What is the deal with $Waves? How could this crypto perform so well during an uncertain period?
$Waves have been performing quite amazingly if we consider the uncertainty that we felt in crypto markets during the last months.
Why and how was it able to stand on all the other crypto assets?
I instantly got curious and tried to investigate.
The waves “political uncertain” origins
First of all the project was born in Russia, by the Ukrainian founder @sasha35625 and gained the pseudonim of “The Russian Ethereum”. Bloomberg, in this article, points out some evidences on why the origin of this token has some shady sides:
The project debuted with a partnership with the Russian state-owned defense conglomerate and another with Alfa-Bank
And the fact that the price pumped right after Ukraine invasion may make us think something…
Data from blockchain data firm Nansen shows that since Feb. 28, the total amount of Waves tokens going into the FTX exchange went from nearly zero to as much as 135,242. Nansen told Bloomberg the Wave tokens that went to a FTX-labeled deposit wallet were generated, or minted, by an address closely associated with the Waves project itself.
But the most interesting fact is that most of volumes on WAVES came from the popular Korean exchange Upbit.
Now let’s take a look at the charts to see when the token started its 2022 rush:
All of this made me thought there must be something weird about this token i’m not understanding.
Why should a korean exchange’s volumes on an unknown altcoin have been higher than the volumes on BTC? Why important Russian entities had a partnership with this token? And again: how it pumped so much?
I was already thinking this token was shady, few entities moving the whole WAVES market…
And that was before i took a further in-depht look at how WAVES work.
How does the WAVES and USDN mechanism works?
Their stablecoin (USDN) is 100% collateralized by Waves, actually overcollateralized at the moment. USDN can only be minted by staking waves in yielding nodes. Basically like LUNA with UST, except that in this case the tokens are not burned but are staked and give rewards.
However, the rewards coming from WAVES stake nodes are only given to USDN stakers (who stake on waves exchange). Therefore, USDN stakers also take yields from all those who have not staked and have used their USDN in some other way. So if there are fewer USDN stakers or the WAVES price goes up, the yields go up as well, because waves nodes are generating more rewards or less people are taking them. Conversely, if the price of WAVES falls or the USDN stakes increase, it decreases.
So basically people mint stablecoins (who can stake on waves exchange) earning on them the rewards of all waves in stakes.
Guess what happens if the price of waves dumps and people come out of staking to sell? The rewards decrease because there are fewer waves staked and the value of USDN compared to that of the Waves increases, USDN is no longer 100% collateralised, creating a USDN selloff that would send it off-peg. The protocol solves this by selling another token representing USDN at a “discounted” price (eg $ 0.97) which can be redeemed later when USDN returns in pegs for $ 1, essentially borrowing liquidity from users who are willing to speculate on the USDN price stability.
The only function of waves is to generate rewards for USDN and waves’ price has risen precisely because few entities pumped and staked WAVES to make the rewards increase.
The founder itself said that USDN is technically wrapped WAVES:
So it seems that this token was pumped by a single Korean exchange (Upbit) when everything was dead, and it is the only stablecoin/chain that gave interesting yields during that period. The interpretation is that the coins taken out of supply and staked did a supply shock effect. This made the price jump and surely attracted lot of new retails to the project.
So it is a token backed by a volatile asset, that has been heavily pumped by a few entities, which has no fundamentals other than generating rewards, which has a TVL composed only of the appreciation that the price has had thanks to all the tokens locked in staking and so removed from the circulating, and does not have a maximum circulating supply.
But there’s more.
Everything we’ve just seen is leveraged. yeah, levereged.
The Vires mechanism
As 0xHamZ explains here’s the flow that the tokens (in big batches) follow:
- Deposit USDN on Vires
- Borrow USDC on Vires
- Transfer USDC to Binance
- Buy WAVES with USDC
- Convert WAVES to USDN
- Start over
All of this is trackable onchain.
Here we can see how the borrows of USDC and USDT increased during the last months:
Here we can see that on Vires USDC/USDT borrowing yields are higher than the ones on USDN
That’s because they keep borrowing USDC/USDT against USDN collateral, the reserve shrinks and therefore borrow APR increases to discourage borrowing and supply APY increases too to incentivize lending.
Then they buy WAVES > pump the price, lock in stake and mint USDN> put USDN in lending again on Vires to borrow other USDC/USDT as we explained above.
This means that the whole system (USDN) is backed by borrowed stablecoins, and to keep it going, it will need to borrow more and more and more in order to keep the pace with the increasing borrow APR.
When the price will drop enough the whole castle will fall:
Waves price decreases and therefore USDN backing decreases, USDN is undercollateralized and depegs.
If USDN depegs is material — — Vires could liquidate $607mm of the $875mm outstanding USDN to repay the USDC/USDT debt. This would completely disrupt the protocol.
What could trigger this?
It is certain then, if WAVES doesn’t completely change its way of operating, the protocol will reach a point of no sustainability.
On 1/04/2022 a team of investors decided to attack this vicious mechanism by depleting the reserve of USDC and USDT on Vires by borrowing a huge amount of those stablecoins. As a result the borrow APR skyrocketed, sabotating the whole system.
Many investor had some problems removing USDC/USDT from lending. And looking at the EURN borrow APR, it seems it may be under attack as well, or that the protocol entities moved part of their debt there.
If this attack is strong enough and lasts long enough it could be a potential trigger to debilitate the whole system supporting the waves price pumps, therefore triggering the fall of the protocol.
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