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Did a ‘concerted attack’ cause Terra’s UST to crash below $1? An exec behind the largest stablecoin and experts agree it’s suspicious

May 13, 2022, 8:27 PM UTC

TerraUSD (UST), the largest algorithmic stablecoin, completely unraveled this week, sending ripples throughout the crypto markets.

UST plummeted far below its $1 peg, adding downward pressure to Bitcoin and the overall cryptocurrency market as it crashed. Its sister token, Luna, also collapsed to nearly zero.

This wiped out many cryptocurrency investors’ life savings. Reddit forums dedicated to the Terra ecosystem are riddled with sad posts and a series of links to help lines like the National Suicide Prevention Lifeline.

Many first-time investors were left confused as to what happened, and there are a few theories. Among them is that there was a “concerted attack” on the Terra ecosystem in which the claimed attacker made off with over $800 million. It is being likened to legendary hedge fund manager George Soros’ successful bet against the British pound in the early 1990s.

Paolo Ardoino, the chief technology officer behind Tether, the world’s largest stablecoin, said during a Twitter Spaces on Thursday that while it’s in the realm of conspiracy theory for now, he thinks there was likely an attack on Terra. “If you have a weakness, you can always expect someone that is bigger than you to use that weakness, and we have seen that with Terra,” he said.

Nonetheless, there are many assumptions being made about this that are tough to verify, and it wouldn’t be wise to rush to conclusions, Lucas Outumuro, head of research at IntoTheBlock, told Fortune. But “it is certainly suspicious due to it happening at a very specific time where Luna was most vulnerable,” he said.

So why does the crypto community increasingly think Terra was attacked?

Terra’s collapse

On Saturday, Terra’s UST stablecoin lost its peg to the U.S. dollar. 

The “depeg” seemed to be prompted by a few massive withdrawals from Anchor, a Terra-based decentralized finance (DeFi) protocol that offers high yields to those who deposit UST. Over the weekend, UST deposits in Anchor fell from $14 billion to $11.2 billion. UST being so reliant on Anchor has been a source of criticism in the crypto community, since Anchor’s yields may well be inflated by huge backers.

As the UST stablecoin dropped, it brought its sister token Luna down with it. 

The Luna Foundation Guard (LFG), an organization that supports the Terra ecosystem, announced it would issue $1.5 billion in loans denominated in Bitcoin and UST after the stablecoin lost its peg to the U.S. dollar to try to save it. But it didn’t work.

This also impacts Luna. UST is an algorithmic stablecoin, which means it has no reserves. Instead, it holds value based on an algorithm that is coded to strike a balance between the stablecoin and a partner coin, in this case, Luna. Every time a UST token is minted, the equivalent of $1 in Luna is burned, or removed from circulation, and vice versa, to maintain the peg. 

Throughout the week, UST and Luna continued to crash, leaving many confused and very concerned.

What happened?

Many critics blame the collapse on Terra’s algorithmic stablecoin structure and UST’s fast growth seemingly without proper funds to back it, among other things, but some say the depeg could also have been caused by an attack. 

Much of the accepted narrative of the conspiracy comes from a recent Twitter thread with over 9,000 retweets and 31,000 likes that argues that one cryptocurrency wallet dumped $350 million worth of UST in an attempt to crash the stablecoin below $1 and force the LFG to sell its Bitcoin reserve in order to keep the peg. 

The thread speculates that the claimed attacker had a major Bitcoin short position and wanted to push the price of Bitcoin down. By selling whale-size UST holdings, the attacker would cause panic, pushing the LFG to offload its Bitcoin to save UST, and tank the cryptocurrency’s price. As things went south, the thread calculated that the hacker made a profit of over $800 million.

“The large withdrawals appeared to be timed precisely at the moment when Luna was most vulnerable,” Outumuro said, adding that he checked the data himself. “It lines up.”

That being said, many assumptions would have to come together in order for this theory to be correct, Outumuro said. Some moves aren’t on-chain, and therefore, cannot be proven just yet. But “it is certainly suspicious.”

“There was interest in attacking Bitcoin and Terra. I think we are beyond that this [idea of an attack] is just speculation,” Ardoino also said on Twitter Spaces on Thursday.  “Maybe I’m wrong. That was just my feeling when I saw all this.”

Tether is “looking into the trades that prompted this week’s volatility across the cryptocurrency market,” it told Fortune in an email. “No doubt independent expert analysts have also begun tracking the source of this week’s events, and hopefully we will have more clarity in the following weeks.”

There was also speculation that BlackRock, Citadel, and other firms were involved in the depeg, which Citadel denied to Fortune in a statement.

Beyond the Anchor withdrawals and how the Terra ecosystem structure works, it remains unknown whether an intentional attack truly happened.

To Ryan Selkis, founder and chief executive officer of Messari, “what happened with Terra wasn’t fraud,” he tweeted on Friday. “It was overconfidence in the investors of last resort who had already backed the project. And reckless growth at a time the market was slowing down.”

After days of decline, Bitcoin recovered on Friday to the $30,000 level. The overall cryptocurrency market is up 7% in the past 24 hours as well. But UST remains well below $1, currently at 14 cents. Luna completely crashed to pretty much zero.

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