The algorithm powering the Waves protocol’s neutrino USD (USDN) stablecoin needs to be adjusted in the wake of two recent depeggings from the U.S. dollar, founder Sasha Ivanov said Wednesday.
“We have to work on the algorithm,” Ivanov said on CoinDesk TV’s “First Mover” program. “And what happens now is kind of inevitable, which is just a test of the whole system.”
USDN is dollar-based stablecoin backed by the protocol’s waves tokens, which are locked in smart contracts to mint USDN. USDN redemptions have the opposite effect, destroying the stablecoin to unlock the waves token supply. The idea is to keep USDN’s price steady at $1 per token. The risk is that there may not be enough collateral to back redemptions during a crisis, which is what happened to Terra’s UST stablecoin and luna token last month,
In April, USDN lost its $1 peg and fell to 83 cents, while the WAVES token that backs the stablecoin fell to $22 from $50 within days amid a price manipulation scare. That depegging wiped out nearly $200 million in USDN’s market capitalization. In May, USDN once again fell when UST’s collapse rippled through the stablecoin world, this time bringing USDN's price to 88 cents.
Ivanov said that “some people made a lot of money with waves crashing.”
Ivanov was asked how Waves was different from Terra, whose UST algorithmic stablecoin and luna token crashed in May, wiping out $60 billion in market value. Neutrino’s protocol has “similar mechanics” to Terra, “but (is) different,” he said, citing restrictions on how many redemptions users can get in one day.
Both projects were inspired by the Basis protocol, an algorithmic stablecoin that was ultimately shut down because of its potential use as a security, he added. (Luna founder Do Kwon appears to have tried to revive Basis at one point under a pseudonym before starting Terra, as reported by CoinDesk).
Ivanov said a group of developers are making adjustments to USDN but emphasized that nothing at the moment has been changed. One change that is needed, he said, would be to “create an incentive for people to recapitalize USDN because guarantee incentives are not sufficient.”
Ivanov said USDN doesn’t have sufficient backing, and likened it to fractional reserve banking in traditional markets, saying that “banks have been working with fractional reserve setup for centuries and they're doing fine.”
Nonetheless, he said that “it's better to be fully backed and have over-capitalization."
USDN was recently trading at a 1% discount to the U.S. dollar.
“This is the beginning of the process, and I think it will result in the emergence of a very stable, stablecoin,” Ivanov said.
As part of the process, Waves has released a master DeFi Revival Plan to restore user confidence and protocol functionality.
“We have developers that are trying to make the stablecoin very stable,” Ivanov said. “It’s a very natural process, and we will be better off once we have come out with some better algorithms.”
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