‘Wizard’ speculates how attacker made >$800 million by de-pegging Terra’s UST

Lavina Daryanani
Source: Twitter

Terra has been the talk of the crypto town for quite some time. Back in April, it kept making it to the headlines owing to its Bitcoin-buying spree. Even until recently, it kept buying BTC for its reserves. However, of late it has been in the news for different reasons.

With every passing day, the state of the Terra ecosystem is getting from bad to worse. Terra’s tokens—LUNA and UST—have registered free-falls on their respective price charts.

Time for the Wizard’s show

UST’s de-pegging was instigated a couple of days back, and since then, people from the space have been putting forward their respective theories outlining what might have triggered the same. Per Crypto Twitter users, pseudonymous analyst Onchain Wizard’s theoretical analysis of how the attacker made >$800 million by attacking the once third largest stablecoin seemed appealing and close to the truth.

To being with, LFG had started accumulating BTC on 3 March and by 26 March it had a $1 billion+ BTC position. Per Wizard, this was “leg #1” that made this trade [or attack] brilliant.

The second leg was eventually formed during the 4pool Frax announcement for UST on 1 April. The same, helped the attacker execute the strategy in a capital-efficient way. The attacker shrewdly played his next moves by initially borrowing 100k BTC to start a position to build a $1 billion OTC position in UST. As a result, the stage got set to create a run on the bank and get paid on the BTC short.

Then, per Wizard,

The liquidity was pulled on 5/8 and then the attacker uses $350mm of UST to drain curve liquidity (and LFG pulls another $100mm of liquidity).

In a way, this move instigated USTs to deviate from $1. To get the situation back under control, LFG began selling Bitcoin to defend the peg, causing downward pressure on Bitcoin, while they run on UST was just getting started.

So now, with the Curve liquidity drained, the attacker used the remaining of their $1 billion OTC UST position ($650 million or so) to start offloading on Binance. As withdrawals from Anchor turned from concern into panic, this triggered the actual de-peg as people rushed to exit.

Simply put, LFG was selling BTC to restore the peg, while the attacker was selling UST on Binance. As a result, the chain got congested and the CEX suspend withdrawals of UST. The same had fuelled the bank run panic. As the price for both the assets dipped, liquidations across the board started rising.

Concerning the arrival of the >$800 million figure, Wizard elaborated,

Opining on what was the kicker, the analyst said,

“BTC was the perfect playground for the trade, as the liquidity was there to pull it off. While having LFG involved in BTC, and foreseeing they would sell to keep the peg (and prevent LUNA from dying) was the kicker.”