Collapse of 3AC, Celsius is attributable to opaque, off-chain holdings: Nansen

There has been a negative sentiment globally against cryptocurrencies since the plummeting of stablecoin UST and its sister coin Luna in May this year. Consequently, several other popular cryptocurrencies, including Bitcoin, also saw a drop in their value.

Many speculations were in the air about the events that led to the fall of UST and Luna – until blockchain analytics platform Nansen came up with an accurate analysis of the events that unfolded. Following this, the platform rose to prominence.

But how did Nansen dig into the reasons for the crashes?

e27 spoke to Ingrid Sia, Head of PsyOps at Nansen, about this.

Below are the edited excerpts from the interview:

How did Nansen manage to dig into the details and come up with a perfect analysis? What are some of the new vulnerabilities that could lead to more such disasters, and how can they be prevented?

Nansen provides extensive on-chain data by enriching it with proprietary wallet labels. This entity address tracking and analysis gives us informative insights in conducting post-mortems on major on-chain events, such as the collapse of UST, where we identified the activities of entities with a high level of detail and granularity.

This focus on on-chain intelligence storytelling enables our research team to produce high-quality reports backed by factitious events that are both transparent and immutable.

To prevent such events, we must first understand the underlying events that transpired before the UST and Luna depeg.

The crashes were the result of the mechanism of Luna, which undoubtedly led to a death spiral due to several factors:

• The correlation between UST and Luna’s market cap as investors viewed the latter’s market cap as an indication of the number of dollars that were backing UST
• The ability to mint/burn UST/Luna for the other asset to maintain the peg of UST.

The crux of the problem that led to the depeg was that multiple large entities attempted to bridge out of UST at once, causing the stablecoin to initially depeg. This led the holders to burn their UST for Luna and then sell Luna to exit the ecosystem, causing Luna’s price to fall.

Also Read: What lessons can crypto investors draw from the Luna, UST episode?

The decline of Luna’s price further spurred other UST holders and investors to exit the ecosystem in a panic since the market cap of Luna could not hold the massive amounts of UST wanting to exit the Luna ecosystem. This led to a larger depeg of the UST stablecoin through Luna, causing a death spiral.

This event was not preventable as the 20 per cent yield generated from UST was heavily subsidised by Luna Foundation Guard (LFG), who owned a huge amount of Luna, presumably used to generate UST to pay for the yield.

Although the protocol promised to use the collateral to generate yield across similar yield-generating protocols, many of such yields dried up as the markets slowed. Also, LFG was left paying for the generated yields out of pocket to continue incentivising investors to keep their funds in Anchor.

Moreover, the recent collapse of entities such as Three Arrows Capital and Celsius is attributable to opaque, off-chain (outside of the blockchain network) holdings. Theoretically, the transparency of the blockchain means that creditors can audit the holdings of any on-chain entity. However, data complexity and off-chain obfuscation make this ideal difficult to achieve.

While the debacle with Luna was inevitable, Nansen users could benefit from on-chain insights when such events happen through our real-time alerts that would notify users when entities are exiting a specific ecosystem. In particular, one of our users managed to save millions by doing this.

Is the overall macroeconomic situation also impacting the valuation of cryptocurrencies?

The global macro environment is one of persistently high (although tentatively peaking) inflation and slowing real growth. Since 2021, it has been a negative environment for risk asset prices, especially crypto prices, which tend to correlate with global money supply growth.

However, we note the following recent changes in data and central bankers’ tones:

a) the Chinese authorities have started loosening fiscal policy, mainly to prevent a systemic domestic mortgage crisis, and b) the US Fed Chair sounded slightly less hawkish at this week’s Fed meeting.

The current rally in risk and crypto assets could be just a bear market rally, as there is no sufficient proof that inflation has peaked, especially given the ongoing conflict in Ukraine.

However, there are some promising signs that the bottom in crypto assets is likely not too far down the road. According to bond market inversion statistics, the Fed pauses policy on average seven months after the yield curve inverts, which leads us to November 2022 (estimates have a range of a few weeks to 22 months, though).

Also, the US economy is showing signs of slowing. It will concern the Fed at a certain point, even if inflation is not yet back to its 2 per cent target.

How do you view the government regulations on cryptocurrencies? Do you think the current rules are disrupting its growth? Do we need very effective and innovative laws to protect users from scams?

No comments.

Where is the crypto industry headed? Does the industry hold a promising future despite the crashes, scams and hacks?

As a rapidly-growing industry experiencing 0-to-1 uptake in terms of users, use cases, and overall product-market fit, cryptocurrency is a new frontier where a new class of winners among individual traders and businesses is emerging.

Also Read: UST, Luna crashes: Can regulation alone restore investors’ confidence in cryptocurrencies?

Our goal is to empower that emerging class at the forefront of our industry. We hope that Nansen will become the information super-app of Web3, helping people become winners with on-chain intelligence tools.

DAOs are gaining traction. What potential do DAOs hold?

As on-chain entities/organisations, DAOs are exciting from an analytics perspective. Our recently-released DAO Paradise dashboards allow users to audit DAO treasuries, token distributions and other health metrics.

We believe this transparency is tremendously essential for the future of on-chain governance.

What is your view on CBDCs? Can they replace stablecoins in the future? What will be the overall impact of CBDCs globally?

A few statistics on CBDCs (as of June 2022) show their importance:

105 countries or ~95 per cent of GDP study the launch of domestic CBDCs,

Ten countries have already launched a CBDC pilot, the largest in terms of users being the e-CNY from China,

South Korea, Japan, India, and Russia have made some progress, and the Eurozone set a tentative deadline of “a few years” for a digital EUR,

The UK and the US are relatively further behind and still in the “research” phase.

It is improbable that people would be comfortable with their remuneration and spending habits being transparent for anyone to see. We will probably see a version where the underlying blockchain technology is primarily used between banks and other centralised entities (such as governments) and is not open for anyone to peruse.

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