DEFI

Another Crazy Governance Proposal! Why is WAVES experiencing sudden ups and downs? How will the stablecoin USDN recover from severe decoupling?

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Another Crazy Governance Proposal! Why is WAVES experiencing sudden ups and downs? How will the stablecoin USDN recover from severe decoupling?

The public blockchain Waves, known as the "Russian Ethereum," has been on the rise since the outbreak of the Ukraine-Russia war. However, this week its token WAVES has plummeted more than 50% from its peak, and its on-chain algorithmic stablecoin USDN has also significantly decoupled from the value of the US dollar. What exactly has happened to cause this?

Relationship between Waves and USDN

Similar to Ethereum, Waves is a Layer1 blockchain that can deploy smart contracts, allowing people to develop dapps and issue tokens on it. Like Terra, the most popular feature in the ecosystem is algorithmic stablecoins. Users can exchange their WAVES for USDN on the DeFi protocol Neutrino. The more the price of WAVES rises, the more USDN one can exchange, and vice versa. USDN is backed by WAVES, and for every 1 USDN issued, the smart contract locks in the value of 1 USD worth of WAVES.

However, this exchange mechanism carries risks. When the price of WAVES continues to decline, the value as collateral will also decrease. If the total value of WAVES is lower than the total value of issued USDN, a "debt exceeds assets" situation may occur.

In such a scenario, if users panic and try to exchange a large amount of USDN back to WAVES, it may lead to USDN becoming detached from the US dollar due to insufficient liquidity and asset reserves.

Note: Before exchanging WAVES for USDN, users need to pledge the platform token NSBT on Neutrino to obtain gNSBT. Holding more gNSBT can provide a higher exchange limit.

0xHamZ Calls WAVES a Ponzi Scheme

As mentioned earlier, to maintain the stability of USDN's price, it is necessary to avoid sharp declines in the price of WAVES and ideally maintain stable growth. However, a post on Twitter by cryptocurrency analyst 0xHamZ on 4/1 sparked community panic. The post indicated that the Waves team artificially caused a tightening of the WAVES currency by leveraging, leading to a continuous price increase. This process involved operations on the WAVES lending protocol Vires.Finance, with the following detailed steps:

  1. Deposit USDN into Vires.Finance to obtain borrowing limits through the vTokens feature
  2. Borrow USDC/T from Vires.Finance
  3. Transfer USDC/T to Binance to purchase WAVES
  4. Convert WAVES to USDN through Neutrino
  5. Repeat the process

By repeating the above steps, the price of WAVES continued to rise due to high demand for purchases. The increasing WAVES price attracted more market attention, leading to capital inflows. When there is a continuous inflow of USDC/T into WAVES, the above cycle can continue.

Regarding this phenomenon, 0xHamZ believes that when USDN reaches its target reserve amount, the issuance of USDN will slow down, and the buying pressure on WAVES will significantly decrease. If the price drops too sharply, the "debt exceeds assets" situation mentioned earlier may occur.

Since the publication of this post, the price of WAVES has continued to decline, causing USDN to become detached. As of the deadline, the price of USDN is approximately $0.88, reaching as low as $0.76.

Waves Founder Accuses SBF of Malicious Shorting

In response to 0xHamZ's article, Waves founder Sasha Ivanov stated that the growth in the price of WAVES is attributed to their recent establishment of a U.S. company, TVL growth, and the release of a new roadmap. He also believes that WAVES, with over $10 billion in daily trading volume, cannot have price increases due to daily movements of a few million dollars, implying that the Waves team did not engage in artificial operations on Vires.Finance.

Furthermore, Sasha pointed out that the sharp drop in the price of WAVES was due to someone maliciously manipulating behind the scenes, and the mastermind behind it was Alameda Research, founded by SBF. Sasha stated that since 3/20, Alameda has continuously deposited USDC/T into Vires.Finance to borrow WAVE, then sold it after borrowing, causing the price to collapse and profiting from shorting.

In response to these accusations, SBF stated that this is clearly a conspiracy theory and that the director of research at The Block, Larry Cermak, mentioned that Alameda's actions may simply be to raise funds and conduct some Delta-neutral operations such as spot arbitrage. In addition, Sam Trabucco, CEO of Alameda Research, suggested that people should focus on WAVES' funding rates, which have been extremely high for weeks.

Latest Proposal from Vires.Finance

To rescue the prices of WAVES and USDN, Sasha Ivanov released a new governance proposal for Vires.Finance on 4/5 here. In this proposal, Sasha suggests significantly lowering the liquidation threshold for WAVES, USDN, and the Euro stablecoin EURN offered by Vires.Finance to 0.1%, and reducing the borrowing APR cap to 40%.

Lowering the liquidation threshold to 0.1% means that if the value of the borrowed tokens exceeds the collateral by 0.1%, liquidation will occur, which is stricter compared to common DeFi protocols. If this proposal is passed, all users who borrow WAVES, USDN, and EURN through collateral will need to repay the funds within the repayment period, or their collateral assets will be liquidated.

The extreme nature of this proposal aims to reclaim WAVES, USDN, and EURN from the market to reduce the risks of dumping and shorting. Lowering the borrowing APR cap to 40% may be due to the excessively high borrowing rates of USDC/T on Vires.Finance, aiming to curb them and increase borrowing rates.

Currently, the approval rate for this proposal is approximately 54% and will end on 4/10. Although the supporting votes are slightly ahead, discussions on the forum show overwhelming opposition to this proposal. Many believe that this approach will harm the interests of the majority and lead to a loss of trust in WAVES.