As the dust settles on the catastrophic collapse of the Terra ecosystem, deep diving on a chain carried out by blockchain analytics firm Nansen highlights two main avenues.
The cryptocurrency ecosystem was full of different speculative theories about the cause of the Terra algorithmic stablecoin UST disconnection from its $ 1 connection. Who and why seemed a mystery but the result was dire, with ICT falling well below $ 1 while the value of the stablecoin symbol Terra plummeted as a result.
Nansen undertook a study using data from a chain from the Terra ecosystem to the Ethereum blockchain in an effort to map the course of events that led to the ICT depeg.
Interestingly, the report does not include potential off-chain events that could have exacerbated the situation, the impact on investors, the breakdown of net losses between wallets and what happened to Bitcoin (BTC) reserves that support ICT.
The attackers chased shallow Curve liquidity to take advantage of arbitrage opportunities
The first and biggest advantage was Nansen’s identification of a small set of addresses or players that identified vulnerabilities in the Terra ecosystem. These players applied for the relatively shallow liquidity of Curve pools that supported the TerraUSD (UST) connection to other stablecoins and moved to take advantage of arbitrage opportunities.
The report describes how these actors withdrew UST funds from the Anchor Protocol on Terra. These funds were then bridged from Terra to Ethereum using the Wormhole infrastructure.
Enormous amounts of ICT were then exchanged for various stablecoins in Curve’s liquid assets. Nansen then wonders that during the disconnection process, some of the identified wallets took advantage of the discrepancy between the pricing of the Curve as well as the decentralized and centralized exchanges by taking a buy and sell position between exchanges.
Nansen’s report refuted a speculative statement that one attacker or hacker had worked to prevent ICT instability.
Seven wallets centrally in depeg UST
Nansen blockchain analysis adopted a basic approach that identified relevant data on trade volumes between May 7 and May 11 – a time frame in which UST lost its $ 1 connection.
The company went through social media and forums to narrow down that particular time frame and focused on the noticeable business flow of Curve liquidity funds – which led to its three-phase analysis method.
The first phase included an analysis of transactions in and out of the Curve credit protocol, which allowed Nansen to compile a list of wallets where their activities indicate a significant impact on the ICT disconnection.
Phase two was a bit more complicated, as Nansen watched trades across the Wormhole Bridge that could have affected the depeg event. The company reviewed the outflow of ICT from the Anchor Code, which includes a narrower list of wallets. This was followed by a study of the sale of UST and USDC on central exchanges.
Connected: Switches back to “Terra 2.0 resuscitation program” with air drops, registration, acquisitions and incineration
The final phase included a triangle of evidence on the chain to form a narrative of events surrounding the ICT depeg. A list of seven wallets was then identified which is believed to have been a central point in the collapse of the Terra ecosystem.
The Nansen report provides interesting insights driven by blockchain analysis. However, the essence of “why” is still a mystery – as the company chooses not to consider the potential goals or motivations behind the seven key addresses that played a major role in triggering the depeg UST algorithmic stablecoin.
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