130 million US dollars disappeared in one day, why USDN has been unanchored?
Original Author: Fu Zhuorui
Original Author: Fu Zhuorui
Neutrino USD (USDN) currently ranks 8th on Coinmarketcap in terms of stablecoin market capitalization, with a volume of about $630 million. It is a regional and global force that cannot be ignored in the stablecoin market. Neutrino, also known as "Russia's Ethereum", mainly supports transactions in the huge Waves ecosystem. Waves Protocol was founded by Ukrainian Sasha Ivanov in 2016, and now it has evolved into a very large virtual financial and pan-financial system. Waves uses a proof-of-stake derived proof method LPoS (Liquid Proof-of-Stake), so the delegation right of Waves is optional, and users can delegate the verification right to other token holders.
USDN is an algorithmic stable currency, which has some similarities but also differences with Terra USD in its operation mode. Previously, there were three coins in the USDN system, WAVES, USDN, and NSBT (Neutrino system base token). Waves is the native token of the complex Waves system, the underlying blockchain (layer 1), and the collateral of USDN. Like most stablecoins, USDN also overcollateralizes WAVES, so the total amount of WAVES pledged is greater than the minted USDN. Here, Waves is the same as Luna in Terra, users can mint USDN through WAVES. USDN is the stable currency used in the Waves ecosystem, and it has a 1:1 relationship with the US dollar. But unlike Terra, Waves put a "double insurance" on its stablecoin and introduced NSBT. NSBT is a governance token used to balance WAVES and USDN. When the value of WAVES cannot be cashed/reserved USDN, it is automatically generated by the smart contract. The value is the difference between WAVES and USDN, which is the difference between the two stable medium.
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The relationship between WAVES, USDN and NSBT comes from the Neutrino website
Like other algorithmic stablecoins, USDN also adopts the principle of currency supply and demand balance/arbitrage mechanism based on efficient market theory. When the market demand for USDN is high and the price of USDN exceeds $1, users can burn their own WAVES to generate Neutrino for sale. When many users do this, Neutrino is sold in large quantities, and the price will drop back to $1. vice versa. Theoretically, arbitrageurs go to arbitrage, but today when robots are rampant, these profits are small or zero when many people do it.
However, the theory is beautiful, but the reality is very skinny. In the case of a large number of users selling USDN at the same time, it will still be unanchored in a short period of time.
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130 million US dollars disappeared in one day, unanchored "King" Neutrino
At the end of August 2022, Neutrino broke down again, reaching $0.939 on August 25. As of press time September 4, 2022, Neutrino was trading in the $0.925 range.
This is not the first time that USDN has unanchored. In 2022 alone, Neutrino has unanchored three times before. Among them, in April 2022, more than 20% of the anchorage was broken. On April 4th, the historical anchorage level was set at US$0.7831, and the market value of US$130 million disappeared in one day from the market value of nearly US$940 million on April 3rd. Just one month later, on May 11, 2022, USDN broke again, trading at $0.8256. On June 14, it was trading at $0.937.
According to the Coinmarketcap report, since 2020 to August 5, 2022, USDN has been unanchored as many as 38 times, the most serious one being in April this year. The reason why USDN’s multiple unanchoring did not cause an epic crash and widespread attention like Terra’s is that USDN’s leverage ratio is relatively low, and its volume is not as good as Terra.
When USDN unanchored on April 4, 2022, the collateral ratio of WAVES on Neutrino's official website to USDN reached 2.62, so it stands to reason that WAVES has enough collateral to guarantee USDN's US dollar anchor. However, in the past two months, the price of WAVES has increased many times. The market believes that Russia may evade sanctions through pro-Russian WAVES under Western sanctions.
Under such a scandal, users on Vires Finance began to withdraw funds from stablecoins, causing the platform's interest rates to soar to 80% APR, and the platform's lending paralyzed. WAVES was under short-selling pressure, users began to sell USDN eager to convert it to other stablecoins, and Neutrino began to de-anchor.
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Based on this, on April 3, Sasha Ivanov, the founder of Waves, counterattacked, saying that no one can artificially operate such a large amount of funds, and questioned that the researcher of Alameda Research, a research institution led by Sam Bankman-Fried, released the news in order to make it more accurate. Well short Waves for personal gain.
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Sasha Ivanov tweeted that the short seller was someone else, the company behind the tweeting user 0xHamz
In this regard, SBF quickly fought back, saying that this is a conspiracy theory.
On April 4, USDN was unanchored, and 1/4 of the value of WAVES also evaporated. However, within a few days, USDN returned to the $1 range again.
After being unanchored on May 11, the Waves team announced on May 27 a new plan (The Master Plan) to revolutionize WAVES (and thus revolutionize USDN). The founder, Sasha Ivanov, proposed that he repay Waves' large creditor's foreign debt worth US$400 million to increase the liquidity of USDN and improve the infrastructure of the stable currency to better deal with future black swan events. The new plan has 4 steps.
Step 1: Increase demand for USDN by purchasing and locking CRV tokens, with 45% of WAVES staked from Neutrino's profits, and voting to incentivize the USDN 3 pool. Since the decoupling was initially caused by a massive sell-off of USDN in the Curve pool, the need to keep an eye on CRV and gain enough voting power to distribute rewards makes USDN more attractive to the DeFi market.
Step 2: Sasha Ivanov will assume $400 million in debt and liquidate the collateral on the whale account, selling USDN to return liquidity to the Vires Platform.
Step 3: In order to avoid further decoupling by dumping large amounts of USDN, Sasha will slowly sell Neutrino. Waves expects it will take up to 2 months for Vires Finance to return to normal working conditions, with full freedom to deposit, withdraw and borrow.
Step 4: Improve the Neutrino architecture by issuing new recapitalization tokens to eventually replace NSBT. Since NSBT fails to do so under current conditions, this new token is tasked with recapitalizing Neutrino with new WAVES tokens when undercollateralized. Recap token holders can earn rewards from staking 50% of WAVES in the Neutrino contract.
In a video connection with CoinDesk on August 5, Sasha Ivanov said that after Neutrino has been reformed according to the above steps, there will be no more unanchored situations.
first level title
Algorithmic stablecoins in the era of involution, how will they be stable in the future?
The arbitrage mechanism is very smart and automated within a controllable range, but there is still a lot of risk in the case of a large-scale sell-off. There was a lesson from the collapse of Terra before, and there were multiple algorithmic currency de-anchors later. Neutrino's unanchoring is just a point of the algorithmic stable currency. Although it has a system like NSBT, it still temporarily lost its stability in the case of short-term sell-offs. Fortunately, it did not collapse because of its strong stable system and reserves.
In addition, other stablecoins have de-anchored several times in the past year. For example, Huobi’s stablecoin HUSD was unanchored to $0.82 on August 19. According to the company’s explanation, it closed the accounts of several large market makers due to compliance. Due to the time difference, the anchor was unanchored.
When the market sells a certain stable currency, no control or weak control will make the stable currency sell more and more serious, thus falling into a negative vortex. With the collapse of Terra and the advent of the cold winter of cryptocurrencies, stablecoins with large and small algorithms are in a whirlpool, with de-anchoring one after another. In order to strengthen the stability of algorithmic stablecoins, in addition to sufficient collateral reserves, some stablecoins have also proposed new methods to better "stabilize" stablecoins when black swan events come. For example, the Balance Ecosystem proposes that the supply of its stablecoin USDB will be strictly "controlled", and the details have yet to be released. At the same time, the protocol is also testing some stress tests, a common risk control test for traditional banks. The agreement also pointed out that USDB will not only dock with one kind of collateral, so as to avoid the problem of unanchoring of other stable coins.
Reference:
http://neutrino.athttps://coinmarketcap.com/currencies/neutrino-usd/
https://cointelegraph.com/news/waves-backed-stablecoin-usdn-breaks-peg-again-amid-protocol-upgrade
https://finance.yahoo.com/news/russia-ethereum-loses-stablecoin-peg-081857369.html
https://medium.com/wavesprotocol/the-waves-defi-revival-plan-c21d9bfabc7e
https://www.defidaonews.com/article/6739588
https://chaindebrief.com/why-liquity-usd-may-save-us-all/
https://coinmarketcap.com/currencies/liquity-usd/
https://coinmarketcap.com/currencies/usdd/
https://cointelegraph.com/news/alfa-bank-launches-bank-as-a-service-platform-on-waves-blockchain
