USDN vs UST: Understanding the Differences
Since the crash of UST/LUNA, many questions have been raised around the viability of algorithmic stablecoins, including Waves Protocol’s own USDN.
We want to clarify the critical differences between USDN and UST to explain how USDN is specifically designed to avoid any potential death spirals and provide sustainable yields for users.
To understand the differences between the mechanisms by which UST and USDN operate, let’s go over how they both work.
How the UST/LUNA Mechanism Worked
UST utilized a simple mint and burn function between UST and the LUNA token. Users could burn $1 worth of LUNA and receive 1 UST in exchange and vice versa.
This mechanism created an arbitrage opportunity to keep UST pegged to $1. If UST dipped below $1, then arbitrageurs could buy 1 UST for less than $1 and burn it in exchange for $1 worth of LUNA.
This arbitrage profit incentive was the only mechanism keeping UST stable.
Unfortunately, this didn’t last. When the market cap of LUNA fell below the market cap of UST, a death spiral occurred; this is because as UST began to depeg, holders lost confidence and burned their UST for newly minted LUNA and immediately began selling their LUNA as fast as they could to cash out.
As more and more LUNA was minted, the supply grew out of control and with so many sellers the market cap began dropping with it. The lower the market cap got, the less their mechanism was able to defend the UST peg, ending in a tragic crash for those left holding.
How the USDN Mechanism Works
USDN operates differently. There are three tokens involved in the USDN system: USDN, WAVES, and NSBT (the governance token for Neutrino).
The major difference between UST/LUNA and USDN/WAVES is that an unlimited amount of WAVES or USDN is not possible to be minted. The amount of USDN/WAVES that is possible to be minted is limited in two main ways:
- First, unlike with LUNA, WAVES exchanged to USDN is NOT burned, instead, it is locked in the Neutrino smart contract. This means that when exchanging from USDN back to WAVES, the total amount is limited by the amount locked in the contract. An unlimited amount of new WAVES cannot be minted as was the case with LUNA.
- Second, the amount of USDN a user is able to swap WAVES for in a single day is limited by the amount of NSBT they own and stake. NSBT stakers get gNSBT, and the amount of gNSBT owned dictates how much WAVES/USDN can be swapped on a daily basis.
This table illustrates examples of how much WAVES/USDN can be swapped each day based on NSBT limits:
USDN Recapitalization Measures
One of the biggest differences between UST and USDN is the thoughtful safety measures that have been put in place to maintain the USDN peg in the scenario when the WAVES reserves cap dips below USDN market cap.
The Neutrino team has been continuously working on maintaining USDN stability by implementing various mechanics depending on the market conditions.
The initial setup implied that in case of USDN BR (backing ratio) going below 1, the WAVES recapitalization mechanism would activate NSBT sale.
During the sale, users could buy NSBT from the contract at a discount until the market capitalization is back above the safety threshold. This created a profit incentive for arbitrageurs to raise the market cap of WAVES reserves back above USDN’s.
Later on the moon factor mechanics were introduced, this was extremely beneficial to NSBT holders and USDN reserves, however the result was that 95% of NSBT was issued. Meaning the MAX supply of NSBT is not enough for investors to recapitalize the system, during particularly bad market conditions like we’re experiencing currently. The Neutrino team is working with the community to improve the recapitalization mechanics by instituting a new recap token. This was proposed as part of a wider Waves DeFi ecosystem plan and has since been updated based on feedback from the community in this article.
Staking Rewards Distribution
Another fault point of UST vs USDN is how the rewards are generated and utilized. For UST, the majority of users were depositing in Anchor which promised a near 20% APY. However, this yield was unsustainable because it was being funded directly by the Terra/Luna team.
In contrast, the rewards offered for staking USDN is a result of the Waves blockchain’s Leased Proof of Stake (LPoS) consensus algorithm.
USDN stakers receive profit based on leased collateralized WAVES reserves. This is somewhat similar to other Proof of Stake blockchains that offer staking rewards. Read this article to learn more about the specifics of staking.
The Neutrino team continuously monitors the market conditions and configures staking rewards distribution accordingly. For example, as of today’s conditions, we hedge financial risks by investing in the protocol to make it safe. We invest half of the generated profit in the reserves, we use a part of the profit to buy CRV to balance the peg and we still distribute a part of the profit to stakers.
Summarizing the Differences
To recap, these are the key differences between USDN and UST:
- LUNA used to mint UST was burned whereas WAVES used to mint USDN is locked in a smart contract
- Unlimited amounts of LUNA/UST could be minted with no safety measures in place
- USDN exchange is limited to the amount of WAVES locked in the contract meaning unlimited amounts cannot be minted like LUNA which caused their death spiral
- NSBT stakers have daily limits on the amount of WAVES/USDN that they can swap
- When the WAVES reserves market cap falls below the USDN market cap, the NSBT recapitalization mechanism automatically begins to take effect. There is also a further community proposal to strengthen that mechanism here.
- The yield paid to UST stakers in Anchor Protocol was created largely from the treasury of Luna’s foundation, the USDN yield comes via the rewards generated from Wave’s LPoS consensus algorithm.
Neutrino website: https://neutrino.at
Twitter: https://twitter.com/neutrino_proto
Telegram : https://t.me/neutrino_group
