A team of researchers from Queen Mary University of London has uncovered how a group of traders may have caused one of the biggest disasters in cryptocurrency history.
Their study, published in ACM Transactions on the Web, dives into the mysterious collapse of the TerraUSD stablecoin and its partner currency, LUNA, which lost a shocking $3.5 billion in value almost overnight in May 2022.
Stablecoins like TerraUSD are designed to keep a steady price, usually matching the value of a real-world currency like the US dollar.
But TerraUSD suddenly lost its stability, dragging LUNA down with it. This crash shocked crypto investors around the world.
The research team, led by Dr. Richard Clegg, used advanced mathematical tools and new software to understand what really happened.
By studying huge amounts of trading data, they spotted unusual patterns that suggested a small group of traders might have been working together to crash the system.
The key tool they used is called “temporal multilayer graph analysis.” This method helps researchers look at how different parts of a system are connected over time. In this case, it allowed the team to track how cryptocurrencies were being traded on the Ethereum blockchain during the days leading up to the collapse.
What they found was startling. Just before the crash, instead of the usual wide mix of buyers and sellers, most of the trading was controlled by just five or six traders. Even more surprising, these traders were each controlling almost the same amount of the market—something very unlikely to happen by chance.
Dr. Clegg explained, “We saw very strange patterns in the data. It was clear that these few traders had taken over the market. This kind of coordination is not normal and strongly points to a planned attack on the system.”
These traders were likely “shorting” the market—betting that TerraUSD would fail and making money when it did. Their actions may have caused panic and helped push the stablecoin into a downward spiral.
To carry out their research, the team worked with a tech company called Pometry, which spun out of Queen Mary University. They developed special software that turns complex trading data into visual graphs, helping to spot suspicious behavior more easily. This tool could be very useful for financial regulators, researchers, and investors who want to understand and protect against crypto market risks.
Beyond the crypto world, this research shows how math can help us understand and protect complex systems. Dr. Clegg hopes these techniques can lead to safer and more transparent financial systems in the future.
