A complex and increasingly bitter drama is unfolding at Waves, a layer 1, or base, smart-contract blockchain.
The system, an Ethereum analog with smart contract and decentralized finance (DeFi) functionality, has seen extreme price volatility in its eponymous native token over the past few days, while its algorithmic stablecoin, neutrino USD (USDN), has dramatically broken its dollar peg. The neutrino stablecoin is widely considered the main utility of the Waves blockchain, so the broken peg threatens the entire system.
The causes for that chaos are disputed, but what’s most notable is the Waves team’s seemingly unprecedented response.
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Arguing that short sellers are fueling the chaos, founder Sasha Ivanov is championing a proposed system change that would make it impossible to borrow large amounts of WAVES tokens through the system’s primary decentralized exchange (DEX), Vires Finance.
Because WAVES is a relatively thinly traded asset of little interest to institutions like hedge funds, traders tell CoinDesk that it is nearly impossible to borrow outside of Vires Finance. Borrowing an asset is essential to shorting, or betting its price will fall. So the Waves proposal would in essence make it very difficult or impossible to short the WAVES token.
Blame the shorts (crypto edition)
The decision to publicly blame short sellers for the Waves system’s woes may mark the first time a crypto project has pursued the same rhetorical strategy as a long list of troubled, traditional, publicly traded companies.
Many companies that attack short sellers ultimately turn out to be engaged in fraud, with my favorite recent example being Nikola, a supposed electric vehicle manufacturer that briefly threatened to sue short sellers before ultimately admitting to having faked its product demo.
More famously, Enron CEO Ken Lay blamed short sellers for the company’s problems in statements made in 2006 – while he was on trial for overseeing the biggest corporate fraud in history. To longtime finance observers, blaming shorts often comes across as the last desperate deflection of a project in denial about its own failure.
Anti-short rhetoric is common among unstable or dishonest projects because, in reality, shorts are structurally incentivized to only attack for very good reasons. In part that’s because shorting is extremely high risk, with potentially uncapped losses if the value of an asset being shorted goes up instead of down. It’s not something that any serious trader or fund does lightly, and often it’s a move made by traders who think they see something the rest of the market does not.
That means shorts often engage in public campaigns to spread awareness about their “short thesis,” or the reason they believe an asset will fall. This casts a different light on Ivanov’s allegations of a “FUD campaign” organized by Alameda Research, a sister company of the FTX exchange. Even taken at face value, a public short campaign by a firm as serious as Alameda would be a sell signal to any sane trader, and not mere “fear, uncertainty and doubt.”
But it’s not actually clear that Alameda is engaging in a WAVES short on its own account, much less a public campaign around it. On Twitter, Ivanov claimed that a $30 million borrowing of WAVES through Vires can be linked back to Alameda. A representative for Vires declined to clarify the source of that information, and some have argued the move amounts to Ivanov doxing a user.
Meanwhile, some believe these loans may represent borrowing on behalf of Alameda clients rather than the firm’s proprietary trades. Alameda founder, and FTX CEO, Sam Bankman-Fried on Twitter dismissed allegations of a coordinated “FUD” publicity campaign as an “obv bulls**t conspiracy theory.” Alameda declined to confirm or deny to CoinDesk whether it has or had a short position in WAVES.
The rest of the story
A short against WAVES would not be a particularly surprising or personally motivated move by any trading firm. In the days leading up to the current drama, there was an increasing drumbeat of criticism of specific financial decisions made by the Waves team, and clear-eyed predictions of the token’s crash.
On March 31, a pseudonymous Twitter user known as 0xHamz called Waves “the biggest [P]onzi in crypto,” claiming the Waves team was printing its neutrino stablecoin and using it to artificially pump the WAVES token. At that point, WAVES had just seen a massive and sharp price spike, nearly doubling in value. But 0xHamz predicted that the consequence of the moves would be a crash of the WAVES token and a depegging of the USDN stablecoin.
That proved wildly prescient. The neutrino stablecoin has dropped as low as 76 cents on the dollar in the days since, before rebounding to 91 cents Wednesday morning. The issuance of neutrino is one of the primary use cases of the WAVES network and token, with nearly $1 billion of the stablecoin in circulation against WAVES’ $2.7 billion market cap. That could make the de-pegging of USDN an existential threat for the entire Waves ecosystem, and the WAVES token itself has crashed back below its pre-pump level.
0xHamz also made the far more serious allegation, based on blockchain data, that Ivanov personally moved a massive $300 million pile of WAVES tokens to Binance, saying the move “could be an imminent dump.” In a Twitter Space organized by Waves on April 5, 0xHamz was invited to discuss his allegations directly with Ivanov.
Ivanov declined to publicly refute the claims that he is dumping WAVES tokens, instead arguing that 0xHamz was not a real person and making vague threats against the critic. “What you do is bullshit. You're a troll ... Maybe your voice is generated by AI, I don’t know,” said Ivanov. “I would be happy to meet somewhere and discuss in private. I can show you everything, my friend, and you don’t do your homework at all. What you do is crap. It’s baseless accusations.
"And if you’re a real person, my friend you can actually have some legal problems. So I suggest you think [about] what you do.”
This sort of menacing language from corporate or crypto leaders is often a gigantic red flag. Founders so emotionally fragile they resort to threatening critics rather than addressing their questions are not reliable stewards – a realization that apparently came to Ivanov a few minutes later when he insisted that “I am not making threats.”
The big stop
Despite the surrounding drama, the proposal to cut off short sellers remains the most interesting part of the story. The proposal, which Ivanov has endorsed, opened for voting on April 5 and will run until April 10.
Currently, the proposal is barely passing. Many responses have argued that it is at best contrary to the spirit of crypto because it forecloses legitimate economic activity. And while blocking short sellers could boost the price of WAVES in the short term, experts say the proposal is likely to prove damaging to WAVES over the long term.
According to Jeff Dorman at crypto asset management firm Arca, the chaos may have already increased short pressure rather than easing it. Institutions and hedge funds uninterested in holding WAVES on its merits, he says, “are all probably scrambling right now to find a WAVES holder to get a borrow from [to enable shorting], but they are likely unsuccessful in doing so. The negative funding rate [for WAVES] on FTX, for example, is indicative of how little borrow there is, as those who want to short have resorted to selling perpetual futures.”
In other words, it’s so hard to find actual WAVES tokens to sell short that bears are willing to pay up for derivative contracts that would profit from the asset’s eventual fall.
Putting up a shield against shorts would further limit such activity, but it’s by no means a sure win for WAVES.
“Messing with free markets also has other long-term consequences, including reducing liquidity,” Dorman says. That “would make long-term holders more concerned [and] could negatively impact [WAVES’s] price."
Update 4/6/2021: We have expanded and revised quotes taken from the WAVES space on April 5.