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Was Market Maker Behind Terraform Labs Collapse?

2 mins
Updated by Geraint Price
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In Brief

  • Terraform Labs has filed a court motion to force Citadel Securities to provide documents related to the collapse of TerraUSD.
  • The SEC accused Terraform Labs of market manipulation and fraud in February 2023, leading to the collapse of the Terra ecosystem.
  • Terraform Labs alleges that the collapse was due to heavy short-selling from market makers like Citadel, backed by data from Nansen.
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Terraform Labs has filed a court motion to force Citadel Securities to hand over documents that Terra claims show the market maker had a hand in last year’s collapse of the TerraUSD (UST) stablecoin.

The failure of Terraform Labs shook the cryptocurrency market and pushed it toward a bear market. The event started with the depeg of the algorithmic stablecoin, UST, and had a cascading effect on other projects.

Terraform Labs Asks Citadel to Submit Trading Documents

The court document shows that Terraform Labs has asked the court to compel Citadel to provide certain documents of the market making firm’s trading activities. Terraform Labs cites that the documents are necessary for its defense against the United States Securities and Exchange Commission (SEC)

In February 2023, the SEC accused Terraform Labs and former CEO Do Kwon of market manipulation and fraud. It believes that due to Terraform Labs’ misrepresentations, the Terra (LUNA) ecosystem collapsed.

UST depeg, Terraform Labs Citadel
Depeg of UST (now with the ticker USTC). Source: BeInCrypto

However, Terraform Labs claims the collapse happened due to heavy short-selling from market makers such as Citadel. It further argues that data from the blockchain analysis firm Nansen suggests that seven whale traders caused the depeg of the UST stablecoin. 

The court filing mentions:

“Information compiled by cryptocurrency analytics firm Nansen indicates that the May 2022 depeg was caused by the act of just seven so-called “whale” traders – well-funded, established traders which have the ability and determination to take very large long or short positions in an asset or financial instrument.’ According to Nansen, its “on-chain investigation revealed that a small number of players identified vulnerabilities early into the UST de-peg.”

Read more: Shorting Bitcoin: How It Works and Where You Can Do It (2023)

A Soros-Style Attack?

The court documents also mentioned that many traders received rumors about Citadel CEO Ken Griffin wanting to short the stablecoin UST. According to documents, a pseudonymous trader, @GiganticRebirth, wrote in a Discord server:

“I have lunch with ken griffin about twice a month… he was telling me over a nice bacon rib they were going to soros the f*** out of luna ust.”

The infamous trader/investor George Soros is known for breaking the Bank of England in 1992 by betting against, or shorting, the pound. Some analysts claim the UST depegging was a “brilliant Soros-style attack.” 

Hence, Terraform Labs seeks documents “describing any trading strategy in any of the Terra-Native Tokens or the Terra Financial Instruments during the time period March 1, 2022 through May 31, 2022.” from Citadel.

Read more: Crypto Hedge Funds: What Are They and How Do They Work?

Do you have anything to say about Terraform Labs’ collapse or anything else? Write to us or join the discussion on our Telegram channel. You can also catch us on TikTok, Facebook, or X (Twitter).

For BeInCrypto’s latest Bitcoin (BTC) analysis, click here.

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Harsh Notariya
Harsh Notariya excels in delivering SEO-optimized crypto news under tight deadlines. Previously, as a Growth Marketer at Sporty and a Community Consultant at Totality Corp, he significantly boosted community engagement and followers. Harsh also crafted engaging content for top crypto influencer Shivam Chhuneja, blending meme references for an educational yet fun experience. His versatile skills make him a notable figure in crypto journalism.