whale story – How do you explain, with supporting evidence, theto collapse to zero of the value stablecoin terraUSD (UST) and LUNA † This company tries to distinguish the true from the false by analyzing Terra’s on-chain data.
Collapse of the UST Stablecoin: The 7 Mercenaries Instead of the Lonely Pirate
The blockchain analytics company Nansen conducted a study on the loss of anchorage of the TerraUSD to the US dollar. The analyzes aim to put an end to the a pointed myth that would have managed to cause this catastrophe in the Terra ecosystem.
for Nansen, 7 large purses could be the cause of this loss of TerraUSD’s peg to the dollar. Those involved would have lost their UST against USD coins or against other digital assets.
What are the reasons that prompted these investors to carry out this massive sale of UST? Nansen has abstained “commentary on the objectives of the 7 portfolios”†
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Beginning of the peg: On the trail of guilty USTs, from Anchor to Curve
The massive exchanges to the detriment of the UST, which would have taken place from May 7 to 11, 2022would have been done through the liquidity pool curve† The loss of the stablecoin’s peg would also be part of the protocol – Curve is a DEX on Ethereum (ETH)†
“When assessing on-chain activity, we found that a small number of wallets and a likely even smaller number of entities behind those wallets caused imbalances in Curve’s liquidity protocols. They regulated the parity between UST and other stablecoins. †
Statement by Nansen
Going into details, the wallets have have withdrawn their money from Anchor† The latter is one of Terra’s most popular decentralized applications. It offers a generous reward on protocol UST deposits.
The relevant portfolios then transferred their UST to Ethereum via the Wormgat Bridge. They have finally traded their UST for other digital assets on Curve.
As the UST started to lose its peg, Nansen believes that some investors utilized arbitration opportunities† It was then a matter of buying the asset cheaper on one protocol and selling it more expensively on another, when the latter show different prices for the same asset.
All these factors created an infernal spiral that led to the collapse of the value of the UST.
UST, Terra and Bitcoin: An Infernal Triangle as the Basis of an Algorithmic Stablecoin
UST is an algorithmic stablecoin linked to LUNA, Terra’s native cryptocurrency. When the price of UST falls below 1 dollar, the mechanism that guarantees the peg to the dollar is send UST to Terra† The last one returns in exchange for LUNA†
Terra burns the received USTreducing the supply of the stablecoin and increasing its value to $1. In fact, LUNA’s supply will increase as Terra issues new ones.
But what happens in a massive liquidation of UST, as was the case recently? Excessive LUNA emission to most UST . to burn will offer LUNA . explode at a level well above market demand. So the price of LUNA is in danger of collapsing – and that collapse has actually happened.
However, a fall in the LUNA price is also worrying holders of UST. The 2 tokens are linked, one basically guarantees the value of the other. Thus, concerns could lead to further massive liquidations of UST, creating a downward spiral.
To avoid such a scenario, the Luna Foundation Guard must: protect the parity of the UST with the dollar† It can intervene in buy back the USTs sold en masse. The Foundation has a reserve of bitcoin (BTC) that it can sell to buy these USTs.
However, by selling a large amount of bitcoins, the Luna Foundation Guard is putting a strong downward pressure on them. She decreases so the value of his own reserves remaining bitcoins.
The fall in the price of Bitcoin then put the Foundation in theinability to provide adequate UST. to exchange liquidated en masse to rebalance the price of the stablecoin – to avoid UST burns which in turn lead to a drop in the LUNA and fuel the spiral described above.
Nansen also indicated that the Luna Foundation Guard did indeed have tried to “delete” the significant amount of UST sold by the 7 portfolios.
However, given the magnitude of the liquidation, the Foundation simply could not absorb them all. The Bitcoin price drop, paradoxically due to the sale of BTC reserves in an effort to save the UST, did not help the foundation.
Terra rises from the ashes with a new blockchain and a LUNA 2.0 airdrop† Did the project and other stablecoin issuers learn the right lessons from this earthquake that shook the crypto industry?
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