Imagine a market in which it is possible to bet on the rise or fall of an asset.
If apples are today at 1€ and I am convinced that their price will go down I borrow 100 apples, sell them at 1€ and when the price is at 80c I buy them back margining on the difference. I collect 100 for something I borrowed, buy it back at 80, pay back the loan (in apples) and I have earned 20. In financial jargon this is called going short or opening a short position.
Conversely, if I am convinced otherwise, I borrow euros to buy the apples, when the price goes up I will sell them and return the loan (in euros), margining on the difference. Aka long position.
But let’s stick to short.
#UST is a #cryptocurrency that is always worth one dollar, #stablecoin in jargon. At least in theory.Tweet
In practice, so much liquidity is placed in the places where this currency is bought or sold, the exchanges, that anyone who wants to make a trade is unable to move the price. To make sure it is always worth a dollar, and to give guarantees to those who buy it, the issuer puts a large amount of Bitcoin as the underlying, in this case $1.1 billion in BTC bought at an average price of $42k last March.
The attacker borrows 100k Bitcoins (equivalent to $4.2bn) to build a short position, while also buying 1 billion USTs off the market, in private agreement, so as not to move the price (because it is fine that there is huge liquidity, but with a billion the price would have moved).
Having taken these USTs privately, he sells 350M of them on the market, shifting the price to $0.972.
And therein lies the stroke of genius of the attack. Why would someone buy 1 billion coins at $1 and sell them at a lower price? Because he knows that the issuing company has to put liquidity back into the market, thus starting to sell BTC and causing downward pressure on the price of Bitcoin and generating profit for those who had opened short positions.
With the remaining 650M, the transaction is repeated the next day causing further pressure on UST.
Panic sells ensue, all the ordinary people convinced they have money in something stable that in reality is not stable start selling.
BTC loses 10% a day. UST even touches 22 cents, the currency of the company that issues UST, namely Luna, loses 96% in 24 hours.
Billions of dollars of small investors are burned, those who opened the short gloat and have, at the moment, an estimated profit of over a billion dollars.Tweet
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