Terraform Labs is Blaming Citadel for UST Depeg

Terraform Labs faces setback as UST stablecoin depegs from $1 to $0.02, accusing Citadel Securities of intentional destabilization. Legal battle ensues.

Oct 13, 2023 - 13:11
Oct 13, 2023 - 13:10
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Terraform Labs is Blaming Citadel for UST Depeg
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Terraform Labs, the entity behind the TerraUSD (UST) stablecoin, experienced a significant setback when its stablecoin, designed to maintain a 1:1 peg with the U.S. dollar, faced a massive depegging event. 

The UST stablecoin's mechanism ensures that its supply and demand remain balanced through an arbitrage strategy. If UST traded above $1, the protocol would incentivize users to mint UST and burn its sister token, LUNA. This would ideally increase the supply of UST, bringing its price down, while simultaneously reducing the supply of LUNA, pushing its price up.

However, in May 2022, the UST stablecoin plummeted from its pegged value of $1 to a staggering $0.02. This drastic fall not only affected Terraform Labs but also had a cascading impact on other projects, pushing the entire cryptocurrency market towards a bearish phase.

UST current marketcap. (Source: TradingView)

In the aftermath of the UST depegging event, Terraform Labs pointed fingers at Citadel Securities. They accused the U.S.-based market-making firm of intentionally destabilizing the UST stablecoin. Terraform Labs' stance was that the depegging was not a result of an algorithmic failure but rather a "concerted, intentional effort" by certain market participants, including Citadel Securities, to short and cause the UST to depeg from its one-dollar price.

To support their claims, Terraform Labs filed a motion with the U.S. District Court for the Southern District of Florida, requesting Citadel Securities to produce documents related to its trading activities between March 1, 2022, and May 31, 2022. These documents, Terraform Labs argued, were crucial for their defense against allegations from the U.S. Securities and Exchange Commission (SEC), which accused them of misleading investors about the stability of TerraUSD.

Terraform Labs' defense leaned heavily on data from the blockchain analysis firm Nansen. According to Nansen's findings, the May 2022 depegging event was primarily caused by the actions of just seven "whale" traders. These traders, with significant financial backing, took large positions, leading to the destabilization of the UST stablecoin.
Terraform Labs further argued that the collapse was a result of heavy short-selling from market makers like Citadel. They believed that these market makers played a significant role in the depegging event, which had a domino effect on the crypto market.

Adding fuel to the fire were rumors suggesting that Citadel Securities' CEO, Ken Griffin, had intentions of shorting the UST stablecoin, drawing parallels to the infamous trader/investor George Soros' move against the Bank of England in 1992. Screenshots from Discord chats and tweets from financial market traders hinted at Citadel's potential involvement in the depegging event. However, it's essential to note that these claims are based on unverified sources and should be taken with a grain of caution.

In response to the allegations, a spokesperson from Citadel Securities stated that the motion filed by Terraform Labs was based on false social media posts. They emphasized that they had no involvement in the UST depegging incident and had already provided information confirming their non-involvement.

Philip Bohmer Philip is a seasoned journalist that brings clarity to the complex world of cryptocurrencies through his articulate and insightful articles. His passion for blockchain technology fuels his writing, making him a trusted voice in the rapidly evolving digital currency landscape.