The community behind blockchain protocol Waves has voted in favor of a proposal that aims to address the liquidity crisis of non-custodial lending protocol Vires.Finance.
Waves Community Backs DeFi Revival Plan
The Waves (WAVES) community has backed a governance proposal to reboot the decentralized finance (DeFi) lending protocol Vires.Finance, which had been dormant due to a liquidity crisis. The vote is aimed at stabilizing the project and compensating the impacted users.
Neutrino (USDN), a stablecoin operating on the Waves platform, depegged from the dollar in April. This resulted in a series of user withdrawals from the platform, ultimately leading to a liquidity crisis in which users were unable to withdraw their funds from the platform. During the incident, Waves founder Sasha Ivanov stepped in, amassing $500 million in debt in his wallet with the intention of repaying it gradually.
To address the issue, the Vires team presented a proposal that allows users with balances on the platform exceeding $250,000 with two options. The first option is to exchange their shares for Waves’ algorithmic stablecoin Neutrino (USDN), which has a 365-day vesting period and a 5% liquidation bonus. The second option is to remain in USD Coin (USDC) and Tether (USDT) with 0% APY, which will be repaid by Ivanov, with no guarantees on payment timeframes.
With the implementation of this proposal, the Vires team anticipates improved liquidity, allowing users to withdraw their funds from the platform. In a press release, Ivanov said:
Amid the ongoing crypto winter, it is essential to remember and highlight the core values of decentralization, immutability, freedom from institutional greed, and inclusivity that underpin the blockchain sector. Unlike other platforms, Vires.Finance and Waves keep weathering this storm – largely thanks to the loyal and decisive community that always has the last word in the matter.
Stablecoins in the Spotlight
In 2022, the demise of a lending protocol and its related algorithmic stablecoins has become a recurring subject. Algorithmic stablecoins, which can give relatively greater returns, are neither entirely nor partially backed by fiat currency. They rely instead on code to predict how people will respond to macroeconomic and market momentum.
The collateralized offers from Tether and Circle, which service USDT and USDC, respectively, stand in stark contrast to such form of stablecoins.
Because the code that underlines such stablecoins is developed by people, creating a completely autonomous set of codes that can deal with all market situations is exceedingly challenging. Terra’s UST was perhaps the most prominent example of a flailing algorithmic stablecoin.
Terra, which serviced the stablecoin UST and a native governance token LUNA, likewise crumbled shortly after USDN went below its peg in April, wiping away nearly $40 billion. The wipeout led to the collapse of a number of cryptocurrency companies, including Celsius, Voyager, 3AC, and others. Furthermore, Terra’s implosion sparked extensive regulatory attention due to the magnitude of its failure.
US Treasury Secretary Janet Yellen quickly advocated for stablecoin regulation, and UK regulators introduced the Financial Services and Markets Bill, which included stablecoins in the scope of regulators.
Similar to central banks, academics have shown an interest in stablecoins’ underlying mechanisms. According to Ben Charoenwong, Robert Kirby, and Jonathan Reiter’s 2022 research paper, the only sort of stablecoin that guarantees to maintain its dollar peg is one that is fully backed by hard cash and short-term debt. And, as Terra and Waves have demonstrated, algorithmic stablecoins are a high-risk and volatile venture.
At the time of writing, USDN is trading slightly below its peg at $0.99, while WAVES and VIRES are trading at $5.79 (down 8.1%) and $23.08 (up 1.45%), respectively.