On USDN De-Pegging & How YOP Actively Managed the Risk

The USDN stablecoin has lost its peg. As of the time of writing it is currently off peg by 0.12c and is trading at 0.88c according to CoinMarketCap. In the last 24 hours it experienced lows of 0.78c. In this blog post we will explore the evolving story with USDN and why it is relevant to YOP.

What are Stablecoins

Stablecoins are crypto assets that attempt to reduce volatility by retaining a peg to something more stable — such as the U.S dollar. There are 3 key categories of stablecoins:

  • Fiat-collateralised: These have a centralised company that retains dollars and issues tokens that represent IOUs (I owe you). In theory these should remain the most stable as they are redeemable for actual US dollars on a 1:1 basis.
    Examples: USDT, USDC, BUSD
  • Crypto-collateralised: These seek to maintain a peg of $1 USD but are backed with mostly “exogenous” crypto assets — meaning assets outside the immediate protocol. Since crypto collateral is volatile, to maintain faith, they are typically over collateralised.
    Examples: DAI, MIM, sUSD
  • Algorithmic: These act as decentralised central banks, algorithmically adjusting parameters to maintain the peg. They have no exogenous collateral (such as BTC or ETH) and are fully backed by their own native token (endogenous collateral).
    Examples: UST, FEI, USDN

There is usually a trade-off between the level of “innovation” in the stability mechanism and its ability to provide a stable store of value. In the case of USDN, we are looking at an algorithmic stability mechanism.

A brief history of USDN

Neutrino protocol was launched in 2019 (on the Waves Blockchain) and is built and maintained by the waves exchange. It enables the creation of stable coins tied to real-world assets or currencies (e.g. USD, EUR, GBP, JPY). The key principle of the protocol (and others such as Terra and it’s native stablecoin UST) is to achieve equilibrium between the backing of their stablecoin (USDN) and the collateral represented by their native token (WAVES).

How did it begin?

On Thursday evening a twitter thread was published highlighting recent activity by the Waves team — which posed an inherent risk to USDN stability.

Key points:

  • TLDR; WAVES team has engineered price spikes by borrowing USDC at 30% to buy its own token.
  • USDN is an overcollateralised stablecoin backed by the WAVES token.
  • WAVES needs to grow its market cap so it can keep issuing more USDN.
  • Over the last 3 weeks USDN supply has increased 85%.
  • WAVES team has allegedly been folding leverage to engineer a supply squeeze by:
    - Depositing USDN on Vires
    - Borrowing USDC on Vires
    - Transferring USDC to Binance
    - Buying WAVES with USDC
    - Minting USDN using WAVES
    - Repeat
  • This dynamic can only continue while participants are willing to lend their USDC on Vires.
  • If WAVES price drops enough, the WAVES market cap would be less than that of USDN resulting in the insolvency and subsequent de-peg of USDN.

On Sunday WAVES founder Sasha Ivanov took to twitter to accuse Almeda Research of orchestrating a campaign of FUD designed to manipulate the WAVES price.

Relevance to YOP

The YOP USDC Vault had an exposure to USDN via the Curve USDN / 3Crv swap Pool (https://curve.fi/usdn).

On Friday evening, after reviewing and digesting 0xHamz Twitter Thread, we started observing an imbalance in the pool. Ideally, the pool should be balanced 50:50 between USDN and 3Crv — upon inspection this balance was off with 64:36 in favour of USDN. This means that individuals were removing liquidity from the pool and selling out of their USDN for the 3Crv tokens (DAI, USDC or USDT). After reviewing the USDN Curve deposit contract, our suspicions were confirmed.

Out of an abundance of caution, we quickly triggered our break glass escalation processes and convened a call with a quorum of the YOP Governance key holders on the call. With this quorum in place, we initiated an emergency shutdown on the two exposed strategies and withdrew all funds back to the USDC Vault (See this transaction and this transaction).

We exited the Curve pool in the base token of the Vault (USDC), whilst selling our USDN exposure at 0.99c (at this time the peg had not broken). By doing so, we were able to secure $440 of profit with the capital that was deployed in the USDN strategy.

Your funds remain safe

All the funds involved in the USDN strategy are safe and are currently being held in the USDC Vault (usually they are allocated to strategies to earn yield). We will resume with the strategy allocation in the coming weeks — in the meantime, you will continue earning YOP rewards on your Vault deposits. As always, users are free to withdraw funds from Vaults at any point in time.

As mentioned, for the time being the USDC funds will be held in the Vault. Over the coming weeks, we will be completing smart contract audits on additional strategies — which will allow us to diversify our stablecoin allocation and re-engage the funds in the USDC Vault. We will keep you updated on the progress of this work as it is happening.

The situation at the moment

At present, USDN has failed to find it’s $1 peg, but it has not gone to zero either. It has dipped as low as 0.78c on April 4th, but as of April 6th it is trading at 0.88c.

When we exited the pool on Friday, the currency reserves in the Curve pool were 64% USDN and 36% 3Crv. As of the 6th of April, this ratio has changed, with 88% in USDN and 12% in 3CRV.

Takeaways

One key takeaway for the YOP team is that we need better monitoring on the balance in pools, so that we can automatically trigger an emergency exit where we see the pool balance move beyond an acceptable amount (e.g. 60/40 or 70/30)

Monitoring liquidity in pools to identify and respond to these kinds of situation in the future is something we will definitely be looking into.

We will continue to monitor this evolving situation and provide further updates as needed.

Feel free to ask any questions and stay tuned for real time updates by joining our community chat on Telegram and Discord.

Keep up to date on YOP updates on our social:

Twitter | Telegram | Discord

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YOP — Yield Optimisation Protocol

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