In the shadowy world of cryptocurrency, where fortunes rise and fall in seconds, few events have matched the scale and suddenness of TerraUSD’s implosion.
Now, a groundbreaking study from Queen Mary University of London has peeled back the layers of that chaos.
Published in ACM Transactions on the Web, the research reveals how a coordinated and targeted assault unraveled the TerraUSD stablecoin and its counterpart, LUNA – wiping out $3.5 billion in value almost overnight. Using cutting-edge graph analytics and a powerful new software tool, the team uncovered the hidden hand behind one of the most explosive collapses in crypto history.
The research, spearheaded by Dr Richard Clegg, leverages temporal multilayer graph analysis to dissect how complex interactions on the Ethereum blockchain led to TerraUSD’s downfall. This method allowed the team to trace market dynamics over time, revealing how a flurry of tightly orchestrated trades undermined the stablecoin’s value.
Stablecoins are typically designed to stay pegged to traditional currencies like the US dollar. But in May 2022, TerraUSD and LUNA spiraled into a freefall. Dr Clegg told phys.org, “What we found was extraordinary. 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 smoking gun evidence of a deliberate attempt to destabilize the system.”
The data was stark. Just five or six traders were responsible for nearly all trading activity on key days, with each holding a nearly identical market share. The odds of such symmetry occurring randomly are minuscule, strongly indicating a coordinated effort to short the market and spark panic.
Beyond revealing how the attack unfolded, the research also debuts a novel tool for mapping trading behaviours. Developed with Pometry – a Queen Mary University spin-out – the software applies graph network analysis to interpret crypto market data. Its implications stretch far beyond TerraUSD.
“Cryptocurrencies are often seen as the wild west of finance, with little oversight and even less accountability,” Dr Clegg said, adding “Our work shows that by applying rigorous mathematical techniques, we can uncover the hidden patterns and behaviors that drive these markets.”
For regulators and investors alike, the findings mark a turning point. Not only does the study expose the mechanics of a major crypto collapse, it also lays the groundwork for future safeguards. As Dr Clegg puts it, “This isn’t just about understanding what went wrong in the past – it’s about building a safer, more transparent financial system for the future.”