On Friday morning, on-chain analytics firm Nansen released its detailed report on the trading activity that led to the depegging of stablecoin terraUSD (UST). There is an immense amount of detail to be unpacked, but Nansen's main conclusion is this:
We refute the common narrative that an "attacker" or "hacker" worked to destabilize UST. Instead, the destabilization of UST may have been the result of investment decisions by multiple well-funded entities, such as risk management compliance or alternative reductions in UST allocations deposited into [credit protocol] anchors in the context of turbulent macroeconomic and market conditions."
To put it in English, Nansen concludes that terraUSD lost its one-to-one peg to the U.S. dollar because a number of large holders felt it was too risky to continue holding the tokens. So they sold them.
Nansen identified seven wallets that put major selling pressure on the token and believes they all belong to different players. According to Nansen, one of the seven belongs to the Celsius network, for example.
Nansen found that from March 7 to March 11, these "whales" independently began aggressively trading their UST for USDC or other assets through the Curve liquidity pool, from which Nansen says the depeg originated. (Curve is a decentralized stablecoin exchange on Ethereum).
Luna Foundation Guard tried to defend the peg by buying all those UST, but the whales depegged so much that LFG couldn't keep up. That is, the nonprofit organization created to protect the $1 valuation of the UST ran out of other assets to trade the UST for. At that point, the exchange rate began to falter as concerned UST owners decided it was worth taking 97 or 98 cents for a dollar.
From then on, the shouting was over, as the UST's Rube Goldberg-like fake perpetual motion machine made it profitable to arbitrage this price imbalance in ways that further magnified it. This led to a "death spiral" for UST and caused hyperinflation in LUNA - the associated "balancer token" - so that ultimately there were few buyers for either.
There would be much more to say about the intricacies behind the scenes, but this is about the big picture: ultimately, UST collapsed because several large holders independently decided it was too risky. That shouldn't come as a surprise, because after terraUSD collapsed, insiders like FTX's Sam Bankman-Fried claimed that the smart money knew the token was "obviously going to falter at some point," and was ready to bail when the waters got choppy.
And why was the smart money so prepared to run for the exit? Because they looked at the basic structure of LUNA and UST and saw something that could never work. Any other understanding of events is pure and simple distraction - what kids these days call "coping."
As I wrote last week, the notion that a single malicious "attacker" or shadowy cabal deliberately upset UST basically amounts to a defense of a terrible network design and implies that everything would have been fine but for the powerful enemies of the Luna(tic) revolution. But the Nansen report exposes this claim as a fallacy: UST collapsed because the market didn't have enough faith in the algorithmic stablecoin's design and team, and that was that.
This morning, belatedly, I discovered one of the most absurd UST conspiracies to date, one that neatly sums up the motivated thinking behind the "attack" narrative. BitBoy, a particularly suspect YouTube crypto "influencer" who has been credibly accused of accepting "pay-to-play" payments to promote tokens, confidently stated last week that the U.S. government is "100% behind the UST Depeg.
Whether he's aware of it or not, BitBoy is delivering the perfect line here to cover his own ass as a Terra promoter (LUNA's "pump can't be stopped," he declared in December) and to protect Do Kwon and his investors. Because, boy, if the U.S. government was behind the attack, there certainly wasn't a problem with the UST design or team. In fact - my God! - wouldn't that suggest that LUNA/UST are so perfect and powerful that the government was desperate to throttle them in their cradle?
This is the kind of lazy, fact-free conspiracy thinking that rots all our brains and gives crooks the opportunity to steal our money. In this case, it's especially diabolical because we're about to launch "Luna 2.0," which skeptics say could be just another chance for Do Kwon and his allies to work the same people they got the first time around.
The truth is that LUNA and terraUSD failed at best because they were built on a fundamentally flawed economic mechanism that encouraged its own collapse as soon as confidence wavered even a little. Accepting this reality may not be comforting, but keeping your money should be.