Why has the world’s eighth largest stablecoin been de-anchored?

Neutrino USD (USDN) currently ranks 8th on Coinmarketcap according to the market value of stablecoins, 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 “Russian Ethereum”, mainly supports transactions in the vast Waves ecosystem. Waves Protocol was founded by Ukrainian Sasha Ivanov in 2016 and has now evolved into a very large virtual financial and pan-financial system. Waves uses LPoS (Liquid Proof-of-Stake), a proof-of-stake evolution method, so Waves’ delegation power is optional, and users can delegate the verification power to other token holders.

In 2016, Ivanov also founded Waves Platform AG, a for-profit organization headquartered in Moscow, to support the Waves protocol. In addition, it has its own decentralized trading center Waves Exchange, lending platform Vires, etc. From the Waves Protocol, Waves Enterprise, an independent platform serving enterprises with the same origin, supports and cooperates with many enterprises, most of which are related to Russia. It cooperated with Alfa Bank, Russia’s largest private bank with total assets of US$16.3 billion, and launched Alfa Bank’s blockchain liquidity management system on the Waves platform in 2019, allowing the bank’s corporate customers to manage account status, conduct transactions through this platform. financial operations. In the same year, Waves also launched a blockchain liquidity management system along with X5 Retail Group, the largest food retail giant in Russia with an annual revenue of $27.4 billion. In addition to this, it has also cooperated with many Russian giants. Of course, Waves Enterprise has not only dealt with Russian giants, but also cooperated with global giants such as Microsoft’s office in Russia in July 2020 to develop a blockchain memorandum. The blockchain’s massive and efficient speed and its ties to Russia made it even more important after the Russian-Ukrainian war.

USDN is an algorithmic stablecoin that shares some similarities with Terra USD but also differs in its mode of operation. 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 system of Waves, the underlying blockchain (layer 1), and the collateral of USDN. Like most stablecoins, USDN will over-collateralize WAVES, so the total amount of mortgaged WAVES is larger than minted USDN. Here, the role of Waves is the same as Luna in Terra, and users can mint USDN through WAVES. USDN is the stable currency used in the Waves ecosystem, and has a 1:1 relationship with the US dollar. But unlike Terra, Waves added a “double insurance” to its stablecoin and introduced NSBT. NSBT is a governance token used to balance WAVES and USDN. When the value of WAVES cannot be redeemed/reserve the required 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.

Why has the world's eighth largest stablecoin been de-anchored?

WAVES has relationship with USDN and NSBT, from 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 USD, users can burn their WAVES to generate Neutrino for sale. When a lot of users do this, Neutrino is sold in large quantities and the price drops back to $1. vice versa. In theory, arbitrageurs go to arbitrage, but in today’s era of robots, these profits are very small or zero in the case of many people.

Since WAVES is not a stable currency, it is possible that the market value of WAVES itself exceeds or is less than USDN, resulting in excessively high or low reserves. At this time, the third balance token NSBT under the system will be useful. In the case of WAVES over-reserve, USDN will be automatically generated to repurchase NSBT, and the opposite will be done in case of insufficient reserve, so as to balance the supply and stability of Neutrino its price.

However, the theory is beautiful, the reality is very skinny. In the case of a large number of users selling USDN at the same time, it will still de-anchor in a short time.

130 million US dollars disappeared in one day, and the “king” Neutrino broke off

At the end of August 2022, Neutrino broke off again, reaching $0.939 on August 25th. As of the deadline of September 4, 2022, Neutrino is trading in the $0.925 range.

This is not the first time USDN has been de-pegged. In 2022 alone, Neutrino has been de-pegged three times before. Among them, in April 2022, the de-anchoring reached more than 20%, and on April 4, it set a historical de-anchoring height of USD 0.7831, which lost $ 130 million in market value in one day compared with the market value of nearly $ 940 million on April 3. Just one month later, on May 11, 2022, USDN broke off again and traded at $0.8256. On June 14, it traded at $0.937.

According to the Coinmarketcap report, from 2020 to August 5, 2022, the number of USDN de-pegging was as high as 38 times, and the most serious was the de-pegging in April this year. The reason why the multiple de-anchoring of USDN has not caused an epic crash and widespread concern like Terra is that USDN has a lower leverage ratio and is not as large as Terra.

When USDN was de-anchored on April 4, 2022, the collateral ratio of WAVES on Neutrino’s official website reached 2.62 compared to USDN, so it stands to reason that WAVES has enough collateral to guarantee USDN’s USD anchoring. However, in the past 2 months, the price of WAVES has risen many times, and the market believes that it is possible that Russia may have avoided sanctions through pro-Russian WAVES under Western sanctions.

On March 31, an anonymous trader (Twitter name 0xHamz) questioned that Waves had artificially raised the price of WAVES by 750% in the past period through Vires Finance, a lending platform within the Waves ecosystem.

Amid such scandals, users on Vires Finance began withdrawing funds from stablecoins, causing interest rates on the platform to soar to 80% APR, and lending on the platform paralyzed. WAVES was under short-selling pressure, and users began to sell USDN in a hurry to convert it into other stablecoins, and Neutrino began to de-anchor.

Why has the world's eighth largest stablecoin been de-anchored?

The USDN-3CRV pool can clearly see the funds flee after the tweet

Based on this, on April 3, Waves founder Sasha Ivanov countered, saying that no one can artificially operate such a large amount of funds, and questioned the researcher of Alameda Research, a research institution led by Sam Bankman-Fried. Well short Waves for personal gain.

Why has the world's eighth largest stablecoin been de-anchored?

Sasha Ivanov tweeted that the short seller was someone else, the company behind the tweeter 0xHamz

Why has the world's eighth largest stablecoin been de-anchored?

In this regard, SBF quickly fought back, saying that this was a conspiracy theory.

On April 4th, USDN de-anchored, and 1/4 of the value of WAVES also evaporated. Within days, however, USDN was back in the $1 range.

After de-anchoring on May 11, the Waves team announced a new plan (The Master Plan) to revolutionize WAVES (and thus USDN) on May 27. Founder Sasha Ivanov proposed to repay Waves’ large-scale creditor external debt worth $400 million by himself to increase the liquidity of USDN and improve the stablecoin’s infrastructure to better cope with future black swan events. The new plan has 4 steps.

Step 1: Increase demand for USDN by buying and locking CRV tokens, 45% of WAVES staked with profits from Neutrino, and voting to incentivize USDN 3 pools. Since the decoupling was initially caused by the massive sell-off of USDN in the Curve pool, the need to keep a close eye on CRV and get enough voting power to distribute rewards makes USDN more attractive to the DeFi market.

Step 2: Sasha Ivanov will take on $400 million in debt and liquidate the whale account’s collateral, sell USDN to return liquidity to the Vires Platform.

Step 3: To avoid further decoupling by selling large amounts of USDN, Sasha will slowly sell Neutrino. Waves expects that it will take up to 2 months for Vires Finance to return to normal working order with complete freedom to deposit, withdraw and borrow.

Step 4: Improve the Neutrino architecture by eventually replacing NSBT by issuing a new recapitalization token. Since NSBT has failed to do so under current conditions, the task of this new token is to recapitalize Neutrino with new WAVES tokens when under-collateralized. Recapitalization token holders can earn rewards from staking 50% of WAVES in the Neutrino contract.

Since then, the price of Neutrino has gradually moved back into the $1 range until a breakaway occurred later. At present, Neutrino is still implementing the Master Plan, which aims to bring USDN into a stronger and more stable existence. But as the cryptocurrency entered a bear market, USDN broke off again at the end of August.

In a video link with CoinDesk on August 5, Sasha Ivanov said that after Neutrino innovates according to the above steps, there will be no more de-anchoring.

Algorithmic stablecoins in the era of involution, how will they be stable in the future?

The arbitrage mechanism is very smart and automated within control, 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 then there were multiple de-anchoring of algorithmic currencies. The de-anchoring of Neutrino is only a point of the algorithmic stablecoin. Although it has a system like NSBT, it still loses its stability briefly in the case of short-term sell-off. Fortunately, it does not collapse because of its strong stable system and reserves.

In addition, other stablecoins have also de-pegged many times in the past year. For example, Huobi’s stable currency HUSD de-pegged to $0.82 on August 19. The reason, according to the company’s explanation, was that it closed the accounts of several large market manufacturers due to compliance, and it was de-pegged due to the time difference problem.

When the market sells a certain stablecoin, no control or weak control will make the sell-off of the stablecoin more serious, thus falling into a negative whirlpool. With the collapse of Terra and the advent of the cold winter of cryptocurrencies, stablecoins of large and small algorithms are in the vortex, breaking off 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 a black swan event comes. For example, the Balance Ecosystem proposes that the supply of its stablecoin USDB will be strictly “controlled”, with details 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 points out that USDB will not be docked with only one collateral, thus avoiding the problem of other stablecoins de-anchoring.

From this, it can be seen that, as a complex stable currency that is highly dependent on financial engineering, the algorithmic stablecoin must have a rock-solid core logic. In the case of a large number of sell-offs, the protocols may wish to refer to the traditional bank’s calculation of black swan events to reinforce the stablecoin infrastructure, and ensure the quantity, quality, and diversification of reserves. Although the control of supply seems to imply the “centralized” control of the protocol, how to find a reasonable balance in the decentralization of laissez-faire and the possibility of encountering a black swan event collapse and centralized control A system that works and can handle extreme events will be critical to the future development of algorithmic stablecoins.

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