Nansen Research Debunks Single 'Attacker' Myth in Terra's Collapse

The TerraUSD stablecoin collapsed for one reason: big holders didn't trust it.

AccessTimeIconMay 27, 2022 at 6:18 p.m. UTC
Updated May 11, 2023 at 4:50 p.m. UTC
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​​Friday morning, on-chain analytics firm Nansen released its in-depth report on the trading activity that led to the depegging of the stablecoin terraUSD (UST). There is an immense amount of detail to be unpacked, but Nansen’s most important conclusion is this:

“We refute the popular narrative of one ‘attacker’ or ‘hacker’ working to destabilize UST. The depeg of UST could instead have resulted from the investment decisions of several well-funded entities, e.g., to abide by risk management constraints or alternative to reduce UST allocations deposited into [lending protocol] Anchor in the context of turbulent macroeconomic and market conditions.”

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To put that in English, Nansen concludes that terraUSD lost its one-to-one peg to the U.S. dollar because a variety of large holders felt it was too risky to keep holding the tokens. So they sold them.

Nansen identified seven wallets that were putting big selling pressure on the token, and it believes they all belong to separate actors. Nansen says one of the seven, for instance, is part of the Celsius network.

Nansen found that from May 7-11, these “whales” independently began aggressively trading their UST for USDC or other assets through the Curve liquidity pool, where Nansen said the depeg originated. (Curve is a decentralized token exchange on Ethereum.)

The Luna Foundation Guard tried to defend the peg by buying all that UST, but whales dumped so much LFG couldn’t keep up. That is, the nonprofit founded to protect UST’s $1 valuation didn't deploy enough assets to soak up all that UST. At that point, the peg started to waver as worried UST holders decided it was worth it to take 97 or 98 cents on the dollar.

From there it was all over but the shouting, because UST’s Rube Goldberg-like perpetual motion machine made it profitable to arbitrage this price imbalance in a way that widened it further. That led to a “death spiral” for UST and caused LUNA – its related “balancer token” – to hyperinflate, ultimately leaving few buyers for either.

There’s a lot more to say about the back-end nuances, but the big picture is what matters here: At the end of the day, UST collapsed because several large holders independently decided it was too risky. This shouldn’t be surprising, because after the terraUSD collapse insiders like Sam Bankman-Fried of FTX have suggested the smart money knew the token “was transparently going to falter at some point,” and were poised to bolt when waters got choppy.

And why was the smart money so primed to run for the exits? Because they looked at the fundamental structure of LUNA and UST and saw something that could never work. Any other understanding of events is pure and simple deflection – what the kids these days call “cope.”

As I wrote last week, the idea that a single malicious “attacker” or some shadowy cabal had intentionally knocked UST off its kilter basically amounts to a defense of terrible network design, implying that things would have been fine if it weren’t for the powerful enemies of the Luna(tic) Revolution. But the Nansen report shows that for the delusion it is: UST collapsed because there wasn’t enough market faith in the algorithmic stablecoin’s design and team, and that’s that.

This morning, I belatedly discovered one of the most absurd pieces of UST conspiracy cope yet, one that nicely sums up the motivated thinking behind the “attack” narrative. BitBoy, a particularly suspect YouTube crypto “influencer” who has been credibly accused of taking “pay to play” payments to promote tokens, confidently declared last week that the U.S. government is “100% behind the UST depeg.”

Whether he’s self-aware about it or not, BitBoy here is delivering the perfect line to cover his own ass as a Terra promoter (LUNA’s “pump cannot be stopped,” he declared in December), as well as covering for Do Kwon and his investors. Because, boy, if the U.S. government was behind the attack, then surely there wasn’t a problem with the UST design or the team. In fact – My God! – wouldn’t that suggest LUNA/UST were so perfect and powerful that the government was desperate to strangle it in its crib?

This is the kind of lazy, fact-free conspiracy thinking that’s rotting all of our brains and lets grifters get away with stealing your money. In this case it’s particularly devilish because we’re about to see the launch of “Luna 2.0,” which skeptics have said could just be another chance for Do Kwon and his allies to work over the same people they got the first time around.

The truth is that LUNA and terraUSD collapsed, at best, because they were built on a fundamentally flawed economic mechanism that incentivized its own collapse the moment faith wavered even slightly. Accepting that reality might not be comforting, but getting to keep your money should be.


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David Z. Morris

David Z. Morris was CoinDesk's Chief Insights Columnist. He holds Bitcoin, Ethereum, and small amounts of other crypto assets.

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