The Fall and recovery of aUSD in 10 points
Polkadot’s aUSD is the only StableCoin that has succeeded in reverting its ominous outlook after the collapse.
Let’s see in detail what happened and how the Polkadot governance managed to save the day
1. What is Polkadot
First of all, for those who don’t know, the Polkadot cryptosystem has a primary blockchain and many parallel user-created chains called “parachains”. The primary chain lies at the bottom of the network, while the parachains are auctioned off, allowing independent projects to create and manage their own blockchains that directly benefit from the level of security provided by the Polkadot ecosystem.
…or so it should be.
2. aUSD
The February 9 2022 Acala team, after the evaluation of Ethereum, ETH2, Cosmos and Polkadot, choosed the latter as layer 1 for its new stablecoin aUSD. Acala USD is pegged to the dollar and can be reliably integrated by any blockchain connected to Polkadot or Kusama and by applications distributed on those chains. Anyone can mint aUSDs using a trusted reserve asset, and each aUSD is backed by the reserve/pledged asset. Reserve assets are also cross-chain in nature and can include native Polkadot assets.
3. iBTC
On August 4, Acala announced an iBTC/aUSD liquidity pool. iBTC is a wrapped bitcoin token developed by Interlay. Acala community members were pushed to contribute iBTC and aUSD to the pool to create liquidity, being rewarded with Acala and Interlay tokens. The pool was effectively launched on August 13.
4. The Black Saturday
Exactly at 22:41 UTC of the same day, a bug was exploited in the iBTC/aUSD liquidity pool. There was a loophole in the Honzon protocol that led to the minting of 3 billion aUSD in 16 different wallets.
As we said earlier, the rewards were supposed to be INTR and ACA, but for a protocol misconfiguration, were distributed in aUSD
5. Countermeasures
In a few minutes, one Acala network contributor noticed unusual activity in the pool, and after a quick investigation declared an incident. This event caused the stablecoin, which is pegged to the U.S. dollar, to plummet to $0.01 in just 2 hours.
In response, the Acala team froze the erroneously minted tokens by putting the network into maintenance mode (we will focus later on this).
After a community referendum, the momentarily found 1.2 billions aUSD were burnt, partially restoring the peg on august 15th
2 days later, another iBTC/aUSD pool check took place, leading to the discovery of an additional 1.68 billion aUSD and a new and potentially lethal peg loss. This could have been the end for the Acala ecosystem, but the immediate discovery of the associated wallets led to the recovery of the peg in 7 hours, compared to the two days required the first time.
Acala, after threatening legal consequences for the “exploiters”, opted for a softer approach, setting up a 5% bounty for those who will return at least 95% of the funds transferred out.
Meanwhile, by referendum, the vast majority of erroneously issued tokens were burned anyway.
6. Actual situation and outlook
By now (august 23rd) the situation seems to be slowly returning to normal: aUSD floats between 0.75 and 1 and investing in it could seem to be a good money-making opportunity.
The Acala community has been understanding, cooperative, patient, and resilient. There is a common sense in the users that the worst is now over, and the other communities also share a certain relief at finally seeing a stablecoin rise again after a moment (even two I would say…) of difficulty.
Once the storm has passed, the critical issues that led to the coin’s collapse remain to be eliminated: such a promising project has been jeopardized by the carelessness of a few people.
7. “TheCentralization” conundrum
Although the move to put the network into maintenance mode and freeze funds in the target wallets was meant to protect users and the network from further damage, decentralization supporters are screaming outrage and it’s ironic how a “censorship-resistant currency” can be frozen so quickly without governance having had a chance to decide.
In some ways, a similar mechanism is reminiscent of the Roman republic: during revolts or external threats, the senate elected a dictator whose mandate could not exceed six months.
Democracy implies confrontation and debate, so it’s not the best form of governance for handling emergencies: if we want to get a cue from the Romans, we should also, like them, specify mechanics and timings so that there can be no room for misinterpretation or gray areas: we all remember how this practice led to a perpetual dictatorship and the advent of Caligula.
8. HUSD
Another case of fortunate recovery is that of the Seychelles-based crypto HUSD.
The company had to close several offshore accounts to comply with legal requirements, and due to the time difference in banking hours, this resulted in a short-term liquidity problem.
What country can be more offshore than Seychelles???
Can you believe that this is really how it happened? I don’t, and I fear there will be more shake-ups to come.
9. TERRA
- We all know the story of the collapse of the UST stablecoin, but what went wrong, compared to the other two currencies we examined?
So much that it would take a separate article.
I could avoid giving a technical answer for once, saying that Do Kwon had made too many enemies ( which is also true) but it was basically excessive speculation: the company did not have enough funds to back the 20% interest rate of its Anchor Protocol and when everyone tried to exit, anything is left.
10. Personal considerations
As happened in previous cases, a variety of inaccuracies shrouded this news: contrary to reports virtually everywhere, the event did not happen on August 14, but rather on August 13.
- We are not talking about just over a trillion dollars, but almost 3.
- Last but not least, this was not a hacker attack, but rather an exploit of a rewards configuration error.
On a personal note, I think the only ones who can be held responsible for what happened are the developers of the Honzon Protocol and all the auditors who failed to notice the critical issues involved in the iBTC/aUSD liquidity pool.
Some “exploiters” were pilloried and their crypto addresses exposed. Their fault? Having believed in this project; they may have gotten a little carried away when they saw the rewards they got, but they were in good faith: who wouldn’t have done it in their place?
Eloisa Marchesoni — Tokenomics Architect
