Mathematicians reveal hidden patterns behind the $3.5 billion cryptocurrency collapse

In a new study published in the ACM transaction on the web, researchers at Queen Mary University in London have uncovered the complex mechanisms behind the downfall of one of the most dramatic collapses in the cryptocurrency world, Terrausd Stablecoin and its associated currency Luna. Using advanced mathematical techniques and cutting-edge software, the team identified suspicious trading patterns suggesting a coordinated attack on ecosystems, effectively causing catastrophic losses of $3.5 billion overnight.

The study, led by Dr. Richard Clegg and his team, employs temporary multilayer graph analysis, a sophisticated method for examining complex and interconnected systems over time. This approach allowed researchers to map relationships between the various cryptocurrencies traded on the Ethereum blockchain, revealing how Terraus Stabcoin was destabilized by a series of intentional, large-scale transactions.

Stablecoins like Terrausd are designed to maintain stable value, usually fixed in Fiat currencies like the US dollar. However, in May 2022, Terraus and its sister currency, Luna, experienced a catastrophic collapse. Dr. Clegg’s research reveals how this happened and reveals evidence of a coordinated attack by traders who were betting on the system. This is known as “short”.

“What we found was extraordinary,” says Dr. Clegg. “In the days leading up to the collapse, we observed very unnatural trading patterns. Instead of a normal trading expansion across hundreds of traders, we saw a small number of individuals who controlled most of the market. These patterns are smoking guns of intentional attempts to put the system at risk.”

Team analysis revealed that on the main dates, five to six traders account for almost all trading activities, each controlling roughly the same share of the market. This level of adjustment is by chance virtually impossible in a normal trading environment, strongly suggesting that these individuals are working together to cause collapse.

This study not only provides insight into the collapse of Terrausd, but also introduces powerful new tools to analyze the cryptocurrency market. The team’s software, developed in collaboration with Queen Mary University’s spin-out company Pometry, uses graph network analysis to visualize and interpret complex transaction data. This tool could prove invaluable to regulators, investors and researchers seeking to understand and mitigate risks in a volatile world of cryptocurrency.

“Cryptocurrencies are often considered the wild west of the finances, with little surveillance and little accountability,” says Dr. Clegg. “Our work shows that applying strict mathematical methods can reveal hidden patterns and behaviors that drive these markets, not just understanding what has been wrong in the past.

The implications of this study go far beyond the cryptocurrency world. The methods developed by Dr. Clegg and his team can be applied to a wide range of complex systems, from financial markets to social networks. For regulatory agencies, this work provides new ways to protect both individual investors and the broader economy, as well as systematic risk monitoring and protecting.