Researchers have unveiled the hidden pattern behind the collapse of a crypto project worth about $3.5 billion. Researchers at the Queen Mary University of London have revealed the behind-the-scenes details behind one of the biggest collapses in the crypto world, the fall of TerraUSD and its associate currency, LUNA.
The Terra ecosystem suffered a big collapse in May 2022, with its LUNA native token dropping from $87 to $0.0005. As if that was not bad news enough, the platform’s stablecoin, UST also depegged, falling from its 1:1 peg with the dollar to about 0.03:1, causing panic which led to the 2022 bear run, triggering the sale of several digital assets including Bitcoin and Ethereum.
According to reports, the researchers deployed advanced mathematical techniques and cutting-edge software and identified suspicious trading patterns. The patterns pointed to a coordinated attack on the ecosystem, leading to a big loss of $3.5 billion in value overnight. The study was led by Dr Richard Clegg and his team of researchers employed temporal graph analysis, a sophisticated method for examining complex, interconnected systems over time.
Queen Mary University researchers reveal details behind the Terra ecosystem collapse
According to the researchers, the approach allowed them to map the relationship between the different tokens that were traded on the Ethereum blockchain. It also revealed how the TerraUSD stablecoin was destabilized by a series of deliberate, large-scale trades.
According to Dr Clegg, stablecoins like TerraUSD are typically designed to maintain their steady value by being pegged to a fiat, which is usually the US dollar. The collapse in May 2022, was catastrophic, with the crash affecting TerraUSD and its sister token, LUNA. In his research, Dr Clegg sheds light on how this happened, mentioning that they were a group of traders who carried out a coordinated attack, betting against the system in a practice known as “shorting.”
He mentioned that what his team of researchers discovered was unbelievable. “On the days leading up to the collapse, we observed highly unnatural trading patterns. Instead of the usual spread of transactions across hundreds of traders, we saw a handful of individuals controlling almost the entire market. These patterns are the smoking gun evidence of a deliberate attempt to destabilize the system,” he said.
According to the team’s analysis, on specific dates, only about five or six traders accounted for nearly all the trading activities. The analysis highlighted that each of those traders controlled the exact share of the market on those days. This level of coordination is nearly impossible on a normal trading day or environment. It shows that the individuals involved in the trades were working together to trigger the collapse.
Research unveils new tool to analyze patterns in the crypto market
The research not only provides insights into the TerraUSD collapse but also introduces a powerful tool to analyze the crypto market via graph network analysis to visualize and interpret complex data. It could be very useful for regulators, researchers, investors, and anybody willing to understand trading data and mitigate risks in the volatile world of cryptocurrency.
“Cryptocurrencies are often seen as the Wild West of finance, with little oversight and even less accountability,” Dr Clegg said. He added that the research shows that by applying complex mathematical techniques, anybody can uncover the hidden patterns and behaviors that drive the activities in the crypto market.
Dr Clegg also mentioned that the tool is not just to provide insight into what went wrong in the past, it is also to provide a safer and more transparent financial system for the future. Also, the implications of this research extend way beyond the world of cryptocurrencies, as other sectors could use this tool. The method designed by Dr Clegg and his team of researchers can be deployed in several fields, including financial markets, social networks, and the like. For regulators, this provides a new way to monitor and safeguard against systemic risks, protecting individual traders and the wider economy.
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