytics company Nansen linked the de-peg of Terra’s US dollar stablecoin to seven large crypto wallets, among them a wallet associated with crypto lending platform Celsius, whose massive sales of UST triggered a stampede for the exit.
UST maintained its peg to the US dollar through a complex network of arbitrageurs – traders who bought and sold the token, as well as a linked, volatile crypto called LUNA, to profit from price differences across exchanges and DeFi liquidity pools.
This all worked pretty well since UST launched in December 2020 – until the market lost confidence in the mechanism earlier this month, sending the network into a death spiral that plunged UST to $0.02 and LUNA from well over $100 to fractions of a cent.
Nansen’s report, released Friday, claims that seven arbitrageurs contributed to UST’s depegging by flooding shallow liquidity pools on Curve with huge amounts of UST.
Liquidity providers on Curve, then DeFi’s largest protocol by total value locked, are incentivized to maintain the prices of tokens in liquidity pools by balancing their supplies with other, similarly priced tokens, but huge withdrawals and inflows can temporarily throw the price of the tokens out of whack.
Using on-chain data, Nansen traced seven power users who may have triggered the depeg when they rushed to sell huge amounts of UST on Curve.
The seven wallets withdrew UST from Anchor – Terra’s lending product that offered yields of close to 20% before its collapse – sent them to Ethereum via multi-chain bridge Wormhole, then swapped them on Curve, the largest DeFi protocol, for other stablecoins.
Deluge of Sales
Right before the depeg, the seven wallets, including the one linked to Celsius, sent so much UST to Curve that the price of the stablecoin went awry.
Luna Foundation Guard – a Terra-linked organization that tried to defend UST’s peg – tried to counteract this by withdrawing about 150M UST from Curve on May 7, and adding other stablecoins back into the Curve pool.
But shortly after, five other addresses sold another deluge of UST on Curve. LFG attempted to defend the peg once again by withdrawing 189.6M UST. The war continued into the morning of May 8.
Between May 7 and May 10, Nansen reported that the top 20 addresses withdrew 2B UST from Anchor – about 11% of UST’s market cap at the time. The Block reported on May 13 that Celsius pulled out at least $500M of funds from Anchor.
But LFG’s attempts to balance the Curve pool were insufficient in the face of relentless selling. UST inflows to centralized exchanges like Binance gathered momentum on May 9. That peaked on May 10, when 165M UST was sent to centralized exchanges.
The on-chain data disputes the popular belief that a single ‘bad actor’ crashed Terra’s US dollar stablecoin earlier this month.
“While many of these wallets were likely acting independently, collectively, arbitrageurs influenced a liquidity imbalance that ultimately led to the UST/LUNA death spiral,” Nansen tweeted.
Even without Anchor, Celsius still offers interest rates of up to 9.32% on stablecoin deposits, so long as interest is paid in CEL, the platform’s utility token. The token fell sharply when UST depegged, from about $2.17 to $0.63.
Do Kwon, the founder of Terra, has since relaunched LUNA on a new blockchain, Terra 2.0. The new chain doesn’t feature an algorithmic stablecoin.