In the cryptocurrency world, flash crashes are not an uncommon occurrence, but the ability to decode these events and understand their inner workings is an evolution in its own right. A recent case regarding the Luna flash crash from May 2022 could serve as a landmark instance of this rapidly advancing realm of research.
An enormous sum of $40 billion loved by investors was lost during this crash, followed by the arrest of Do Kwon, Terra’s co-founder, under allegations of criminal activity tied to these losses. The ensuing investigation saw Luna’s coin value sink and Terra’s UST stablecoin de-couple from the U.S. dollar. However, statisticians and quantum physicists from King’s College London offer ground-breaking insights into this catastrophe.
These researchers borrowed methodologies from particle physics and applied them to decrypt the crash’s inner workings, essentially reverse-engineering it. Treating the trade orders as physical particles moving along a one-dimensional axis added a dimensionality previously absent in such investigations. The order size represented the particle’s mass, and the corresponding distance a particle moved was the distance the order has moved.
Moving from this snapshot approach, the team delivered invaluable findings regarding widespread instances of spoofing and layering in the market, arguably one of the primary catalysts for Luna flash crash. However, it wasn’t a cakewalk. Detecting layering and spoofing required synthesizing a large amount of data due to the absence of accurately labelled instances of spoofing or layering related to the Luna crash. From successful detection to benchmarking the results against the existent Z-score system, the researchers turned every stone.
This innovative approach allowed the researchers to dig deep into the market’s microstructure and unearth previously-hidden elements, prompting a revision of how we view cryptocurrency markets. The much-discussed comment by Do Kwon, Terra’s co-founder, about how 95% of cryptos would fail seems exceptionally ironic in retrospect.
However, what’s crucially interesting here is the unveiling of a new method for understanding cryptocurrency flash crashes and market structures. This research is proof of the potential of cross-disciplinary methods to unravel the inherent complexities of crypto markets, a much-needed evolution in a world where decentralization and digitization are fast becoming the norm.
In a market as volatile as cryptocurrencies, such integrative studies set a precedent for future investigations and can factually guide investors and regulators alike, ensuring more transparency and stability. However, the question remains – Is it enough to restore the narrated trust in digital currencies, or will it be just another piece in the elaborate cryptocurrency puzzle? It’s safe to say, only time will tell.
Source: Cointelegraph
