In recent days, everyone has been talking about a notorious speculator-style short-selling attack against Terra stablecoin UST and native coin LUNA. But almost no one talks about the benefits that attackers gain from this attack.
But recently, a famous Twitter analyst named Onchain Wizard gave a thorough explanation showing how this attacker exploited a weakness in the LUNA-UST-BTC ecosystem as well as how much profit from this attack.
The beginning of the attack
The strategy of the attack began to be rekindled in March of this year, when the Luna Foundation Guard (LFG) – the organization created by Terra to maintain the stability of the UST – announced that it would buy about 10 billion USD in reserves. Bitcoin to reinforce the stability of the UST. This is seen as a necessary condition of this short selling attack.
Then, the conditions for the attacker came in April when Do Kwon – the founder of Terra – tweeted about the 4pool cooperation between 4 stablecoins including: UST-USDT-USDC-FRAX on the exchange. stablecoin Curve translation. This allows an attacker to execute a strategy in a capital-efficient way (4pools reduce the circulating volume – or liquidity – of the UST and can trigger an attack).
One thing Onchain Wizard doesn’t understand is when the attacker borrowed 100,000 BTC to prepare for the short sale attack. Most likely the Bitcoin borrowed for the short sale was sold to the LFG itself. The institution reportedly bought 15,000 BTC between March 27 and April 11 at an average price of around $42,000 – bringing its total BTC holdings to 39,900 – around $1.58 billion. Along with other cryptocurrencies, the total reserves of LFG as of April 11 are around $2.394 billion.
With 100,000 BTC borrowed, the attacker built himself a short position of about $4.2 billion. At the same time, the attacker also builds a $1 billion USD swap (OTC) option position in UST to use it to create a massive market withdrawal and will buy back BTC at a cheaper price.
The attack begins
On May 8, the number of USTs in the 3pool Curve started to decrease as LFG pulled $150 million out of it in preparation for the 4pool deployment and the attack started to kick in. At the same time as LFG, the attacker sold 350 million UST, draining the UST 3pool liquidity on Curve exchange. There were not enough stablecoins USDC and USDT on Curve to balance the amount of UST sold by the attacker, and the UST-USD rate began to decrease, from 1:1 to only 0.97.
This forced LFG to start selling BTC to earn UST and balance the exchange rate. This move put downward pressure on BTC and started the panic among UST holders. Once Curve’s UST liquidity was drained, the attacker dumped the remainder of the 1 billion UST block of options — 650 million UST — onto Binance.
Since a large amount of UST resides in several DeFi protocols such as Anchor, a decentralized lending platform with high interest rates for UST depositors. As the attack skewed the balance of the UST-USD exchange rate, UST depositors at these protocols began massively withdrawing USTs and selling them off on exchanges. For example with Anchor, in just one day, the amount of UST sent in this protocol has decreased from more than 14 billion to only 10.95 billion.
Not only did the UST-USD exchange rate continue to decline, the attacker’s 650 million UST and billions of other USTs were suddenly sold, blocking orders and forcing exchanges to stop allowing UST withdrawals, further stimulating panic attacks among UST holders. This continues to push the UST-USD rate even lower – having hit $0.7 yesterday.
More dangerously, the more UST drops in price, the stronger the LFG sells BTC to rebalance the exchange rate and put more downward pressure on BTC. On Monday night alone, BTC lost more than 10% of its value, falling from $34,000 to $30,000.
In addition, due to Terra’s UST and LUNA swap algorithm, the increasing supply of UST causes LUNA to decrease in price. Finally, within a few days, the attack caused the LUNA coin to collapse, losing 98% of its value (from 83 USD on May 6 to only 2.8 USD at press time).
So how much can an attacker gain from this attack?
There are no specific details on when the attacker would buy back the 100,000 BTC they shorted, but according to Onchain Wizard speculation, if they can buy back all of these BTC at approximately $32,000, they made $952 million for this short sale.
“With 350 million UST dumped, I don’t think they lose too much, let’s say only 3% or only 11 million USD. And assuming that the remaining UST dumping on Binance is done at $0.8, they only lose another $125 million on this deal. The total profit of this attack is about 815 million USD (excluding borrowing fees)..”
Besides, this analyst believes that the attacker also short sold LUNA and made a large profit for this position.
Meanwhile, the coins involved in this attack all suffered heavy losses. BTC dropped 10% in value, from $34,000 to hovering around $31,500. Stablecoin UST sometimes even dropped to $0.22 this afternoon (Vietnam time), before bouncing up to the current $0.32 mark. LUNA became the most damaged coin when it lost 98% of its value.
Who is behind this attack?
It is very difficult to know the exact owner of this devastating currency attack. But according to a post by a user with ID YTwDtE4V on the 4channel forum, it is most likely the two notorious “monsters” of Wall Street: BlackRock and Citadel.
According to this person, according to the loan book, these two hedge funds borrowed 100,000 BTC from the Gemini exchange and then swapped about 25,000 BTC to UST. All done silently in preparation for the attack.
Currently, BlackRock and Citadel’s BTC loan book website – which is publicly posted on Gemini’s website – is not accessible.
The post adds that, when the time is right, they call Do Kwon at the Terra Foundation and say the funds want to swap a lot of BTC to UST. It was a big deal and so they didn’t want to do it on the open market and wanted to sell the deal to Kwon for a better discount. Do Kwon bit the hook. He gives them a large amount of UST, reducing the circulation of this stablecoin in order to get back the BTC needed for the LFG reserve he is building.
And when a large amount of BTC and UST were sold by these two funds, the price of both coins plummeted without braking and triggered other sell-offs across the market.
In the end with just a small amount – around $350 million in UST – these attackers triggered a massive market-wide sell-off of LUNA and UST cryptocurrencies, but also threatened to bring down other cryptocurrencies. decentralized financial protocol related to the above coins. At the time of writing, the dashboard of Anchor, the UST deposit and lending protocol, shows that they have only 3.9 billion UST, down more than 70% from 14 billion UST a few days ago.
Compared to the crypto world, BlackRock is a real monster with a total of 10 trillion USD in assets under management (as of January 2022). In late 2020, early 2021, the GameStop stock rescue mission performed by amateurs on Reddit (with BlackRock behind) knocked out Melvin Capital – another hedge fund with total assets of 12.5 billion USD. . According to Reuters, BlackRock made about $2.4 billion from a $173 million investment in GameStop in just one month.