The UST mystery of Wallet A

Jump Trading’s crypto arm has not covered itself in glory in the terra-luna implosion. But the trading firm has now published an interesting postmortem into the debacle.

If it is to be believed, the owner of the Ethereum address 0x8d47F08EBc5554504742f547eb721a43d4947D0A and Terra address terra1yl8l5dzz4jhnzzh6jxq6pdezd2z4qgmgrdt82k (‘Wallet A’) has some questions to answer. The whole report is interesting, but especially what it considers the first fatal blow, on May 7.

According to Jump Crypto’s Nihar Shah and Maher Latif, the crucial events happened on a trading pool called Curve over a 75 minute window late on Saturday, May 7. For reference, Terraform Labs is the company of Do Kwon, the person behind the algorithmic stablecoin terraUSD (UST), and USD Coin (USDC) is a rival stablecoin.

At 21:44 GMT, Terraform Labs (TFL) withdrew $150 million in UST liquidity. This made the Curve pool relatively balanced, but much smaller.

At 21:57, a relatively-inactive account (“Wallet A”) swapped $85 million UST for USDC in this pool. (This was the largest swap transaction in that particular Curve pool ever.) Such an action pushed the Curve pool out of balance again.

From 22:32 — 22:38, another account (“Wallet B”) swapped $75 million UST in the pool across three transactions. By this point, the pool was severely imbalanced.

At 22:52, Terraform Labs withdrew another $100 million in UST liquidity. This made the pool slightly more balanced, but it was still heavily imbalanced and — more critically — tiny at this point, leaving it vulnerable to even small transactions.

At 22:59, Wallet B swapped another $25 million UST in the pool.

After 23:00, there was a flurry of activity in the Curve pool. Appendix A. 1 briefly explores those transactions, but an excellent research note recently published by Nansen.ai should be consulted for more depth on both those and other transactions.

Here’s how it played out that Saturday night:

Jump focuses a lot on Wallet A, noting that it had earlier that day also transferred $108mn in UST to the crypto exchange Binance. The events of that Saturday cascaded and eventually caused the whole “stablecoin” project to collapse a few days later.

Here is what Jump had to say about the mysterious Wallet A’s actions. A lightly edited synopsis below (check out Jump’s full report for footnotes, sources and some links to the underlying hashes).

While the Curve pool illustrates the most noteworthy sequence of events on Friday, May 7, there remain open questions around the worsening liquidity earlier in the day. On further examination, this coincided with some other transfers from Wallet A.

In particular, from 5:00 to 21:40 GMT, Wallet A had sent $108 million in UST to Binance in clips of $10 — 20 million. This is the largest set of UST transfers to Binance by that point in the day, by far — dwarfing second-place at $37 million. Moreover, if those positions were indeed liquidated in the UST/USDT market that day, this notional would account for a third of the total volume done by that point in the day.

Moreover, the worsening liquidity on Curve coincided with high volumes at Binance… There is a sharp uptick in volumes at Binance after 15:00 GMT, and that aligns with the relative imbalance at Curve.

Thus, one hypothesis to link these facts is that Wallet A sold UST on Binance, and that relatively one-sided selling pressure manifested in worsened liquidity for future UST sales on both Binance and Curve. We do not have any visibility into the transactions at Binance, so we can neither validate nor reject this hypothesis with certainty.

In a move we’re sure will cause a million trad-fi conspiracy theories to bloom, Jump then argues that Wallet A’s actions are very different from what it would normally expect from a crypto pro.

We do not know who controls Wallet A. They traded in large size, but their activity differs from what would be expected from an active or sophisticated trading operation. We thus provide some additional facts to supplement their profile:

From March 15 through April 11, Wallet A received a total of $200 million from Binance, across five separate days… Each time, Wallet A deposited the inflow into Anchor.

This made this account the sixth-largest holder of UST as of Friday, May 6 (excluding protocols, bridges, and wallets held by Terraform Labs). Outside of these transactions, the account was mostly inactive.

Wallet A’s activity does not seem to fit that of a sophisticated trading operation for the following reasons.

First, the account was a base account and not a multi-signature account, as @larry0x has noted.

Second, the account apparently made a “fat finger” error — withdrawing $100 million from Anchor when they meant to withdraw $10 million from Anchor, on April 25 p.

Third, the account overpaid for using Wormhole on May 7.

As one counterpoint, Wallet A’s transaction in the Curve pool on May 7 did utilize Flashbots, suggesting an awareness of Miner Extractable Value (MEV).

Interestingly, Wallet A seemed to have prepared for the Curve trade earlier in the day. In particular, at 16:33 and 16:49 respectively, Wallet A tested a small transaction bridging UST from Terra to Ethereum via Wormhole and funded the Ethereum account from Binance with around 0.5 ETH for future gas fees.

A few hours later (0:00 — 1:00 GMT, on Sunday, May 8), Wallet A sent all the accumulated USDC to an account at Coinbase in nine clips of $9 million and one residual clip of $3.5 million.

For easy reference, Wallet A’s Ethereum address can be found here and the linked Terra address can be found here.

Snitches.

We’re uncertain of what to make of all this. But we’d note that Jump was a big backer of Do Kwon and Terraform Labs, and seems to be trying to deflect blame towards some mysterious assailant, Wallet A. Wallet B also seems like an intriguing account, but doesn’t get the same scrutiny, for example.

But even if is true that one crypto whale could wreak such havoc — if the project was so vulnerable to an attack like this — it was very clearly congenitally and fatally flawed. And Jump’s heavy involvement lent its considerable credibility to it.

Here’s what Jump Crypto head Kanav Kariya had to say about Terraform Labs’ Do Kwan last year:

It’s been a real pleasure working with @stablekwon and the Terra team over the last couple years. A+ folks https://t.co/qizwdrke50

— Kanav Kariya (@KanavKariya) September 14, 2021

Moreover, as Jump’s postmortem also admitted, the project’s final death sentence came from the exodus of seven big depositors in UST’s Anchor protocol, while smaller depositors actually increased their exposure even as the project imploded.

Bro Kwon. I’ve had 9 liqs today. I’m officially fuckin broke. Leveraged LUNA buys from last year and now that’s gone too. I’m beside myself.

Wtf man, was it an attack or just a failed concept. I’ve had like 15 beers and feel sober af. I’ll never make this money back.

— Wicklidation (@Joe_Cool_Bitmex) May 11, 2022

Plus ca change. As is so often the case in crypto, the whales escaped unscathed, while smaller ordinary investors became the bagholders.

Check out the replies to Jump’s tweet thread on the report to get an idea of what they think of all this.