In a recently published article in ACM Transactions on the Web, a team of researchers from the Queen Mary University of London, led by Dr Richard Clegg, has revealed the complex mechanisms that led to one of the most significant collapses in the cryptocurrency arena: the crash of TerraUSD stablecoin and its counterpart currency, LUNA. Utilising state-of-the-art mathematical approaches and advanced software technologies, the researchers have pinpointed suspicious trading patterns indicative of a coordinated assault on the cryptocurrency ecosystem, which resulted in an abrupt and catastrophic devaluation of $3.5 billion.
The groundbreaking study utilises temporal multilayer graph analysis, an advanced analytical technique crucial for dissecting complex, interconnected systems that evolve over time. The team successfully mapped out the interrelations among various cryptocurrencies traded on the Ethereum blockchain using this method. Their findings highlighted how the TerraUSD stablecoin was systematically undermined through orchestrated, large-scale trading activities.
Stablecoins, such as TerraUSD, are designed to offer a stable value, often pegged to conventional fiat currencies like the US dollar. However, in May 2022, TerraUSD and LUNA faced a devastating downfall. Dr Clegg’s research illuminates the mechanics behind this event, revealing evidence of a coordinated attack executed by traders who aimed to profit from the currency’s decline—a strategy known as “shorting.”
The findings astonished Dr Clegg: “What we uncovered was remarkable. The trading patterns deviated significantly from the norm in the days leading up to the collapse. Instead of a diverse group of traders participating in the market, a concentrated cluster of just a few individuals dominated nearly the entire trading volume. These patterns serve as clear indicators of a deliberate effort to destabilise the currency system.”
Further analysis demonstrated that on critical dates, a mere five or six traders were responsible for most of the trading volume, each holding a nearly identical market share. Such precise coordination among traders is unlikely to occur randomly in a standard trading environment, strongly implying collusion to precipitate the currency’s collapse.
This research casts light on the reasons behind the TerraUSD debacle and heralds the introduction of an innovative analytical tool for the cryptocurrency markets. This software, developed in partnership with Pometry—a spin-out company from Queen Mary University—employs graph network analysis to decode and visualise complex trading data. This novel tool holds significant promise for regulators, investors, and academicians to enhance their understanding of market dynamics and mitigate potential risks in the notoriously unpredictable cryptocurrency market. Dr Clegg remarked on the broader implications of their findings: “Cryptocurrencies are often perceived as the Wild West of finance, characterised by minimal regulation and scarce accountability. Our research demonstrates that we can reveal the underlying patterns and behaviours that steer these markets by employing robust mathematical methods. This effort is not merely about dissecting past failures—it’s about constructing a safer, more transparent financial framework for the future.”
More information: Richard Clegg et al, Investigating the Luna-Terra Collapse through the Temporal Multilayer Graph Structure of the Ethereum Stablecoin Ecosystem, ACM Transactions on the Web. DOI: 10.1145/3726869
Journal information: ACM Transactions on the Web Provided by Queen Mary University of London