Why has the world's eighth largest stablecoin been unanchored?

Written by: Fu Zhuorui

Neutrino USD (USDN) is currently ranked 9th on Coinmarketcap according to the market value of stablecoins, with a volume of about $6.3 billion, 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 derivative proof method LPoS (Liquid Proof-of-Stake), so Waves' delegation rights are optional, and users can delegate verification rights to other token holders.

In 2016, Ivanov also founded Waves Platform AG, a profit-making organization headquartered in Moscow, to Support Waves protocol. In addition, it has its own decentralized trading center Waves Exchange, lending platform Vires, etc. From Waves Protocol, Waves Enterprise, an independent platform serving enterprises with the same root, supports and cooperates with many enterprises, most of which are related to Russia. It cooperates with Alfa Bank, Russia's largest private bank with total assets of 16.3 billion US dollars, 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 financial transactions, and more through this platform. financial operations. In the same year, Waves also launched a blockchain liquidity management system like X5 Retail Group, the largest food retail giant in Russia with an annual revenue of 27.4 billion US dollars. In addition, it has also cooperated with many Russian giants. Of course, Waves Enterprise is not only dealing with Russian giants, but also with global giants such as Microsoft’s Russian office in July 2020 to develop a blockchain memo. The blockchain's large and efficient speed and its ties to Russia have made it all the more important after the Russo-Ukrainian war.

USDN is an algorithmic stablecoin, which has some similarities but also differences to Terra USD's operating model. Previously, there were three coins in the USDN system, WAVES, USDN, and NSBT (Neutrino system base token). Waves is the native token of the Waves complex system, the underlying blockchain (layer 1), and the collateral of USDN. Like most stablecoins, USDN also overcollateralizes WAVES, so the total collateralized WAVES amount is greater than the minted USDN. Here, Waves acts the same as Luna in Terra, and 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.

WAVES has a relationship with USDN and NSBT, Sourced from the Neutrino website

USDN, like other algorithmic stablecoins, 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 USDN price exceeds $1, users can burn their WAVES to generate Neutrino for sale. When many users do this, Neutrino is sold in large numbers, 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.

Because WAVES is not a stable currency, it is possible that the market value of WAVES itself exceeds or is less than USDN, resulting in excessive reserves high or low. At this time, the third balance token NSBT under this system will come into play. When WAVES exceeds the reserve, it will automatically generate USDN to repurchase NSBT, and do the opposite operation when the reserve is insufficient, so as to balance the supply and stability of Neutrino. its price.

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

130 million US dollars disappeared in one day, unanchored "King" Neutrino

At the end of August 2022, Neutrino The anchor broke again, reaching $0.939 on August 25th. As of press time September 4, 2022, Neutrino is 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, the unanchor reached more than 20%. On April 4, it hit a historical unanchored height of US$0.7831, and the market value of nearly US$940 million on April 3 disappeared in one day by US$130 million. 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, from 2020 to August 5, 2022, the number of USDN unanchoring times was as high as 38, the most Seriously, it broke the anchor in April this year. The reason why USDN’s multiple unanchoring did not cause an epic crash and widespread attention like Terra is that USDN has a relatively low leverage ratio and its volume is not as good as Terra.

When USDN unanchored on April 4, 2022, the mortgage 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 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.

On March 31, an anonymous trader (Twitter name 0xHamz) questioned Waves’ past The internal transaction of the lending platform Vires Finance artificially raised the price of WAVES by 750% in a short-term.

Amid such scandals, users on Vires Finance began withdrawing funds from stablecoins, causing the platform’s rates to soar to 80% APR, the platform's lending is paralyzed. WAVES was under short-selling pressure, users began to sell USDN eager to convert it to other stablecoins, and Neutrino began to unpegg.

The USDN-3CRV pool can obviously see the funds fleeing after Twitter

Based on this, on April 3, Waves founder Sasha Ivanov Give a counterattack, saying that no one can artificially operate such a large amount of funds, and question the researcher of Alameda Research, a research institution led by Sam Bankman-Fried, for publishing information in order to better short Waves for personal gain.

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 was back in the $1 range again.

After being unanchored on May 11th, the Waves team announced on May 27th a new The Master Plan. Founder Sasha Ivanov proposed that he repay Waves' large-scale creditor foreign debt worth US$400 million to increase the liquidity of USDN and improve the stablecoin infrastructure 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 collateralized from Neutrino profits and vote to motivate the USDN 3 pool. Since the decoupling was initially caused by a massive sell-off of USDN in Curve pools, 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 of the whale account, sell USDN to increase liquidity Return to 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 recapitalized 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.

Afterwards, the price of Neutrino gradually returned to the $1 range, until the anchor broke again. Currently, Neutrino is still implementing the Master Plan, aiming to bring USDN into a stronger and more stable existence. But as the cryptocurrency entered a bear market, USDN broke its anchor again at the end of August.

In a video call with CoinDesk on August 5, Sasha Ivanov said that Neutrino After the above steps are innovated, there will be no more unanchored situations.

How will the algorithmic stablecoin in the era of involution be stable in the future?

The arbitrage mechanism is very smart and automatic 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 also been de-anchored many times in the past year. For example, Huobi’s stablecoin HUSD was unanchored to $0.82 on August 19. The reason, according to the company’s explanation, was that 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 serious, thus Fall 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 the vortex, and anchors are broken 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,” details of which 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.

It can be seen from this that the algorithmic stable currency is a complex stable currency that is highly dependent on financial engineering, and its core logic must be rock solid. In the case of a large number of sell-offs, the protocols may wish to strengthen the stablecoin infrastructure by referring to traditional banks' calculation of the black swan event, and ensure the quantity, quality, and diversification of reserves. Although the control of the supply seems to imply the "centralized" control of the agreement, how to find a reasonable balance between the decentralized laissez-faire that may encounter the collapse of the black swan event, and the centralized control, how to design a Systems that are viable and able to handle extreme events will be critical to the future development of algorithmic stablecoins.

Reference:

http: //neutrino.at

https://coinmarketcap.com/currencies/neutrino-usd //

https: //cointelegraph.com/news/waves-backed-stablecoin-usdn-breaks-peg-again-amid-protocol-upgrade

https://www.coindesk.com/video/first -mover-on-cdtv-clips/waves-founder-on-algorithmic-stablecoin-outlook-after-neutrino-usdn-depeg/

https://cointelegraph.com/news/neutrino-dollar-breaks-peg- falls-to-0-82-amid-waves-price-manipulation-accusations

https://finance.yahoo.com/news/russia-ethereum-loses-stablecoin-peg-081857369.html

https://www.businesswire. com/news/home/20220527005421/en/Waves-Reveals-its-Master-Plan-to-Address-the-Latest-Ecosystem-Upheaval

https://medium.com/wavesprotocol/the-waves-defi-revival-plan-c21d9bfabc7e

https://wavesenterprise.com

https:/ /www.defidaonews.com/article/6739588

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https: //coinmarketcap.com/currencies/usdd/

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https: //www.coindesk.com/learn/algorithmic-stablecoins-what-they-are-and-how-they-can-go-terribly-wrong/

https://cointelegraph.com/news/alfa-bank-launches-bank-as-a-service-platform-on-waves-blockchain

< a href="" target="_blank">https://www.kraken.com/learn/what-is-waves

https://www.coindesk.com/video/first-mover-on-cdtv-clips/waves-founder-on-algorithmic-stablecoin-outlook-after-neutrino-usdn-depeg/

https://thedefiant.io/coinbase-wallet-metamask -tutorial

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