Two key takeaways from Nansen’s UST stablecoin decoupling report

As the dust settles over the catastrophic collapse of the Terra ecosystem, an on-chain in-depth study by blockchain analytics firm Nansen highlights two main conclusions.

Cryptocurrency Ecosystem submerged There are different speculative theories surrounding the cause of Terra Algorithmic Stablecoins UST’s pegged to $1The who and why seemed like a mystery, but the results were disastrous, with UST falling well below $1 and the value of Terra’s stablecoin token plummeting as a result.

Nansen conducted an investigation using on-chain data from the Terra ecosystem to the Ethereum blockchain to map the chain of events that led to the UST depeg.

Notably, the report does not include potential off-chain events that could exacerbate the situation, the impact on investors, a breakdown of net losses between wallets, and what happened to Bitcoin (bitcoin) to retain support for UST.

Attackers exploit shallow curve liquidity to exploit arbitrage opportunities

The first and biggest takeaway was that Nansen identified a small group of addresses or participants who discovered vulnerabilities in the Terra ecosystem. These participants took advantage of the relatively shallow liquidity of the Curve pool that backs TerraUSD (UST) pegged to other stablecoins, and started taking advantage of arbitrage opportunities.

The report outlines how these actors can withdraw UST funds from the Anchor protocol on Terra. These funds are then bridged from Terra to Ethereum using wormhole infrastructure.

A large amount of UST is then exchanged with various stablecoins in the Curve liquidity pool. Nansen then speculated that in the process of unpegging, some of the identified wallets took advantage of Curve’s pricing sources and the difference between decentralized and centralized exchanges by taking buy and sell positions on exchanges.

Nansen’s report refuted speculative narrative A single attacker or hacker works to destabilize the UST.

Seven wallets at the heart of UST depeg

The Nansen blockchain analysis took a grounded-theory approach, identifying relevant volume data between May 7 and 11 — the time frame in which UST lost its $1 peg.

The firm reviewed social media and forum threads to narrow down specific timeframes, highlighting prominent trade flows on Curve’s liquidity pools — which led to its three-stage analysis approach.

The first phase involved analyzing transactions in and out of the Curve lending protocol, which allowed Nansen to compile a list of wallets whose activity indicated a significant impact on UST decoupling.

The second stage is slightly more complicated, as Nansen observed that transactions on the wormhole bridge may have influenced the depeg events. The company reviewed the outflow of UST in the Anchor protocol, involving a narrowed list of wallets. The sale of UST and USDC on centralized exchanges was then investigated.

related: Exchange for the “Terra 2.0 Revival Plan” through airdrops, listings, buybacks, and destructions

The final stage involves triangulating on-chain evidence to form a narrative of events surrounding the UST depeg. It then highlighted a list of seven wallets believed to be at the heart of the collapse of the Terra ecosystem.

The Nansen report provides some interesting insights driven by blockchain analytics. The core “why” remains a mystery, though — the company chose not to speculate on the underlying goals or motives behind the seven major addresses that played a major role in triggering the decoupling of the UST algorithmic stablecoin.