A team of researchers has uncovered the secrets behind one of the biggest crashes in cryptocurrency history. Their method reveals suspicious behavior during the collapse of TerraUSD and LUNA.
Scientists from Queen Mary University of London used multilayer temporal graph analysis to study the cryptocurrency ecosystem. This technique allowed them to visualize interactions between different currencies traded on the blockchain, highlighting anomalies.
Illustration image Pixabay
Stablecoins, like TerraUSD, are designed to maintain a stable value, often pegged to a traditional currency. Yet, in May 2022, TerraUSD and LUNA experienced a dramatic crash. The study suggests this collapse may have been the result of a coordinated attack by traders betting against them.
The analysis identified that a few traders controlled a disproportionate share of the market before the crash. This concentration of activity is a clear indicator of manipulation, according to the researchers. Their software, developed with Pometry, can detect these abnormal patterns.
The implications of this research extend beyond cryptocurrencies. The methods developed could be applied to other systems, such as social networks or traditional financial markets. They provide regulators with a new tool.
The team's work paves the way for a better understanding of systemic risks in unregulated markets. It underscores the importance of transparency and oversight to protect investors and the global economy.
This study marks a significant advance in the analysis of crypto markets. It demonstrates that advanced mathematical techniques can uncover hidden manipulations, contributing to safer finance.
What is a stablecoin?
A stablecoin is a cryptocurrency designed to minimize price volatility, typically by being pegged to a stable currency like the US dollar. Unlike traditional cryptocurrencies, whose value can fluctuate significantly, stablecoins aim to offer constant value.
The anchoring mechanism can vary—some stablecoins are backed by fiat reserves, others by crypto assets or algorithms. TerraUSD used an algorithm to maintain its dollar peg, a mechanism that failed during its collapse.
The importance of stablecoins lies in their ability to facilitate transactions on cryptocurrency platforms without exposing users to price volatility.
However, as TerraUSD's collapse showed, stablecoins are not immune to risks. Their stability depends on user confidence and the robustness of their anchoring mechanism—two factors that can be undermined by attacks or design flaws.