What caused UST to de-peg?

Risk & Research, Credmark, 11 May 2022

Summary

UST, the largest algorithmic stable coin, was under pressure for the last two days struggling to fulfill its core obligation, a peg to 1-to-1 USD. Reasons are both market and idiosyncratic events, which led to a spiraling crash. Market event was BTC trading breaking the side trend that potentially caused a lot of liquidations. Idiosyncratic event – withdrawals from highly concentrated UST holders.

Anchor

By far the biggest on-chain DeFi operator in UST is Anchor, lending protocol with TVL equal to $8.5 bln. as of 10 May. UST withdrawals started on 7 May: $2 bln. on 8 May, $1 bln on 9 May and $7 bln. on 10 May. In total deposits dropped more than half from $17 bln. to $6 bln.

DEXs

Onchain there are three biggest DEXs operating in UST with the following characteristics as of 10 May 2022:

· Curve TVL $0.8 bln. 24H Volume $2.1 bln.

· Uniswap TVL $19 mln. 24H Volume $218 mln.

· Sushiswap TVL $0.5 mln. 24H Volume $4.5 mln.

Curve has by far the largest activity in UST of which the majority belongs to UST +3Crv pool. Its balance in time shows that the balance of UST in the pool almost doubled, which confirms that there was a large exit from UST accompanying unwinding lending positions mentioned in the previous section between 9 and 10 May.

Tracking major UST transactions (>$10,000,000, that represents around 30% of the whole volume) for the same time shows that the highest concentration of whales exit was through Abracadabra ecosystem.

Over the same period UST withdrawals from Uniswap Pools was about $68 mln., of which $17 mln. was a volume from MEV arbitrageur. $40 mln (60% of the total volume) was sold over 7 hours from 4 to 11 am.

Onchain Analytics

UST is a stablecoin and LUNA is a governance token that acts as a treasurer to maintain the obligation of UST to be pegged to $1.

Price of UST initially dropped to $0.975 (2.5% depeg from USD) on 9 May 2022 and then to $0.67 on the next day (33% depeg from USD) on 10 May. Total net supply grew from 351 mln to 801 mln tokens which confirms large structured positions unwindings (like staking on Anchor). LUNA was selling collateral and burning UST to drive the price up but the effort wasn’t sufficient, hence net supply doubled.

Onchain data analysis shows that most of the UST transfer volume on 9 May was minted further confirming large staking positions liquidation.

Luna’s treasury activities to maintain the peg further spiralled the market drop. BTC dipped due to holdings liquidations.

In line with expectations Terra Treasury activities affected the token price of the LUNA.

LUNA also experienced large volumes of DeFI positions liquidations accompanied by a selloff.

Conclusion

Although the majority of the transactions are occurring off-chain, DeFi data could be used as a good early alert system for protocols due to its transparency and verifiability. Large outflows and concentrations can be monitored and tested historically which can help in building a robust LQ risk management system and comparing different shops. LUNA from what is shown underestimated the amount and intensity of withdrawals resulting in a platform to be on the brink of existence.

All the data in the current report was sourced from the Credmark Model Framework as part of risk metrics to empower effective liabilities (in this case to maintain the peg to USD) and risk management.

Version	Change Summary	Author(s) (Discord Handle, ETH Address, Reward)	Reviewer(s) (Discord Handle, ETH Address, Reward)	Submission Date
1.0	Created	atulemis#0983, 0x5fb7584838fB467e90bb8a1df3a278482e34E856, 0 CMK (internal) CrypticPun#1697, 0x05Fe7045E0A28949C2ee33a331Ad4605DE455F95, 0 CMK (internal) ​kunlun#8324, 0x109B3C39d675A2FF16354E116d080B94d238a7c9, 0 CMK (internal)	Credmark Community	11 May 2022