The Attacker of UST Stablecoin Made Rich Profits, Here’s How

Since the beginning of the week, Terra’s UST stablecoin has seen a major crash de-pegging from the USD. At the same time, Terra’s native cryptocurrency LUNA has corrected by over 80% in the last four days.

Amid all the bloodbath, speculations have been growing that there was a coordinated attack on the UST stablecoin. The initial report suggests that a single attacker sold $285 million UST stablecoins on Curve and Binance.

However, the attacker could have made more than $800 million from this coordinated attack. A popular on-chain analyst that goes by the name Onchain Wizard on Twitter has published a recent thread explaining the possibility of how the attacker could have exploited the LUNA-UST-BTC ecosystem.

Back in March, the Luna Foundation Guard (LFG), Terra’s parent firm, announced that they will be buying $10 billion worth of Bitcoin reserves to safeguard the stability of its UST stablecoin. This was when the attacker got active says Onchain Wizard. Also, the 4pool Frax announcement for UST, helped the attacker to execute the strategy. Making a smart guess, he further explains:

“We don’t know when the attacker borrowed 100k BTC to start the position, other than that it was sold into Kwon’s buying (still speculation). LFG bought 15k BTC between March 27th and April 11th, so lets just take the average price between these dates ($42k)”.

As a result, the attacker had built $4.2 billion in Bitcoin short positions by April 11. Simultaneously, the attacker also builds $1 billion in over-the-counter (OTC) position in UST. Now, this sets the stage to liquidate the UST and simultaneously short the Bitcoin, knowing the fact that LFG will sell its Bitcoins to protect the UST peg.

The Real Game of UST Attack Begins

LFG initially removes $150 million in liquidity in anticipation of 4pool. The liquidity pull happens on May 8. At the same time, the attacker uses $350 million of UST to drain the Curve liquidity. This starts de-pegging the UST pushing it down to $0.97.

Later, the Luna Foundation Guard (LFG) also starts selling its Bitcoin from reserves to protect the peg. This puts downward pressure on Bitcoin. Now with the Curve liquidity drained, the attacker starts offloading the remainder of $650 million from the $1 billion OTC UST position, on Binance. Onchain Wizard explains:

“So LFG is selling $BTC to restore the peg while the attacker is selling $UST on Binance. Eventually, the chain gets congested and the CEXs suspend withdrawals of $UST, fueling the bank run panic. $UST de-pegs to 60c at the bottom, while $BTC bleeds out”.

Now with strong UST liquidations, LUNA price starts to collapse because of Terra’s algorithmic mechanism. Over the last month, the Bitcoin price has dropped from $42K to now at $32K.

Now if the attacker might have covered his/her 100K BTC short positions at $32K, they would have made over $950 million. Of course, the attacker would have made some losses on the UST dump, however, that would be very minor. Onchain Wizard explains:

“On the $350mm of $UST curve dumps I don’t think they took much of a loss, lets assume 3% or just $11m. And lets assume that all the Binance dumps were done at 80c, thats another $125mm cost of doing business. For a grand total profit of $815mm (bf borrow cost)”.

The analyst further explains that any short on LUNA would have made the attacker additional profits. Once again our major shoutout to Onchain Wizard for this insightful thread.

How to make a >800 million dollars in crypto attacking the once 3rd largest stablecoin, Soros style:

Everyone is talking about the $UST attack right now, including Janet Yellen. But no one is talking about how much money the attacker made (or how brilliant it was). Lets dig in? pic.twitter.com/nGVfqjpVJb

— Onchain Wizard (@OnChainWizard) May 10, 2022

Bhushan is a FinTech enthusiast and holds a good flair in understanding financial markets. His interest in economics and finance draw his attention towards the new emerging Blockchain Technology and Cryptocurrency markets. He is continuously in a learning process and keeps himself motivated by sharing his acquired knowledge. In free time he reads thriller fictions novels and sometimes explore his culinary skills.

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