Blockchain analytics firm Nansen has linked the decoupling of the US dollar from Terra to seven major cryptocurrency wallets. Among them is a wallet associated with cryptocurrency lending platform Celsius, whose massive UST sales triggered a stampede.
UST kept its price pegged to the US dollar through a complex network of arbitrageurs – traders who bought and sold the token, as well as a volatile, tethered cryptocurrency called LUNA, to profit from price differences between exchanges and exchange pools.
UST stablecoin collapse
This has all worked very well since the UST was launched in December 2020. But that only worked until the market lost confidence in the engine earlier this month, sending the network into a death spiral that plunged the UST to $0, 02 and the LUNA of over $100 for fractions of a cent.
Nansen’s report, released Friday, states that seven arbitrageurs contributed to the removal of the UST, flooding shallow liquidity pools on Curve with massive amounts of UST.
Liquidity providers on Curve, then DeFi’s largest protocol by total amount locked, are incentivized to hold token prices in liquidity pools, balancing their supplies with other similarly priced tokens. But large withdrawals and entries can temporarily bring down the price of tokens.
Using data from the blockchain, Nansen tracked down seven power users who may have triggered the depeg (loss of parity) when they rushed to sell large amounts of UST on Curve.
The seven wallets pulled the UST from Anchor – Terra loan product that offered yields of nearly 20% before its collapse. Then they sent them to ETH through the Wormhole multi-chain bridge. Then they exchanged them on Curve, the biggest DeFi protocol, for other stablecoins.
Just before the depeg, the seven wallets, including the one linked to Celsius, sent so much UST to Curve that the price of the stablecoin collapsed.
The Luna Foundation Guard – an Earth-linked organization that tried to defend the UST peg – tried to counter this by withdrawing around 150 million UST from Curve on May 7 and adding other stablecoins back to Curve’s pool.
But soon after, another five addresses dumped another massive amount of UST on Curve. The LFG tried to defend the peg once again taking back 189.6M UST. The war continued.
But the LFG’s attempts to balance the Curve pool fell short in the face of relentless sales. UST flows to centralized exchanges like Binance, for example, gained momentum on May 9. This peaked on May 10, when 165 million UST were sent to centralized exchanges.
Between May 7 and May 10, Nansen reported that the top 20 addresses withdrew 2 billion UST from Anchor. This was about 11% of UST’s market value at the time. Celsius withdrew at least $500 million in funds from Anchor.
The blockchain data challenges the popular belief that a single “bad actor” knocked the US dollar-pegged stablecoin off Terra earlier this month.
“While many of these portfolios were likely acting independently, collectively the arbitrageurs influenced a liquidity imbalance that eventually led to the UST/LUNA death spiral,” Nansen tweeted.
Even without Anchor, Celsius still offers interest rates of up to 9.32% on stablecoin deposits. This is provided that interest is paid in CEL, the platform’s utility token. But the token dropped sharply as the UST “turned off”, from around $2.17 to $0.63.
Do Kwon, the founder of Terra, has relaunched LUNA on a new blockchain, Terra 2.0. But the new chain does not feature an algorithmic stablecoin.