Tracing cryptoassets across chains: An empirical analysis of the Terra network

Abstract

Cross-chain interoperability is becoming more critical as additional blockchains are added to the Internet of Blockchains. Assets are no longer bound to a specific blockchain but flow across different blockchains, often by making use of decentralized exchange services. However, the interoperability of blockchains also poses a system risk, as failures or issues in one blockchain can have ripple effects on other blockchains as well. In decentralized finance and cross-chain interoperability, the Terra Network is a blockchain that has received significant attention from both institutional and individual investors. The Terra Network’s ability to communicate with other blockchains via a number of protocols and cross-chain bridges was a key selling point. This thesis investigates the Terra network in depth, both before and during its col- lapse, looking at its on-chain activity between smart contracts and user accounts and its cross-chain transactions using some of the most popular cross-chain technologies. The first research question was about which assets were used in cross-chain asset transfers between Terra and other blockchains connected through the decentralized exchange Thorchain. The main asset was BUSD on the Binance blockchain, followed by BTC and ETH. The second research question was about the flow of assets between accounts and smart contracts within Terra before and during the collapse. The analysis shows that Nexus and Anchor Protocol were the dominant smart contracts with a severe outflow during the collapse. The last research question was about analysing how decentralized Terra, Thorchain and the inter-blockchain communication between Terra and the Cosmos Ecosystem are. It was shown that several centralization issues are present, especially amongst computation services, validator locations and IBC relayers. The implications of the thesis are, that asset flow through the analysed cross-chain technologies is visible and can be tracked, as one would expect from on-chain data as well. Centralization is an issue on various levels of analysis with most analysed blockchains and technologies. Validators are heavily centralized by location and computation services used.