BoC’s USDi De-peg: What Customers Need to Know.
Explaining BoC’s USDi
BoC’s users are issued USDi, as the collateral for USD in allocating yield farming strategies. The BoC Vault possesses multiple smart contracts, referred to as ‘strategies’ which interact with external third-party protocols, to enable users to optimise yield on their crypto assets.
By design, the BoC protocol enables the minting of USDi to the equivalent of the stablecoin deposited by a user. USDi tickets are also used on the BoC platform to highlight the transparency of the first allocation fee and prevent the over-minting of USDi without fee deduction.
Understanding BoC’s Aave Strategies
Users’ funds were invested in two strategies that involve the Aave Protocol, a DeFi lending platform. These strategies failed to generate yield, leading to a reduced APY (annual percentage yield) and the de-peg of USDi. The strategies work by leveraged lending and staking on Aave.
First, DAI (a stablecoin on the Ethereum blockchain) is locked as collateral to borrow ETH. Following this, ETH is swapped for stETH, which earns staking rewards. stETH is a unique solution that enables tokenized staked Ether native to Lido, a liquid staking solution for Ethereum.
The BoC strategies interact with Lido to allow users to stake Ethereum without locking up assets. They do this by using the stETH as collateral to borrow ETH through the Aave Protocol, and then staking that Ether again and repeating the process.
The goal is to eventually have stETH that is worth twice the amount of DAI collateral locked, which generates yield.
USDi De-peg: The Cause
Typically, interest is made on funds employing both strategies. However, exacerbating market conditions led to the de-peg of stETH to ETH on the 8th of November, 2022. Therefore, stETH devalued below the equivalent of ETH and loans were unable to be repaid fully, leading to an inability to generate yield as well as a reduced APY.
Funds invested in the BoC strategies which interact with the Aave protocol had to be withdrawn at a lower value than the initial investment and reallocated to other BoC strategies, leading to permanent loss.
USDi De-peg: The Fix
For USDi to return to its dollar-pegged value, income generation from other strategies is required, due to the permanent loss initially incurred. This will result in the total value of USD locked becoming greater than the total supply of USDi, thereby meeting the condition for rebase. Once the rebase is triggered, the value of both assets is reset and additional USDi is issued to equate both assets’ values.
USDi De-peg: Addressing User’s Concern
The value of USDi will eventually return to its intended value (pegged to USD) because funds have been moved to other strategies that will increase the amount of USD locked. Therefore, BoC users have nothing to worry about.
For a more in-depth understanding of the Bank of Chain protocol,
Refer: BoC Docs | BoC Dashboard
