The Big Short

Market Meditations | May 12, 2022

Rumours are flying on Crypto Twitter about how the LUNA/UST death spiral was triggered and whether it was done on purpose. Here’s a summary of thread made by OnChainWizard:

  • By the end of March, the Luna Foundation Guard (LFG) had accumulated over $1 billion in BTC to help back UST.
  • Shortly after, Terra founder Do Kwon announced ‘4pool’, a pool of four tokens (USDT, USDC, FRAX and UST) designed to dominate Curve’s stablecoin market.
  • To date the biggest stablecoin pool was 3-pool (USDT, USDC and DAI). In advance of 4pool going live, Terra started removing liquidity from the UST-3pool pairing.
  • The alleged attacker noticed an opportunity of having BTC as collateral and low token liquidity in the pool.
  • They apparently borrowed 100k BTC to build a multi-billion dollar short position and built a $1 billion UST position. When LFG removed liquidity, the attacked dumped $350 million UST for another stablecoin, sending the UST-3pool pairing seriously off-balance.
  • UST starts to de-peg slightly and LFG starts selling BTC to defend it, putting downward pressure on Bitcoin’s price.
  • With no Curve liquidity, the attacker started to aggressively sell the rest of their UST on Binance. This caused panic and cascading withdrawal’s from Anchor protocol, leading to a severe de-peg.
  • LFG is forced to accelerate its BTC sells and the attacker starts racking  up serious profit on their short position.

We all know what happened next. Such a move could have returned hundreds of millions in profit, maybe more if LUNA was also shorted. A power move, not for the faint-hearted. Welcome to the citadel.