On May 13, Terra, the second largest economy in the decentralized financial world, completely failed in this unprecedented encryption storm. In the five days from May 8 to today, Terra’s market value dropped from nearly $25 billion to less than $1 billion. Terra’s main currency, Luna, fell from the original $80 to 0.00005, and basically returned to zero. The Terra blockchain has been temporarily shut down, and the algorithmic stablecoin, UST, fell to $0.17.
In our previous analysis "Last Year 519, This Year 510-From the perspective of on-chain analysis, will LUNA really fall into a death spiral" introduced the reasons for the Luna death spiral in detail. But was this event really just an unpredictable perfect storm? Or a long-planned financial hunt? There are also many discussions on this issue in the industry, but most of them are still subjective guesses. It is better for us to analyze objectively together, let the clues speak and let the data speak.
1. Restoration of the UST death spiral event and analysis of doubts
The birth and development of UST has been accompanied by two completely different voices in the market. Those who support it think it is a "jihad" to defend freedom, and those who do not support it think it is a huge "Ponzi scheme". , so huge that sooner or later it will ruin the entire encryption world.
Objectively speaking, both opinions have their own basis. From the first day of UST’s birth, a sword of Damocles has been hanging on its head. Mechanism, but the liquidity and pressure bearing capacity of UST. If the liquidity of UST reaches a certain level, it will be difficult to beat (more than 4 billion US dollars), so UST, including other algorithmic stablecoins, is itself a game of confidence, which is achieved by confidence and lost by confidence.
(1) 84 million to break the balance: LFG's first mistake and the first suspicion of a premeditated attack
Like most stablecoins, the central battlefield for the 1:1 anchoring of UST and the US dollar is the decentralized stablecoin exchange Curve. The previous anchoring of UST and the US dollar was mainly based on the UST-3Crv pool on Curve (Terra started this year Since March, I have been preparing to create a UST+USDT+USDC+FRAX 4pool of US$4 billion on Curve).
On May 8, LFG's fund pool address (0x6a97B6) withdrew UST liquidity of US$150 million from the UST-3Crv pool.
This address has been actively participating in the Luna and UST ecosystems since receiving initial funding from Coinbase on December 11, 2021.
Although Terra is preparing for the construction of 4pool this time, it also directly reduced the liquidity in UST-3Crv to about 700 million US dollars. According to Curve's liquidity mechanism, if someone uses half of TVL's UST (more than 300 million) to exchange 3CRV (3pool), the UST liquidity in UST-3Crv will be exhausted and will return to zero in a short time.
About 10 minutes later, a new address (0x8d47F0) that became active on May 8 sold more than 84 million UST to UST-3Crv, causing UST-3Crv to lose its balance. This address was only activated 5 hours before the attack. The new address was activated to hide its identity and transfer a large amount of funds. enable new addresses, and usually do not make large transactions immediately).
After realizing that UST-3Crv was out of balance, LFG withdrew 100 million UST from UST-3Crv through another fund pool address (0xe89DA2) to restore the balance of the liquidity pool, and did not replenish liquidity immediately.
This caused the liquidity of UST-3Crv to further drop to about 500 million, and it only takes more than 200 million US dollars to exhaust UST liquidity. This was the first mistake LFG made.
(2) Rescue: LFG made the second mistake and doubt
After LFG withdrew 150 million and 100 million funds consecutively, Polygon ’s chief security officer and various KOLs who opposed Terra immediately publicly expressed doubts about LFG’s two withdrawals. Various rumors arose in the market, and voices questioning LFG’s cashing out were overwhelming. Although DK, the founder of Terra, quickly made a statement: the first withdrawal of 150 million is to prepare for 4pool, and the second 100 million is to balance liquidity, but the market is full of doubts about UST and Terra.
We conducted a sentiment analysis on the news about UST on Twitter (50,000 pieces) 3 hours after the incident, and found that 78.32% of the news were questioning and negative, but historically, Twitter that supported UST and questioned UST generally showed a trend toward In the state of equality, it can be seen from the data that the direction of public opinion has completely changed, and the balance is being quietly broken. This is the second doubt, that someone is manipulating or guiding public opinion.
The change in the direction of public opinion has led to a deterioration in market sentiment. Since May 8, giant whales have continued to sell UST, and the selling pressure of UST in the market has increased sharply. LFG sold ETH in the market through Jump Trading, a market maker, and repurchased UST until the funds at the address were exhausted. At this time, LFG has made a second fatal mistake: starting to rescue the market without a strategy. The lack of strategy is reflected in two aspects. On the one hand, a single address has exhausted funds to save the market, causing LFG to sell its property to recover. Everyone is analyzing how much LFG has. At one calculation, there are only more than 70,000 bitcoins (2 billion), and UST in the market There are nearly 18 billion, which is simply unacceptable; on the other hand, the direction of market public opinion has not been corrected in time. You may ask, what should we do if the selling pressure increases? Just buy it back quietly and without leaving any traces, and do positive PR to let everyone know that the market is solving problems by itself.
Who is there to save? Those who are sick and have problems need to be rescued. The loss of market confidence is the real culprit that dragged UST into the abyss, and all this was caused by LFG itself.
(3) Selling BTC: LFG made the third mistake and third doubt
After the unanchor incident on May 8, due to the loss of confidence and the spread of panic, the 18 billion UST locked in Anchor began to be thrown into the market.
LFG officially announced the use of $700 million in bitcoin reserves to maintain the stability of UST. There are 18 billion UST in the market, 7 to 180, the market fear is further strengthened, and everyone starts to "flee for their lives". Maybe DK also noticed that the funds are not enough, so he sent a tweet: "More funds are being mobilized". You must know that the preparation of more than 70,000 bitcoins began in March, and the 18 billion US dollars LFG did not exist in a short period of time. It may be raised, which is tantamount to telling everyone to speed up "escape".
However, 700 million US dollars of bitcoin was thrown into the market, causing the bitcoin market to plummet, and the market began to liquidate in a row, including Luna, and more people began to sell UST and Luna. This was the third mistake made by LFG. By May 10, LFG realized that the strategy of selling bitcoins was a failure, and the market simply couldn't handle it, so it stopped bailing out the market and let the market develop.
In this round of UST sell-off, we found a third doubt. A new address (0x59964a) that was also activated on May 8 began reverse operations after the May 8 incident, absorbing more than 600 million UST in the market.
Then, 588 million UST were sold at one time on May 10, and nearly 30 million UST were sold on May 11.
It can be said that the sell-off of this new address on May 10 made it inevitable that the UST on May 10 would be severely de-anchored. In fact, the lowest point of UST fell to 0.6 on May 10, seriously breaking the anchor, and LFG has used up most of their reserves, and almost ran out of ammunition and food. The subsequent process and results can be imagined.
2. Is it a Soros-style financial attack? Is it profitable?
The above three doubts make us have to suspect that this is a long-planned Soros-style financial attack (if you don’t know the operation logic of Soros’s attack, you can check it on the Internet, and I won’t go into details here), and the market is also full of According to this kind of voice, capital is profit-seeking. If it is a financial hunt, it must be profitable. If this incident is an attack, has the attacker made any money?
Many voices in the market say that some organizations have raised 100,000 bitcoins for this attack, so we use 100,000 bitcoins to estimate how much profit the attacker can gain if this incident is a financial attack.
(1) Ambush: Assume that the attacker’s 100,000 bitcoins created a short position on March 22 when LFG began to accumulate bitcoins. On March 22, the price of bitcoins was about 42,000 US dollars, which is equivalent to creating 4.2 billion US dollars of bitcoins. Currency short position. Once the price of Bitcoin falls, the attacker will be rewarded. (And since March, Bitcoin has begun to show signs of decline, which also reduces the risk of short positions to a certain extent).
(2) Waiting for the opportunity: With the impact of factors such as the Fed’s interest rate hike and the Russia-Ukraine war, the cryptocurrency market continues to decline, and the attacker’s attack time is gradually ripening.
(3) The time is ripe: The attacker set LFG to deploy 4pool to raise a large amount of funds from the existing liquidity pool as an opportunity, and monitored LFG's dynamics at all times. When they got the news on May 8 that LFG would start to transfer funds, they began to withdraw funds from Binance. Withdraw $84 million as the attack principal to prepare for the attack. On the same day, LFG withdrew 150 million UST as scheduled and launched an attack 10 minutes later.
(4) Attack strategy: smash UST and influence public opinion. On May 8th, 84 million USTs were passed, which caused a short-term unanchor and affected public opinion. On May 9th, the market sentiment and UST dynamics were continuously observed. When a large number of giant whales were found to sell UST or withdraw UST from Anchor, the attack strategy took effect (if If there is no market panic, continue to return to the above step to wait for the opportunity).
(5) Fatal blow: The attacker began to use another 600 million US dollars to absorb the UST thrown out in the market and prepare for the fatal blow. On the morning of May 10, he sold UST at one time, smashing UST to a low of 0.6, a serious drop Anchor, market confidence was crushed.
(6) Take the money and leave: After that, the attacker only needs to wait for LFG to use more than 70,000 bitcoins in its reserve to rescue the market, wait for the bitcoin to plummet and make a profit through the 4.2 billion bitcoin short position (not counting the attacker here for the time being) Whether some of the funds have shorted Luna).
Principal: 4.2 billion short positions + 84 million attack start-up funds + 600 million attack reserves, nearly 4.9 billion US dollars (if the UST smashing of US$ 600 million is not an attacker's behavior, but a market behavior, the principal is 4.3 billion).
Cost: According to Curve's fee mechanism and fully consider the price fluctuation of UST during the attack process. 84 million is calculated according to 1%, and the cost of the first attack is 840,000; the second attack cost of 600 million US dollars is calculated as 10%, and the cost is 60 million US dollars (if 600 million is a market behavior, the cost here is 0).
Gains: If the attackers had closed their positions on May 10, when the price of Bitcoin was $32,000, the $4.2 billion Bitcoin shorts would have made $952 million.
Summary: With a principal of less than 4.5 billion and an attack cost of less than 100 million, the profit was nearly 1 billion US dollars. And because of the existence of the UST death spiral, this kind of attack opportunity will inevitably appear continuously, and if you seize it once, you will destroy the entire ecology and make a profit.
3. The stablecoin war has just begun
Stable currency is a liquidity checkpoint of decentralized finance, full of benefits and risks. The stable currency war has just begun and is far from over:
(1) On May 10, May 11, and May 12, the U.S. Department of the Treasury continued to make calls to regulate stablecoins, and the SEC claimed that it would investigate the UST project party at any time. The UST is a project of the Korean DK, which reminds people of the IMF's intervention and influence on the Korean economy during the economic crisis a few years ago. This point should be a wake-up call for any stablecoin, how to develop and how to supervise, the value industry and the relevant financial departments of various countries should think deeply.
(3) Market risk: As institutions continue to enter the market, the encryption market may gradually become a game for professionals and capitalists. High-level financial games will continue to emerge, and high returns will no longer be the norm. How to be vigilant against market risks is an issue for everyone Issues that both projects and users must face and think carefully about.
(3) What should be the security mechanism of the stablecoin: is it a real asset anchor like USDT and USDC or an algorithmic stablecoin like DAI and UST? Are algorithmic stablecoins necessarily insecure? In fact, this is not always the case. Taking UST as an example, if LFG’s $4 billion 4pool is established, it will take at least $2 billion to successfully prevent unanchoring. The attack, this can only be verified by time. No matter what type of stablecoin it is, the security of the economic model and on-chain risk monitoring and early warning are essential.
Davin
Bitcoinist
Cointelegraph
Ftftx
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