Equilibrium Successfully Handles the Multichain’s USDC Situation
We are delighted to announce that our team has taken redundant measures to solve the situation with assets bridged over to Equilibrium via Multichain. These measures were proven successful in sorting out potential issues, and there is no threat to Equilibrium’s solvency or EQD stability now. This article covers details of our course of action, and we start with the context first.
What happened and its consequences
As most of you know by now, Multichain got into trouble some time ago. To better understand what happened, let’s explore how bridging works at a very high level. When assets like USDC get bridged over from blockchain A (Ethereum) to blockchain B (Polkadot), blockchain A assets are transferred over to the bridge and remain in its custody. The bridge then either mints or uses an existing liquidity pool to distribute the corresponding amount of tokens on blockchain B. As such, if assets on blockchain A become unavailable due to hack or theft, bridged assets on blockchain B become worthless since they can not be converted into the original assets at a 1:1 ratio. This happened to USDC and other assets bridged through Multichain recently.
Bridged USDC had a plethora of use cases within Equilibrium: USDC could be used as collateral to mint EQD, borrow other assets, deposited into the Insurance pool, or used to provide liquidity in the EQD/USDC stableswap pool. The latter is a particularly appealing use case due to the fact that LP tokens obtained by providing liquidity to the pool could be further used in various products on the platform.
Of course, the issue with Multichain understandably raised concerns among Equilibrium’s users. The use cases mentioned in this chapter are no longer viable due to the inability to bridge USDC properly, while the value of already bridged assets remains questionable. To eliminate these concerns, we’ve implemented an action plan that accounts for the state of all pools. Let’s go through it.
Action plan
As said, we’ve analyzed the state of all our pools and synthetic assets that rely on bridged USDC (EQD stablecoins, LPT1 tokens). Based on the analysis, we came up with a sequence of measures. Each was submitted to our governance portal for an open public discussion and got voted on by the community before getting effective. Here is our response to the Multichain situation:
- Disable deposits to the EQD/USDC stableswap pool. This measure restricts users from minting new LPT1 tokens by depositing USDC and/or EQD into the pool, while LPT1 holders can redeem their EQD and USDC through returning their LPT1 holdings to the stableswap. As such, the LPT1 supply can only decrease from now on.
- Set mxUSDC price to zero. This measure resets the price of bridged USDC on Equilibrium to reflect that their reverse bridging is worthless due to the theft of erc-20 USDC tokens in Multichain’s custody.
- Updated LP token pricing code. Volume — weighted average price is now calculated instead of simple average price to account for relative volumes inside the pool. This allows for more accurate LP token pricing after mxUSDC price is set to 0.
All changes are implemented in a single proposal here. Approved by governance on August 17th 2023.
Implications for EQD/USDC LPs and Equilibrium at large
The main asset bridged to Equilibrium via Multichain is USDC. 215,823 mxUSDC found their way onto the platform.
Here is how these assets are distributed within Equilibrium ecosystem:
Two margin calls have occurred after the runtime upgrade implemented proposed changes.
Here are the balances for liquidated positions:
These liabilities total <1% of the $97k insurance pool and thus did not have any meaningful impact on system stability.
We kindly ask all users to wind down their LPT1 positions and redeem underlying assets. Depending on how quickly this process goes we might propose to wind down the pool and repay the debt automatically via a runtime upgrade.
EQD collateralization
Let’s take a look at the resulting basket of assets collateralizing EQD after the proposed action plan has been implemented.
As we can see, EQD is collateralized by various DOT wrappers, mainly cDOT (Parallel) at 71.5% and Equilibrium’s native eqDOT at 20.4%. Other notable assets in the basket include iBTC at 2.15%. ASTR, DOT, and GLMR are fractionally collateralizing EQD at under 1% combined.
There are currently 454,162 EQD in circulation and $593,244 worth of collateral backing it. This means that EQD is overcollateralized at 130.62% making EQD and its peg safe and secure.
The key takeaway here is that there are no bridged assets and no LP tokens in the resulting basket. Polkadot native assets ensure protection from events such as the Multichain hack.
Arthswap ASTR/EQD pool
We launched an external liquidity pool on Arthswap for the EQD/ASTR pair a few months ago. During the Multichain drama, the price of ASTR valued in EQD in this pool seemed to increased by 20% approximately pointing to a potential EQD depeg. However, this was caused primarily by low trading activity in the pool amidst users panicking upon learning of the Multichain situation.
Despite the seeming significance of this event, the ratio in this pool does not reflect the valuation of the EQD supply overall but rather a local pool price that will most likely restore thanks to natural arbitrage soon. As we explained above, EQD retains its value due to the fact that USDC has not been used as collateral to mint EQD while a basket of diverse assets still reliably backs the EQD supply.
Closing remarks
EQD continues to be valued at $1 on Equilibrium and can be used in DeFi products on the platform in its intended capacity. For example, EQD can be deposited into the insurance pool at $1 or traded on external platforms.
mxUSDC token and all corresponding risks it introduced have been completely eliminated from the Equilibrium ecosystem as a direct result of our actions. Furthermore, LP tokens’ impact has been fine tuned to mitigate any potential risks due to the fact that the EQD part of the LP token no longer contributes to EQD collateralization at all. The combination of these measures allowed us to overcome this unpleasant situation with minimal impact and emerge with a more robust product.
About Equilibrium
Equilibrium is a one-stop DeFi platform on Polkadot that allows for high leverage in trading and borrowing digital assets. It combines a full-fledged money market with an orderbook-based DEX. EQ is the native utility token that is used for communal governance of Equilibrium. Dollar-pegged EQD is Equilibrium’s native decentralized stablecoin, collateralized by a weighted basket of assets and used as a universal unit of value within the DeFi ecosystem. eqDOT is a liquid DOT staking wrapper that allows users to participate in DeFi on Equilibrium while earning DOT staking yield.
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