The collapse of cryptocurrency exchange FTX and the demise of Sam Bankman-Fried (SBF) prompted authorities to re-examine the collapse of the Terra ecosystem. In May, Terra’s algorithmic stablecoin UST and its sister coin LUNA fell into a death spiral that wiped $40 billion off the cryptocurrency market.
According to a report by The New York Times citing informed sources , U.S. prosecutors are rumored to be investigating SBF, FTX, and FTX’s sister trading platform, Alameda Research, to clarify whether SBF was involved in the collapse of UST and LUNA. On the other hand, Bloomberg News reported that FTX’s new CEO and bankruptcy lawyers met this week with Manhattan federal prosecutors investigating FTX’s collapse .
The Terra ecosystem is controlled by the cross relationship of the above two tokens, and the tokens are managed by automatic programs after calculation. If the price of UST exceeds $1, traders will be rewarded to exchange LUNA for UST to make a profit, and vice versa. Therefore, in theory, the circulation of UST can be controlled.
However, when investors lost confidence in one of the coins, the price of the other fell with it, creating a so-called death spiral that saw the coin crash to near zero in one week in May.
So, who exactly triggered this drop? This should be viewed from two aspects. The first one is the side of the trader who can see the transactions on the chain. On the chain, it can be seen that the wallet address has obviously exchanged UST for other tokens, which caused the market to panic. The other is the order details on the centralized exchange. Since the platform does not disclose user information, it is more difficult to track who placed the order.
Nikita Fadeev, partner at London-based cryptocurrency fund Fasanara Digital, said on Thursday:
In early May, signs of unease about the stability of UST began to emerge. Anchor, a decentralized lending protocol on the Terra blockchain, has dropped its yield rate to 18% for its clients, indicating that it has begun to feel pressure to offer unsustainable rates to traders willing to lock up tokens .
Then, on May 7, Terraform Labs, the issuer of UST, withdrew $150 million in UST liquidity from Curve. Curve is a platform that provides fund pooling. Investors can exchange UST of the same value for other stable currencies such as USDC on this platform . coin . Do Kwon, founder of Terra, said that this is a preparatory action to put more cash into the fund pool within a week.
However, just a minute later, an unknown wallet exchanged $84 million of UST tokens for USDC in the pool . This wasn’t the only wallet that swapped UST, as 12 other wallets also swapped tokens on May 7th and 8th, amounting to a whopping $321 million. Seven of those wallets withdrew UST from Anchor as early as January, and as UST began to deteriorate in May, wallets that initially withdrew $84 million pulled about $193 million in UST from Anchor again , according to data analytics firm Nansen. .
Do Kwon speculated on Twitter on Thursday that Alameda was involved in driving down the price of UST.
All the actions in May unbalanced the Curve pool, which at that time had more UST than any of the other three tokens. Terraform’s foundation, the Luna Foundation Guard (LFG for short, a foundation established to raise funds to maintain the UST value of $1), acted quickly to remove $100 million of UST from the pool. In order to act, it had to sell the bitcoin reserves it had set aside to maintain its purpose, a process that, combined with a slump in market confidence, led to a 29% drop in bitcoin for the week.
As this happens, both LFG and Terraform Labs are already in firefighting mode, expanding their consumption of Canadian currency reserves to prevent UST and LUNA from falling to zero. The result was also unsuccessful, with panic exchange and $10 billion withdrawn from Anchor, causing LFG to fail to balance its size.
While most of the UST activity in May took place on decentralized protocols such as Anchor and Curve, there was also some related activity on centralized exchanges such as Binance and FTX. The only problem is that almost all UST liquidity on major exchanges has dried up as UST and LUNA continue to fall .
According to the data collected by Kaiko, a blockchain analysis company, on May 8, there was a huge UST sell order in Binance, which wanted to exchange UST for USDT. Analysts at Kaiko pointed out that in the end, the poor liquidity of centralized exchanges is likely to have a large impact on the decoupling of UST from the $1 exchange rate , exacerbating the impact in addition to a series of events such as the withdrawal of a large number of UST from Anchor.
Kaiko also found that funding rates and trading volumes indicated that some people were actively shorting LUNA. The bulk of the sell orders against UST apparently came from SBF’s Alameda , sources quoted by The New York Times said . FTX did not respond to a request for comment.
“While we can’t prove it’s FTX, it could be them,” said Clara Medalie, Kaiko’s director of research