Prior to the LUNA collapse and UST de-peg, there was another blockchain, WAVES, whose algorithmic stablecoin, USDN, de-pegged, causing the price of its native token to crash. However, unlike LUNA, WAVES did not go to zero and USDN has come close to regaining its peg. WAVES has a similar design to LUNA with a few differences, so many expect it to follow the same path to zero.
How Does WAVES Work?
WAVES is an L1 blockchain that has been around since 2016 but only introduced their algostable, Neutrino USD (USD), in late 2019. USDN is backed by WAVES in a reserve, but not fully with its backing ratio currently sitting at around 48%. They also introduced a third token, NSBT, which is minted by locking WAVES and is designed to provide extra stability to the reserve. When the backing ratio is < 1, NSBT acts as a bond for speculators to bet on the backing ratio to improve.
NSBT also adds an extra restriction that prevents a LUNA-esque collapse. Only NSBT stakers can swap for an equal amount between WAVES and USDN on the WAVES blockchain, and the amount that a user can swap is limited by the amount of NSBT that they have staked. Therefore, in the event of a bank run, people looking to exit USDN will be forced to buy WAVES and mint NSBT as liquidity dries up in other markets. On top of this, NSBT has a defined max supply, so as more NSBT gets minted, it becomes more expensive in terms of WAVES. So, as USDN decreases and users want to exit, they must pay a higher price to stake NSBT that will be worth nothing if WAVES collapses. Also, NSBT stakers must pay huge fees for unstaking too early (see chart below). This makes it incredibly hard and expensive to exit, leaving users with a bag of NSBT that they can't do anything with.
The introduction of USDN helped attract users looking for high yields on stablecoins. Before the first depeg, users could earn 8-14% APY on USDN through staking or supplying to Vires Finance, which is the AAVE of the WAVES blockchain. Since USDN is backed by WAVES, these yields come from staking WAVES with nodes. However, the current staking yield is roughly 4%, so this reserve must use leverage to achieve a high yield.
Recent News and Activity
Leading up to the first depeg, the price of WAVES increased over 6x in the span of two months to a high of $62 on March 31st. This price spike caused many to theorize as to the reason for this move, with some even claiming that the price was manipulated by the WAVES team. The price started to pump in late February due to its Russian ties. Articles popped up calling it the "Russian Ethereum" and saying some Russians may flee into WAVES given the various new sanctions and restrictions that came from their current conflict. One Twitter user, @0xHamz, said "WAVES is the biggest Ponzi in crypto" and went on to describe how he thinks the team is pumping the price. On Vires Finance, they can borrow USDC and USDT against USDN, transfer those borrowed stables to Binance to buy WAVES, transfer the WAVES back to their wallet to mint more USDN, and repeat the cycle. Since WAVES has a fixed supply of 100M and, at the time, 85% of it was staked, the price could be easily manipulated. Looking on-chain, we can see a period of time where the supply increased every two days at 10-12 PM EST, USDC and USDT were borrowed and sent to Binance, WAVES was sent back and used to mint USDN that was subsequently supplied on Vires. This resulted in the price of WAVES spiking accordingly and attracted traders seeing the unusually high volume.
Shortly after its peak and the release of 0xHamz's thread, the WAVES price crashed and USDN depegged, trading below 60 cents before rebounding over the next few days. The founder, Sasha Ivanov, quickly responded to the allegations and accused Alameda Research of organizing a FUD campaign while holding a short position. However, people were quick to point out that since many traders were shorting WAVES on FTX causing the funding rate to go deep into the negative, Alameda should hedge with a WAVES short to protect their funding fees.
Following the April depeg, Vires put out multiple proposals to limit borrowing that was rejected by the community. USDN traded between 97-99 cents before depegging again in early May in the wake of the UST collapse. USDN rebounded again, and it currently sits slightly below the peg. Meanwhile, its supply has decreased ~$200M from its high while WAVES dropped ~85%. In response, WAVES released their "DeFi Revival Plan" on May 27th which they hope will help restore users’ faith in the ecosystem.
What’s Next for WAVES?
The Vires Finance proposals faced extreme backlash from the community and the new revival plan has been met with the same negative response. It's become quite clear that algostables are destined to fail, and WAVES seems to be no different from the rest. The price pumped largely due to one entity that borrowed USDC and USDT against USDN. That continuous pumping has stopped, and the price of WAVES continues to go lower. Vires currently holds ~80% of the supply of USDN, which could be liquidated in the event of a significant depeg and would destroy the WAVES ecosystem. They have been able to prevent these liquidations so far with their swapping limits from NSBT and by canceling and limiting withdrawals, but this is merely a stall tactic. Most suspect that the artificial pumping of the WAVES price was done by the founder, who also controls Vires and can manipulate that protocol as he pleases. Sasha has been very harsh to his critics (à la Do Kwon) and will continue to push through proposals, attempting to delay the inevitable and find as much USDN exit liquidity as he can.
Written by: Zachary Rampone