Community discussion: Vires Full Reset

A proposed solution to liquidate liquidity crunch once and for all.

The Situation

After VIP-026 passed with more than 75% of the community in support, the proposal was implemented and $1M USDN was vested daily into depositor accounts. On Thursday, August 25th, USDN depegged from the dollar for a fourth time, and dropped below an acceptable range for about 33 hours. The depegging event stopped thanks to the Vires team’s swift actions to pause vesting and protect depositor’s interests.

Unfortunately, the market reset enacted by VIP-026 didn’t go far enough. The components of the proposal have created new problems instead of solving old ones:

• New Problem 1: The $1M USDN released through vesting each day has increased the instability of USDN and caused a depeg.
• New Problem 2: The liquidity crunch — while temporarily improved — has returned due to the 40% APY rate of interest paid out. New incoming capital from depositors and repayments is not increasing liquidity, it is simply paying off the interest.

As the situation evolves and new problems develop, we must continue to act and adapt based on community input. The team’s role is to generate potential solutions for the community to consider. The Vires team believes that the current market situation and loss of faith in the DeFi industry triggered by the Celsius bankruptcy, 3AC insolvency, Tornado blocking issues, etc, set the stage for a meaningful change in our strategy.

Vires’ strategy up until now has been: Improve Trust > Improve liquidity > Sustain the platform. Through ongoing discussion and governance, we believe we have managed to restore trust, but due to macro market conditions, liquidity has not improved. The Vires team believes “Improving liquidity,” or in other words, attracting new depositors, is no longer the correct goal to focus on.

After much internal discussion, it seems that we’ve run into a critical flaw in how Lending protocols are built across DeFi. It is the same flaw seen in AAVE and Compound however, their pools of liquidity on Ethereum are far larger and able to sustain volatility generated by the flight of depositors more easily.

There are three options to solve these new problems:

1. Do nothing, restart vesting, leading to another depeg, risk the potential insolvency of USDN and loss of everyone’s funds.
2. Continue trying to attract new investors with marketing, hoping to attract enough liquidity to pay the daily interest and sustain an acceptable utilization rate.
3. Repay all users, by fully resetting Vires, and start again with new, safe, and sustainable markets with built-in protection from a future liquidity crunch.

The New Strategy: Vires Full Reset

Following from option three, the team wants to propose a change in Vires’ strategy to: Make all users whole > Get back to building > Sustain the ecosystem. Here’s what this new strategy would mean:

Making all users whole

Give all users certain and full repayment of all deposits through the vesting system. Reduce the interest APR so that repayments and new liquidity can help to solve the problem. Defend the peg of USDN by giving users the option to support the stability of USDN by receiving all or part of their vesting amounts in SURF. Give locked LP tokens a way to get out before their locked period is up, so they are not locked into deprecated markets.

Get back to building

Create new markets on Vires that are better protected from a future liquidity crunch. We’ve already implemented adaptive withdrawal, borrow limits, and non-borrowable collateral. Part of this has become the new industry standard as evidenced by the adoption of Compound V3. Unfortunately, these upgrades, while not enough to solve an existing liquidity crisis will be more than enough to stop another one developing.

Sustain the ecosystem

By refocusing team resources like development time and funding on the future progress of the Waves ecosystem, we can build more products and services that create value and attract users. Some of the projects set to launch in the next two months that would benefit from this include:

• PowerDAO: DAO framework for a totally new model of decentralized governance;
• Waves School: Waves Learn-2-Earn course;
• Waves Camp: Project incubator and accelerator;
• Waves Exchange Launchpad: community project crowdfunding platform.

What this would mean for all depositors

• All USDC and USDT markets would move to legacy. No new deposits would be accepted to those markets.
• Depositors can remain in the legacy markets and receive 2% APY with withdrawals enabled based on the adaptive limits.
• Depositors can select to start the vesting period in USDN at any time and receive a guaranteed payout in USDN daily plus a 5% liquidation bonus.
• Depositors may choose to help recapitalize USDN and support the ecosystem by taking their daily repayment in SURF tokens (learn more about the SURF token here)
• Vires’ team would create new markets supporting auto-liquidation when utilization hits 100% for USDT, USDC as well as other markets.

What this would mean for all gVIRES holders

• gVIRES APYs after the 2-month period of guaranteed APY implemented in VIP-026 would be determined by the pools’ market conditions.
• APYs would start off small based on TVL, but would be able to grow sustainably as more value returned to new Vires markets.

What this would mean for all LP Token holders

• Those who have their LP tokens locked, will be able to prematurely unlock them to a regular deposit to start vesting, possibly under a certain penalty.
• As importing LP tokens is paused due to high utilization, the free-circulating LP tokens will need to be locked first.

What this means for the Waves Ecosystem

• All users are repaid and made whole.
• The liquidity crunch on Vires is over and would not return due to non-borrowable collateral and adaptive borrow/withdrawal limits.
• The priority would be to maintain Neutrino stability to support the strategy

Community feedback timeline

All community members can give feedback on this plan, your feedback is what helps us build the right solutions. We’re always listening and evaluating your comments.

Here’s the timeline:

• We have 24 hours to gather feedback on the plan in the community channel or here on the Vires forum;
• After that, on Thursday 1st of September, the Vires team will create a proposal based on this feedback.

The coming proposal may not include all of these changes in one proposal, we could roll out the changes in phases or make them all at once. Some changes are more important for overall sustainability than others, with the priority being to reduce the base interest rate so that repayments can contribute to liquidity.

You can help improve this plan by joining the discussion and sharing your ideas in the forum.