Neutrino USD (USDN) is currently ranked 9th on Coinmarketcap in terms of stablecoin market capitalization, with a volume of approximately $630 million. It is a regional and global force that cannot be ignored in the stablecoin market. Neutrino, also known as the "Russian Ethereum", mainly supports transactions in the huge Waves ecosystem. Waves Protocol was founded by Ukrainian Sasha Ivanov in 2016 and has now evolved into a very large virtual financial and pan-financial system. Waves uses a proof-of-stake (LPoS) method, which is a derivative of proof-of-stake, so Waves' delegation rights are optional, and users can delegate verification rights to other token holders.
In 2016, Ivanov also founded a for-profit organization, Waves Platform AG, headquartered in Moscow, to support the Waves protocol. In addition, it has its own decentralized trading center Waves Exchange, lending platform Vires, etc. From the Waves Protocol, an independent platform for corporate services, Waves Enterprise, which has the same roots as Waves Protocol, has supported and cooperated with many companies, most of which are related to Russia. It cooperated with Alfa Bank, the largest private bank in Russia with total assets of US$16.3 billion, and launched Alfa Bank's blockchain liquidity management system on the Waves platform in 2019, allowing the bank's corporate customers to manage their accounts and conduct financial operations through this platform. In the same year, Waves also launched a blockchain liquidity management system like X5 Retail Group, the largest food retail giant in Russia with an annual revenue of US$27.4 billion. In addition, it has also cooperated with many Russian giants. Of course, Waves Enterprise not only deals with Russian giants, but also cooperates with global giants such as Microsoft's office in Russia in July 2020 to develop blockchain memorandums. The blockchain’s massive, efficient speed and its relationship with Russia make it even more important in the wake of the Russo-Ukrainian war.
USDN is an algorithmic stablecoin, which has some similarities with the operation mode of Terra USD, but also some differences. Previously, there were three coins in the USDN system, WAVES, USDN, and NSBT (Neutrino system base token). Waves is the native token of the complex system of Waves, the underlying blockchain (layer 1), and the collateral of USDN. Like most stablecoins, USDN will also over-collateralize WAVES, so the total amount of collateralized WAVES is greater than the minted USDN. Here, the role of Waves is the same as Luna in Terra, and users can mint USDN through WAVES. USDN is the stablecoin used in the Waves ecosystem, and has a 1:1 relationship with the US dollar. However, unlike Terra, Waves has provided a "double insurance" for its stablecoin and introduced NSBT. NSBT is a governance token used to balance WAVES and USDN. When the value of WAVES cannot be redeemed/reserve the required USDN, it is automatically generated by the smart contract. Its value is the difference between WAVES and USDN, and it is a stable medium between the two.
USDN, like other algorithmic stablecoins, also adopts the principle of currency supply and demand balance/arbitrage mechanism based on efficient market theory. When the market demand for USDN is high and the price of USDN exceeds 1 USD, users can burn their WAVES to generate Neutrino for sale. When many users do this, Neutrino is sold in large quantities and the price will fall back to 1 USD. And vice versa. In theory, arbitrageurs go for arbitrage, but in today's world where robots are rampant, these profits are very small or zero when many people do it.
Since WAVES is not a stablecoin, it is possible that the market value of WAVES itself exceeds or is less than USDN, resulting in too high or too low reserves. At this time, the third balance token NSBT under the system will come into play. When WAVES exceeds the reserve, USDN will be automatically generated to repurchase NSBT, and the opposite operation will be performed when the reserve is insufficient, thereby balancing the supply of Neutrino and stabilizing its price.
However, the theory is beautiful, but the reality is very skinny. In the case of a large number of users selling USDN at the same time, it will still be unpegged in a short time.
$130 million disappeared in one day, Neutrino, the "king" of de-anchoring
At the end of August 2022, Neutrino broke free again, reaching $0.939 on August 25. As of press time on September 4, 2022, Neutrino is trading in the $0.925 range.
This is not the first time that USDN has depegged. In 2022 alone, Neutrino has depegged three times. In April 2022, the depegging was more than 20%, and on April 4, it hit a record high of $0.7831, compared with the market value of nearly $940 million on April 3, $130 million of market value disappeared in one day. Just one month later, on May 11, 2022, USDN depegged again, and the trading price was $0.8256. On June 14, the trading price was $0.937.
According to Coinmarketcap, USDN has been depegged 38 times since 2020 until August 5, 2022, with the most serious being the depegging in April this year. The reason why USDN's multiple depeggings did not cause an epic crash and widespread attention like Terra is that USDN has a lower leverage ratio and is not as large as Terra.
When USDN was depegged on April 4, 2022, the WAVES to USDN collateral ratio on the Neutrino official website reached 2.62, so WAVES should have enough collateral to guarantee USDN's dollar peg. However, the price of WAVES rose many times in the previous two months, and the market believed that it was possible that Russia was evading sanctions under Western sanctions through pro-Russian WAVES.
On March 31, an anonymous trader (Twitter name 0xHamz) questioned that Waves had artificially raised the price of WAVES by 750% in the short term through internal transactions on Vires Finance, a lending platform within the Waves ecosystem.
Under such a scandal, users on Vires Finance began to withdraw stablecoin funds, causing the platform's interest rate to soar to 80% APR, paralyzing the platform's lending. WAVES was under short-selling pressure, and users began to sell USDN and rushed to convert it to other stablecoins, and Neutrino began to depeg.
Based on this, on April 3, Waves founder Sasha Ivanov fought back, saying that no one could artificially operate such a large amount of funds, and questioned whether the Alameda Research researcher released the news in order to better short Waves for personal gain.
On April 4, USDN was depegged, and 1/4 of the value of WAVES evaporated. However, within a few days, USDN returned to the $1 range.
After the unpegging on May 11, the Waves team announced a new plan (The Master Plan) to reform WAVES (and thus USDN) on May 27. Founder Sasha Ivanov proposed that he repay Waves' $400 million in foreign debt to large creditors to increase USDN's liquidity and improve the infrastructure of stablecoins to better cope with future black swan events. The new plan has 4 steps.
Step 1: Increase demand for USDN by purchasing and locking CRV tokens with 45% of WAVES collateralized from Neutrino profits and voting to incentivize USDN 3 pools. Since the decoupling was initially caused by a large sell-off of USDN in the Curve pool, it is necessary to keep a close eye on CRV and gain enough voting power to distribute rewards to make USDN more attractive to the DeFi market.
Step 2: Sasha Ivanov will assume $400 million in debt and liquidate the collateral of the whale account, selling USDN to return liquidity to the Vires Platform.
Step 3: In order to avoid further decoupling due to selling a large amount of USDN, Sasha will slowly sell Neutrino. Waves expects that it will take up to 2 months for Vires Finance to resume normal working conditions and achieve full freedom of deposits, withdrawals and borrowing.
Step 4: Improve the Neutrino architecture by issuing a new recapitalization token to eventually replace the NSBT. Since the NSBT fails to do so under current conditions, the mission of this new token is to recapitalize Neutrino with new WAVES tokens when undercollateralized. Recapitalization token holders receive rewards from staking 50% of WAVES in the Neutrino contract.
After that, the price of Neutrino gradually returned to the $1 USD range until it decoupled again. Currently, Neutrino is still implementing the Master Plan, which aims to make USDN stronger and more stable. However, as cryptocurrencies entered a bear market, USDN decoupled again at the end of August.
In a video call with CoinDesk on August 5, Sasha Ivanov said that after Neutrino follows the above steps, it will no longer be decoupled.
How can algorithmic stablecoins be stable in the era of internal circulation?
The arbitrage mechanism is very smart and automated within a controllable range, but there are still great risks in the event of a large-scale sell-off. Terra collapsed before, and many algorithmic currencies have decoupled from their pegs. Neutrino's decoupling is just one point of the algorithmic stablecoin. Although it has a system like NSBT, it still lost its stability temporarily in the event of a short-term sell-off. Fortunately, it did not collapse because of its strong stability system and reserves.
In addition, other stablecoins have also experienced depegging several times in the past year. For example, Huobi’s stablecoin HUSD depegged to $0.82 on August 19. The reason, according to the company, was that it closed the accounts of several large market makers due to compliance, and the depegging occurred due to time difference issues.
In the case of a market sell-off of a certain stablecoin, no control or weak control will make the sell-off of the stablecoin more serious, thus falling into a negative vortex. With the collapse of Terra and the advent of the cryptocurrency winter, large and small algorithmic stablecoins are in the vortex, and depegging occurs one after another. In order to strengthen the stability of algorithmic stablecoins, in addition to sufficient collateral reserves, some stablecoins have also proposed new methods to better "stabilize" stablecoins when black swan events occur. For example, the Balance Ecosystem proposed that the supply of its stablecoin USDB will be strictly "controlled", and the specific details are yet to be released. At the same time, the protocol is also testing some stress tests, a common risk control test for traditional banks. The protocol also pointed out that USDB will not be docked with only one type of collateral, thereby avoiding the problem of depegging of other stablecoins.
From this, we can see that as a complex stablecoin that is highly dependent on financial engineering, the core logic of algorithmic stablecoins must be as solid as a rock. In the case of a large-scale sell-off, protocols may wish to refer to the calculations of traditional banks for black swan events to strengthen the stablecoin infrastructure and ensure the quantity, quality, and diversification of reserves. Although the control of supply seems to imply the "centralized" control of the protocol, how to find a reasonable balance between decentralized laissez-faire, which may encounter a black swan event and collapse, and centralized control, and design a feasible system that can cope with extreme events will be crucial to the future development of algorithmic stablecoins.
About the author:
Zhuorui Fu, a columnist for Blockbeats, Twitter: @zhuoruifu, LinkedIn: Zhuorui Fu, Zhihu: Fu Zhuorui, Bilibili: Ms. Fu's Irrational Economy. Email for Blockbeats: [email protected]. Former senior analyst at BIS. Alumnus of the University of Pennsylvania. Research interests: monetary policy, financial crisis, cryptocurrency, Middle East studies. Also has a travel account.
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