This year has been a tough one in crypto.
Perhaps no coin signifies that more than Waves. Its lending protocol Vires.Finance was one of the many firms to get caught up in the contagion crisis that swept the industry over the last few months. However, unlike other parties such as Celsius and Voyager Digital, it has put in place a plan to stabilise the project, rather than raising the white flag (or submitting to a complicated and drawn-out bankruptcy process).
Vires’ liquidity crisis was sparked when the Waves-based stablecoin, USDN, de-pegged from its $1 mark, with a bank run testing the ecosystem to the max soon thereafter. The prevalence of whale borrowers was particularly intriguing here, with many in the community curious as to how these wallets were able to borrow such a large quantity of stablecoins in the first place.
As part of the revival plan, Wave founder Sasha Invanov stepped in to subsume roughly half a billion of bad debt. Following a vote by the community, the plan is for Vires accounts with over $250,000 in value (across both USDT and USDC stables) to have a choice between two options.
The first is to exchange their positions for USDN with a 365-day vesting period, as well as an additional 5% liquidity bonus. The second option is to remain on the platform, although stomach a 0% APY on all funds above $250,000 in USDT or USDC, wherein Ivanov will continue liquidating USDN and repaying those debts “depending on market conditions”.
There’s a lot to unpack here, and the story has generated quite a bit of noise in the crypto space. So, who better to interview than the man himself, Sasha Ivanov?
Invezz (IZ): Given a liquidity crisis has happened before, do you think that even if this revival plan works, something of the same nature could happen again in future?
Sasha Ivanov (SI): Along with our general revival plan, we have also implemented a new system that dynamically reacts to limit withdrawals and borrows in the event of platform overutilization, as happened before.
Namely, while more than 95% of funds are utilized, withdrawals will be limited to $1,000 a day per account. This limit will be lowered as fund utilization decreases. When fund utilization drops below 80%, all withdrawal limits will be lifted until those thresholds are reached again.
This means that even in extreme conditions, the market can continue to operate without incident.
IZ: How damaging was the UST collapse to USDN, given people are a lot warier of algorithmic stablecoins now?
SI: USDN initial depeg was actually 3 weeks before UST’s collapse. By the time UST began to unravel, we had already restored the peg. However, UST’s collapse did create a second depeg event as the inherent dangers of algorithmic stablecoins became clear.
That being said, our system was built differently and was up to the challenge; there are some further changes we are making, and the knock-on effects were damaging, but we needed to push the space to come up with creative ways to mitigate these risks.
We are working right now to ensure that what happened cannot happen again with USDN.
IZ: Why do you think USDN can avoid the same fate as UST? Is the fact faith was broken in UST not ominous for USDN going forward?
SI: Firstly, USDN is built entirely differently than UST was. We would have suffered the same fate already if it wasn’t for the way the system is built specifically to stop any type of “death spiral” with USDN and Waves.
Rebuilding faith is a significant part of this, but taking the proper steps to rectify the situation is crucial right now. Beyond our decision to take on the bad debt and prevent another depeg, we’ve also introduced incentives to support USDN and increase demand for it through the Smart Utility Recapitalization Feature, or SURF, token.
SURF is designed to act as a backup for collateralizing USDN in times of emergency. If the backing ratio of USDN goes below 100%, SURF becomes available to purchase. The value will be set to whatever the ratio of USDN is at the time, so if it’s 50%, 1 SURF will be equal to $0.50.
Once the ratio reaches 115%, all surf is liquidated into USDN. This creates an incentive to collateralize the stablecoin, which will help keep the peg stabilized.
IZ: A lot has been made of the whale wallets borrowing enormous amounts of stablecoins on the Vires protocol through March and April. Was there concern this would lead to a situation such as we have today, and if so, is there a reason nothing was done?
SI: This is true. There were, in fact, six whale accounts that borrowed the majority of the liquidity on Vires Finance. These accounts performed a process known as “Looping.” This involves depositing collateral, borrowing tokens against the collateral, sending the loaned tokens to a central exchange, buying more tokens with it, then bringing it back to Vires to deposit as collateral and take out more loans.
To be clear, this strategy is extremely common everywhere; it happens openly and frequently on Ethereum. This process was even found to be a contributing factor to what brought down crypto fund 3AC capital and is effectively the same as “leveraging” in any market, traditional or DeFi.
The reason this became problematic was due to the speed at which the Waves price fell. These over-leveraged borrowers couldn’t repay their loans, and the amount of interest on them was increasing, leading to critically bad account health. This is what led me to take on the debt of these 6 borrowers myself.
The liquidation of those accounts — as the platform is designed to do — with such large amounts of collateral would have been dangerous to the system and likely caused another shock to the community.
The reason nothing was done building up to this moment is that we are a decentralized platform with decentralized governance. We will never unilaterally force policies that limit free markets on the users.
DeFi is about self-sovereignty, and unfortunately, in this case, a few users have made bad decisions with leverage and created a huge problem for our community. It is a sign of the times really — bad actors overleveraging and causing massive problems to the majority.
We’ve introduced two things that will limit this type of behavior in the future: Non-borrowable collateral and adaptive withdrawal/borrow limits. Non-borrowable collateral means you can choose to keep your deposit separate from the pool that gets lent out, and the adaptive limits on a platform level make it difficult to ever get to the same dangerous level of utilization.
IZ: There has been a lot of talk about the Waves token and market manipulation. This was thrown to prominence when you accused Alameda of manipulating the token in April. Do you stand by this three months later, and do you believe other manipulation is occurring?
SI: Unfortunately, market manipulation is a sign of the times; there are bad actors in the space that overleverage, have large balances to throw around, and have intelligent resources to model out scenarios to predict if they can profit off of retail traders.
As much as the space hates the idea of it, we need regulation to protect the people using it. We’re totally in favor of intelligently talking with regulators to come to real solutions for this that respect the values of the space.
We’re also working on our own initiatives, like our upcoming PowerDAO, that will help to set a charter to police and regulate our own ecosystem. The goal of which is to keep our users safe. How we do that we’re still working through, but we’re very excited about this step towards building a more independent battle-tested blockchain ecosystem that is known for the protections it provides its users.
IZ: Looking back, would you do anything different to avoid the situation of a liquidity crisis and suspended withdrawals? Do you think imprudent risk management was practiced?
SI: That’s the benefit of hindsight! There are many things we could have done. However, we’re proud to have gotten through what we have. We had a severe shock to the system — an unprecedented shock — that not only affected us but took down hedge funds, a top ten project, and numerous centralized crypto banks. Yet, here we are still standing and stronger than ever, actually, after turning a community that wanted our blood around to vote on our plan at a rate of 3 to 1.
We’ve tweaked the protocols, and we’ve done it all through decentralized governance, never once influencing a vote. We’ve created new solutions like SURF. Most importantly, unlike centralized institutions that have gone through the same thing, we’ve worked out a way to repay all our users and are heading very clearly back towards a full functioning ecosystem.
This is an unprecedented achievement and really speaks to the skills of the team, the intelligence of the community to see the long-term perspective, and also the unstoppable benefits of a decentralized system vs. a centralized system. Centralized systems have buried their users in years of lawsuits. Our platform will repay everyone within a year with a 5% bonus. Which would you choose?
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