Blockstar Opinion: Revisiting the WAVES Ponzi
How has WAVES held up since USDN depegged?
Written by Zachary Rampone
Back in June, I wrote an article on the WAVES blockchain after its algorithmic stablecoin, USDN, depegged. During this time, the Terra collapse was fresh on my mind, and I wanted to find the next ponzi to inevitably collapse, and WAVES looked like the perfect target considering its similar design. However, WAVES has implemented multiple control mechanisms to make USDN very difficult to exit, which has delayed what I consider to be an inevitable collapse. Since writing that article, WAVES has undergone significant changes and USDN sits well below the dollar peg.
In this article, I'll explore the recent developments of the WAVES blockchain and give my thoughts. If you haven't read my original article on WAVES, I'd recommend reading that first as it gives some important context.
After the Twitter user, @0xHamz, released a thread in late March detailing how the price of WAVES was being artificially pumped by certain whales, many lenders withdrew their USDC and USDT liquidity from Vires Finance, resulting in a liquidity crunch. Shortly after, the price of WAVES crashed and USDN depegged for the first time, leading to over $500 million in bad debt for Vires lenders and the inability to withdraw their collateral. Since USDN is hard-coded to $1, no liquidations occurred and users could buy USDN below peg and borrow other stables against it at $1.
USDN did rebound almost to peg after the April crash only to depeg once again in May following the Terra collapse. Since then, USDN traded at just below $1 for a few months before slowly declining to a low of about 88 cents in August. As of today (September 21st), USDN bounced off the low of 88 cents and is currently trading at about 95 cents.
To restore the peg and help repay bad debt, Vires Finance made a few changes to the protocol. The maximum borrow interest rate was set to 40%, $1000 withdrawal limits were imposed on USDC and USDT, and Sasha Inanov (CEO of WAVES) took control of the six addresses that caused the bad debt. The "Bring USDN Home" campaign was also launched, which incentivized USDN holders to return their USDN to the WAVES blockchain. In doing so, transfers of USDN from WAVES to Ethereum were disabled.
On top of this, users with more than $250k on Vires were forced to choose between two options: exchange their current Vires positions for USDN with a 1 year vesting period or stay on Vires but receive 0% APR on all funds above $250k.
Less than a month later, on August 26th, the vesting of USDN was suspended despite no governance vote being held and no official announcement by Vires.
In an attempt to restore the backing ratio of USDN (currently sitting at about 8.5%), Neutrino Protocol launched a new token, SURF (Smart Utility Recapitalization Feature), on August 8th. Users can buy SURF tokens with USDN or WAVES and that SURF is locked until the backing ratio reaches 115%. Once the backing ratio is restored, SURF will turn into USDN in a 1:1 ratio.
SURF holders can also stake their tokens to receive gNSBT (staked NSBT) tokens at a ratio of 1 gNSBT to 300 SURF. As mentioned in the previous article, NSBT helped prevent a complete collapse since only those who hold gNSBT can swap between USDN and WAVES at a ratio of $1 of WAVES per 1 USDN. Also, the amount of tokens a user can swap is limited by the amount of gNSBT they hold.
On August 25th, a governance vote passed that imposed even further restrictions on swapping between USDN and WAVES. Now, the maximum amount of USDN that a user can swap to WAVES factors in the current backing ratio. As a result, large holders face up to a 99% reduction in the amount of USDN that they can swap for WAVES. Also, if the backing ratio is below 10%, USDN to WAVES swappers will receive a portion of the swap in SURF tokens. For example, if the backing ratio is 5%, USDN to WAVES swappers will receive 5% in WAVES and 95% in SURF.
Currently, a total of 55 million SURF tokens have been issued and the proceeds (in the form of USDN and WAVES) were used to support the backing ratio. However, this resulted in an increase of less than 1% to the backing ratio which has since retraced. Since the time of my first WAVES article, the backing ratio has decreased from about 48% to 8.5% and is showing no signs of slowing down.
As expected, things have gotten even worse for the WAVES ecosystem since the last article. The backing ratio of USDN has decreased from about 48% to 8.5%, USDN depegged multiple times, and all of the restoration efforts have seemed to only delay the inevitable. Users continue to get hit with further restrictions, making it extremely difficult to exit their current positions. With the backing ratio below 10%, USDN holders are essentially stuck with their worthless tokens unless they want to bet on SURF.
At this point, all trust in the WAVES ecosystem should be gone. Major changes have been pushed through without any governance vote, so who knows what actions could be taken next. At this point, the restrictions in place leave users stuck on the WAVES blockchain, and unless the backing ratio can be miraculously restored, they may be stuck there forever.
Written by Zachary Rampone
@nfthunter131 on Twitter