Community Update: Impact of USDC & SVB Events on Bluejay
--
Background
Last week during the week of March 7th, both Silicon Valley Bank and Silvergate collapsed because of liquidity crises and subsequent bank runs. It was made known that Circle held $3.3B in cash reserves in SVB, and the fear around USDC’s exposure triggered a panic in the industry and depeg down to $0.87 (at its lowest).
The USDC depeg event also triggered a few other events as well that are relevant to us. a) DAI which uses around 50% USDC in its backing starting trading at a discount, b) xSGD (the fiat-backed SGD stablecoin) also traded at a premium against SGD because more users than usual were selling off USD stablecoins for alternative non-USD stablecoins.
While the impact of the event was not significant on Bluejay, we would like to cover the effects and responses in this document, as well as outline some of our plans and thinking going forward.
What was the impact of USDC’s depeg on Bluejay?
Bluejay holds DAI and xSGD as part of the reserves backing bluSGD. Since both of these assets deviated from their peg, bluSGD was also affected temporarily as holders of bluSGD rushed for a redemption over the weekend. Despite this, bluSGD remained its peg against the SGD closely during this whole period. This is demonstrable by the bluSGD price chart below which shows that the protocol’s price stablizer was working as intended and was performing actions autonomously to keep the price peg.
Based on the current snapshot of our protocol’s asset, DAI would’ve had to decrease to an astronomical level (as low as $0.25) before there would be a material impact to the solvency of the protocol. This is because the token is overcollateralized and is holding xSGD as collateral whose price movement during the period is negatively correlated with that for DAI.
The biggest issue that we faced was actually around the second collateral asset, xSGD, which started trading above the peg. Arbitrageurs started taking advantage of this, and started buying up bluSGD to swap for xSGD for the premium. That, and in tandem with other bluSGD > xSGD swaps of ~200K through our peg stability module created a temporary liquidity issue, where we didn’t have enough xSGD in our PSM to handle the conversions. The team acted swiftly to replenish xSGD liquidity as well as other actions outlined below to counteract this.
As of today, each bluSGD in circulation is 35% backed by xSGD and 65% backed by DAI, with a collateral ratio of 203%. Please note that these figures can change as the composition of treasury assets changes.
During the period of volatility, none of the liquidity was removed and none of the protocol’s functionalities were paused. The protocol continued to function as expected despite the xSGD liquidity challenge mentioned earlier which was immediately addressed.
The rush for redemption has led to 88 holders withdrawing 228,987 bluSGD in aggregate.
Bluejay’s Response
In order to meet redemption requirements from the PSM, the team replenished it by converting 70K DAI from the protocol’s treasury and swapping 30K xSGD to bluSGD. We also raised the fees for the PSM to 0.5% for xSGD → bluSGD and 1.2% for bluSGD → xSGD in order to maintain a spread against xSGD which was mispriced during the period. This helped the protocol to stop selling xSGD at a loss.
In a detailed analysis of the aftermath, there was a net ~$7.7K SGD of equity lost during the period of extreme volatility.
With the successful management of the crisis, the team also decided that we would still go ahead with Bluejay Earn launch and announced the first loan pool which can be accessed at https://app.bluejay.finance/earn. We expect use cases around fixed income for Earn will help restore bluSGD usage and circulation.
Follow-up Action Post-crisis
To facilitate the system return to normal functions, the following changes are planned:
We have adjusted the PSM fees again on 13th March to the following:
- xSGD → bluSGD at 5 basis point (0.05%)
- bluSGD → xSGD at 75basis point (0.75%)
We will continue to monitor the situation and tweak these parameters when xSGD is back trading at peg with minimum volatility to be ready for Bluejay Earn. The parameters to be adjusted are:
- xSGD → bluSGD at 0 basis point (0%)
- bluSGD → xSGD at 10 basis point (0.1%)
Key Learnings
We also documented our key learnings and we would also like to share this with the wider Bluejay community.
- We could have improved our communication through official channels with our community. The team was actively monitoring the situation and was planning to release a report. However, we could have addressed some of your concerns more proactively during the weekend, especially, during war time. We will learn from this and improve communication in the future to be timely.
- Our operational procedures regarding crisis management can be improved as well. We will be creating a more robust monitoring and alerting system as well as SLAs internally for us to prepare for future events.
