We noticed some concerning movements in USDC/USDN vault and decided to take prompt action to safeguard our investors. Thanks to our quick turnaround, most of our customers came out of this incident unscathed.
USDN is an algorithmic stable coin backed by WAVES, the mechanism where users can mint USDN (which carries an average yield of 8-14%) using WAVES. The Yearn crvUSDN vault is one of the most extensive DeFi vaults in the market, it has a total AUM of $308M globally as of 2021/8/11.
The yield of USDN comes from WAVES rewards (similar to LUNA/UST.) WAVES staking rewards is ~4% at the moment. Therefore if the total market cap of WAVES/total market cap of USDN = 2.5, the APY for USDN would be ~10%.
The $WAVES Pump
WAVES have been pumping since the beginning of March. Using the formula above, we know that the higher WAVES market cap raises the interest rate for USDN, which means more USDN issuance is possible. The fact that more and more people are buying WAVES to mint USDN to pursue high yield pushed the price of WAVES higher, and the cycle began.
However, a conspiracy theory came out on April 1 that the Pump of WAVES is because of the folding trading done by the WAVES team, and the flow goes like this:
- Users deposit USDN on Vires
- Users borrow USDC on Vires
- Users transfer USDC to Binance
- Users buy WAVES with USDC
- Users convert WAVES to USDN
- Cycle starts over
Vires is a money market protocol based on WAVES, and the borrowed amount spiraled out of control over the last two months. The borrow interest rate on Vires can be as high as 40%, so it doesn’t make sense for anyone to borrow money from the protocol.
Viewed from on-chain data, an account has been manipulating the WAVES price underground with the flow mentioned above, and the account is suspected of belonging to the WAVES team.
The WAVES team claims that they have never done this, and they accused Alameda Research of being the team that manipulated the price behind the scenes. Right now, it’s hard to tell who’s telling the truth, but one thing we can be sure of now is the ecosystem of WAVES is not as stable as we thought, and the interest rates on Vires Protocol are unreasonable.
Since WAVES mints USDN, there should be a reverse process where people get to redeem their WAVES using USDN. There is this mechanic that people can call the swapNeutrinoToWaves() function to redeem their WAVES. However, since the NEP-102 proposal was launched on February 23, only NSBT stakers are entitled to do this. Even for the stakers, there’s a limited amount that they can redeem their WAVES based on their staking and can only redeem once per day.
Overall, the arbitrage works like this: people redeem $1 worth of WAVES by sending 1 USDN, gaining instant risk-free profit after selling the WAVES token. However, only a limited number of people can conduct this action, therefore leaving USDN depegged.
How Coinomo Took Action
The team noticed the exchange rate for USDC/USDN was $0.96 on April 3. Still, we understand the pegging system of WAVES and that every USDN is overcollateralized and believe the arbitrage opportunities will bring USDN pegged again. Hence, we decided to monitor the price for a little longer. In the history of USDN, minor depegs have happened before, and the system recovers itself.
However, the conspiracy theory citing that the WAVES team may manipulate the price and the abnormal activities on their top exchange Vires raised a red flag. To be safe, we decided to remove liquidity from Yearn and Curve and get USDN and other stable coins back first.
On April 4, USDN was still overcollateralized (BR ratio is 250%), but the conspiracy was still spreading, and the WAVES team didn’t perform any actions to resolve the de-pegging. So, we decided to swap all USDN left in our products to USDC.
OMO Farming USDC 2.0
An ill-favored situation like the recent USDN incident is hard to avoid in the DeFi industry at this stage and gives retail investors almost no chance to react in time to minimize risks. In our constant effort to provide our customers with good DeFi products with balanced risks and return, the Coinomo team regularly revamps and improves our backend architecture. We will be rolling out the following improvements on our OMO Farming USDC product:
- Set a stop-loss policy for all our products. Most products aim to provide low-risk yields, but there are still risks when investing in DeFi so we will implement an automatic mechanism for stop loss.
- We will diversify our fund into more vaults and strategies. We have researched 17+ USD stablecoin strategies, and we have started deploying funds into some strategies in the past two weeks. We will continue to diversify further into all the identified vaults and strategies.
- We will monitor the prices that can have an impact on our portfolio. Currently, we only calculate the net asset value from the corresponding vault/pool. Our system will be getting more prices from different sources to provide a whole picture of the market value of the stablecoins.
You can reach out team via Discord: https://discord.gg/Edtq7T8BNc or get support by downloading the Coinomo App: www.coinomo.com