Two key takeaways from Nansen’s UST stablecoin depeg report

As the dust settles on the cataclysmic collapse of the Terra ecosystem, an on-chain deep-dive carried out by blockchain analytics firm Nansen highlights two major takeaways.

The cryptocurrency ecosystem was awash with varying speculatory theories around the cause of Terra’s algorithmic stablecoin UST’s decoupling from its $1 peg. The who and why seemed a mystery but the outcome was catastrophic, with UST dropping well below $1 while the value of Terra’s stablecoin token plummeting in value as a result.

Nansen undertook an investigation leveraging on-chain data from the Terra ecosystem to the Ethereum blockchain in an effort to chart the chain of events that led to the UST depeg. 

It is worth noting that the report does not include potential off-chain events that could have exacerbated the situation, impact on investors, breakdown of net losses between wallets, and what happened to Bitcoin (BTC) reserves backing UST.

Attackers preyed on shallow Curve liquidity to exploit arbitrage opportunities

The first and biggest takeaway was Nansen’s identification of a small set of addresses or players that identified vulnerabilities in the Terra ecosystem. These actors preyed on the relatively shallow liquidity of Curve pools backing the TerraUSD (UST) peg to other stablecoin and moved to capitalize on arbitrage opportunities.

The report outlines how these actors withdrew UST funds from the Anchor protocol on Terra. These funds were then bridged from Terra to Ethereum making use of the Wormhole infrastructure.

Massive amounts of UST were then swapped with various stablecoins in Curve’s liquidity pools. Nansen then speculated that during the depegging process, some of the identified wallets exploited discrepancies between pricing sources on Curve as well as decentralized and centralized exchanges by taking buying and selling positions across exchanges.

Nansen’s report refuted a speculative narrative that a single attacker or hacker worked to destabilize UST.

Seven wallets central to UST’s depeg

Nansen blockchain analysis adopted a grounded theory approach that identified relevant transaction volume data between May 7 and 11 - the timeframe in which UST lost its $1 peg.

The firm reviewed social media and forum threads to narrow down that particular time frame, highlighting prominent transaction flow on Curve liquidity pools - which led to its three-phase analytical approach.

Phase one involved analysis of transactions in and out of the Curve lending protocol, which allowed Nansen to compile a list of wallets whose activities suggest a significant impact on the UST depegging.

Phase two was slightly more complicated, as Nansen observed transactions across the Wormhole bridge that may have influenced the depeg event. The firm reviewed outflows of UST from the Anchor protocol involving a narrowed-down list of wallets. This was followed by investigating the sale of UST and USDC on centralized exchanges.

Related: Exchanges back ‘Terra 2.0 revival plan’ via airdrops, listing, buyback and burning

The final phase involved triangulating on-chain evidence to form a narrative of the events around the UST depeg. A list of seven wallets was then highlighted that are believed to have been central in the Terra ecosystem collapse.

The Nansen report provides some interesting insights driven by blockchain analytics. The core ‘why’ remains a mystery though - with the firm opting not to speculate on the potential objectives or motivations behind the seven main addresses that played a major role in triggering the depeg of the UST algorithmic stablecoin.