VIP 24.2: Markets Reset

A solution to Vires Finance liquidity crunch that makes all depositors whole and resets the system immediately to full working order.

What happened to VIP-24 ?

The proposal VIP-024 Migrate all USDT and USDC > 1M to separate markets was defeated this weekend. It suggested that a portion of whale accounts (>1m) would be separated into a different market until sufficient liquidity returned to the protocol. At that point, they would be able to withdraw with rewards at a reduced APY of 2.5%.

There were many different opinions within the community, some:

• Depositors understood and saw the opportunity to get out of Vires
• Depositors didn’t like the idea a specific group was to be penalized
• Vires Stakers weren’t happy about the impact it would have on their APY (currently >120%)
• Depositors saw there was merit to this but wanted changes

The reason for the a different version of the proposal proposal is clear: The longer this liquidity squeeze goes on, the more severe the problems become and the harder it becomes to solve.

Withdrawal limits frighten away new users, and the interest burden of the bad debt taken on by Sasha and the APY of Vires stakers continues to climb to unsustainable levels.

3 problems and 3 worsening effects:

1. Withdrawal limits — kills consumer confidence
2. Bad debt interest — drains funds that could otherwise be better used
3. gVires APYs — snap up debt repayments instantly at the cost of locked depositors who get whatever is left.

The options

We need to take drastic measures to change the situation while we can. We have a reset button in the liquidation of the bad debt collateral, but there are a few ways we can use it. The goal of using it would be for all parties involved to avoid losses and, ideally, even profit.

We want to discuss the options:

Option 1: No action

The 3 problems remain, Withdrawal limits continue to float around based on the number of repayments made daily, with the majority of depositors unable to withdraw or move in and out of pools freely. No certainty about the number of withdrawals you can make a day. At the same time, the FUD machine continues rumours of Vires stealing everyone’s tokens and users not getting paid back. This route potentially leads to insolvency and poses a huge threat to the USDN peg once the liquidation starts.

Option 2: The system fully resets, liquidates all the bad debt ($500m), and repays all lenders with USDN.

This was our initial thinking after the defeat of VIP-24; it is good for a few reasons:

• Every user is repaid all their collateral.
• Full functioning is restored to the protocol immediately, meaning new users can come in, withdraw, deposit, and borrow
• The bad debt is gone, and with new adaptive borrow/withdrawal limits in place, the same situation can never happen again

However, there are a couple of significant problems with a complete reset of the lending markets back to 0:

• New users and small accounts are impacted unfairly.
• Setting markets back to 0 after a large liquidation event like this could severely impact Vires Finance’s ability to attract new users with good yields.

Option 3: Implement the reset button, liquidate all the bad debt above 250k for each account (~$400m of $500m debt) and repay larger lenders with a vesting period.

This option is now the preferred option. It comes with all the same benefits as repaying everyone, but with some added benefits:

• ~100m would stay in the protocol, meaning gVires holders would still get a reduced APY
• Utilisation would be restored to a healthy level at ~75–80%
• New and smaller accounts would therefore be able to withdraw/borrow freely without any vesting period.
• All deposits liquidated (Above 250k) would receive a 5% liquidation bonus for the inconvenience.

The Reset Button

We want to propose liquidating 400m of the 500m in bad debt(Option 3).

With that collateral, the system would repay all deposits above 250k in each account, with a vesting schedule of ~420 days(1m per day). The vesting is to protect the USDN peg. In addition, each liquidated amount would get +5% as a liquidation bonus.

VIP 24.2: All above 250K converted to USDN + 5%

How this works

• Sasha would liquidate the bad debt collateral and immediately repay all depositors.
• All affected depositor’s funds would be repaid in USDN to their accounts with tokens released over a defined vesting schedule plus a liquidation bonus of 5% on top of it.
• Users can withdraw USDN at any time based on the vesting schedule.
• gVires holders will be additionally incentivized and continue to get their APY untouched during the transitional period of one month following proposal approval.

🦐 What it means for suppliers of USDT and USDC < 250K in total

Healthier market utilization, larger withdrawal limits.

🐋 What it means for suppliers of USDT and USDC > 250K in total

• You’ll be repaid in USDN for any USDT & USDC supplied above 250k via vesting to your wallet with a bonus of 5%.
• The unlock of the vested USDN happens linearly during ~420-day vesting period(1m USDN in total unlocked per day).
• If you have a significant debt in USDC/USDT/USDN/EURN, the debt will be settled automatically.
• If you have a significant debt in BTC, ETH or WAVES, part of USDC and USDT will be converted to regular USDN supply, part of USDC and USDT will be converted to vested USDN to maintain a decent level of your account health.

What it means for VIRES stakers (gVires holders)

• gVires APYs would remain intact until the end of the transitional period one month after proposal acceptance through additional incentive in USDN equivalent.
• gVires APYs would then reduce to ~20–30%, still massively outperforming any comparable DeFi yield.
• The protocol will be reset, and full working order will be restored, markets will become healthy and bad debt will be gone.
• Organic growth of the protocol can continue, while still maintaining attractive Deposit APYs.

What it means for markets

This means lifting limits to withdraw, deposit, import, export, and borrow once again, restoring confidence in the protocol.

VIP 24.2: Markets reset to healthy state

Why Now?

We believe the fastest way for things to return to normal is to repay users and start all over again with better parameters. Then, those that want to withdraw will be able to do that, and those that want to stay in the ecosystem can stay. That choice comes down to every wallet.

Decentralization and Self-sovereignty are key values at the foundation of DeFi; we must continue to educate on the state of the situation and provide the choice to you, the users, as we have throughout this crisis.

We’ve seen other centralized lending platforms brought down entirely by bad debt, unable to pay their users back, and taking considerable steps to avoid it. However, the benefits of over-collateralization in decentralized protocols mean transparency and an opportunity to reset. There is still funding to repay all deposits and reward Vires stakers for their support. However, despite already taking various actions as laid out in the masterplan, the situation is not improving fast enough to restore confidence and bring liquidity.

With the improvements to Neutrino’s tokenomics, the new recap token (SURF) will make USDN the strongest algo stablecoin, able to arb back to peg and recapitalize in times of undercollateralization. Add a renewed Vires system back to working order with new limits; the ecosystem can begin to thrive again. Now is the time to play that card when the market is down, and there are still exciting opportunities in the Waves ecosystem. Then, as the market turns and renewed interest in DeFi returns, we can leverage our battle-tested protocols and a clear commitment to crypto’s values as evidence that we are ready to thrive once again.

Feedback to us, we’re listening!

We want to get feedback from the community on an option that would reset the system, but that comes at a cost. The one constant that has guided the team’s thinking has been the feedback from the community. For this, we thank you all.

Here is how this proposal process will work:

• This blog is released, and the community will have 3-5 days to give feedback (we’ll create a forum post for this as well, but you can also give feedback in the community channels, we’re listening very carefully)
• We will review the feedback and prepare a final proposal based on that feedback.
• The proposal will be posted, and we’ll invite the community to vote.

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