DAOs: Uniswap executed first cross chain governance proposal without use of trusted party or multisig, Aave votes on Portals governance framework, Balancer votes on gauge system options, KyberDAO discussing governance parameters changes, DAOhaus’s SZN3 veDAO, and more!
Biweekly report on decentralized autonomous organizations vol.23, 2d April — 16th April
TL;DR
- Uniswap executed first cross chain governance proposal (to Polygon) without use of trusted party or multisig. After passing the Temperature Check vote with 7M UNI voting in favor of deploying Uniswap v3 on Gnosis Chain (GC), the vote moved forward into the Consensus Check stage
- DAOhaus’s SZN3 — codenamed veDAO — takes things to the next level with veBAL. The Graph AdvocatesDAO introduced
- The Aave community votes for Portals governance framework. The proposal intent to create a standard framework for entities willing to be whitelisted by Aave V3 to be a standard-compliant candidates
- BadgerDAO’s BIP 89: Treasury Management Policy & BIP 90: Every Badger Counts are up on the forum for feedback and signal voting
- The Balancer community decide on gauge unexpected behavior. The proposal provides two options for how governance can proceed. Proposals for 3 pools to enable veBAL gauge voting passed
- Bancor 3 code released to the public, and 1m dollar bug bounty announced. 6 governance proposals regarding the rollout of Bancor 3 passed
- MolochDAO Grants Round applications are officially open
- Compound votes on reduced MKR borrowing limit to mitigate governance risk to MakerDAO, with proposal to Aave governance to follow. Proposals 095–98 executed, 099 queued
- Lido and Curve receive proposals to contribute tokens to core Ethereum development fund, similar proposal is rejected by Compound
- New Curve router launched. The vote to set burner for Crypto Factory LP tokens is live
- Terra and Frax propose creating Curve 4pool with UST, FRAX, USDC, and USDT
- Gnosis’s GIPs 33 & 34 are live, GIPs 27, 29 & 32 approved. Metamask Institutional integrates Gnosis Safe to streamline operations for DAOs, institutions and crypto enterprises
- Idle is up to upgrade of its staking model and tokenomics, with the implementation of the veToken model and stkIDLE gauges. The DAO voted to deploy a SmartWalletWhitelist contract. IIP-21 executed
- KyberDAO discussing various changes to the governance parameters to ensure greater decentralization and security
- mStable voted to overhaul of the current governance fee flow to designate a percentage to be put into the mStableDAO Treasury
- The Nexus Mutual community voted to renew and expand the Immunefi Matching Bug Bounty Program
- The PieDAO community discussing revisiting the minimum distribution
- Synthetix’s SIPs 198 and 222 are both done with their audits. These SIPs will update the atomic exchange functionality and the exchange fee system
- New 12 MakerDAO polls are open
- Index Coop’s open letter published on the forum
- Authenticating.com deploys API3’s Airnode, providing Web3 applications access to their extensive AML/KYC services
- Waves Protocol’s USDN stablecoin recovers after loss of peg
- Ichi stablecoins face serious pressure after lending pool insolvency
- Juno faces unscheduled downtime caused by targeted consensus exploit
- Osmosis proposal 191 would directly incentivize validator decentralization and “stake flattening”
- A member of ENS created a translation program for the DAO
- Active proposals: Aave, Balancer, Curve, GnosisDAO, Idle, LidoDAO, MakerDAO, Uniswap
- New & ongoing discussions: Compound, GitcoinDAO, Index Coop, Synthetix, PieDAO, mStable, Yam Finance, Yearn Finance, Nexus Mutual, BancorDAO, Akropolis, PoolTogether, API3, KyberDAO, Kleros, BadgerDAO
- And more!
Overview
Blockchain technology is already radically transforming the financial system. However, properties such as trustlessness and immutability aren’t only useful in monetary applications. Another potential application is governance. Blockchains could enable entirely new types of organizations that can run autonomously without the need for coordination by a central entity.
“Instead of a hierarchical structure managed by a set of humans interacting in person and controlling property via the legal system, a decentralized organization involves a set of humans interacting with each other according to a protocol specified in code, and enforced on the blockchain.” — Vitalik Buterin
DAO stands for “decentralized autonomous organization” and can be described as an open-source blockchain protocol governed by a set of rules, created by its elected members, that automatically execute certain actions without the need for intermediaries.
In simple terms, a DAO is an organization that is governed by computer code and programs. As such, it has the ability to function autonomously, without the need for a central authority.
Like how DeFi is programmable money and how NFTs are programmable media, DAOs are programmable organizations of people.
DAOs Ecosystem Statistics
Top DAOs
Like two weeks ago, the rating is headed by Uniswap and BitDAO.
Global stats
Leading DAOs
Frameworks
Aragon
Community opportunities within the new Aragon product:
26-Aragon: Growing the Pie — an ecosystem approach to value creation:
Tribute Labs (OpenLaw)
Governance
Aave
Active proposals
Closed proposals
- ARC — Strategic Investment BAL Token
- ARC — Update Risk Parameters Mainnet Arc Market
- Aave <> BGD Labs. Request for Approval
- Add stMATIC to Aave V3 Polygon Market
- Should six (6) total risk parameters across three (3) Aave V2 assets be updated?
- Risk Parameter Updates 2022–03–31
New and ongoing discussions
- Optimize rate curve for ETH & improve revenue generation | New dashboard from Llama showing the affect of the new ETH rate, including on revenue generation
- ARC — Strategic Partnership with Balancer Part #1 | Revised proposal implementing community feedback
- ARC — Strategic Partnership with Balancer Part #2 | Acquire 100,000 BAL tokens by deploying a Bonding Curve contract
- Extend the Safety Module Protection to V2 Markets
- ARC: Add support for CVX (Convex Finance Token)
- Add Notifications Center to Aave v3
- Add MAI on Aave V3
- Proposal: Add support for rETH Token
Latest governance topics on governance forum.
API3 DAO
Recent blog posts
API3 DAO Tracker: API3 DAO currently involves 5,057 members participated in 26 votings.
Latest governance topics on governance forum.
Badger DAO
There were no active Badger Improvement Proposals (BIPs) these weeks.
New and ongoing discussions: Badger Discord
To read more about the different proposals and take part in the decision, check out the governance forum.
Balancer
Recent blog posts and news
Active proposals
Closed proposals
New and ongoing discussions
- [Proposal] Allow Whitelist tetuBAL in Balancer VotingEscrow
- Decide on Gauge Unexpected Behavior
- [Proposal] Incorporation of the Balancer Foundation
- [Proposal] Allowlist Aura Finance in Balancer VotingEscrow
- [Proposal] Allow Tribe DAO to lock veBAL
- [Proposal] Authorize Treasury subDAO to Allocate BAL to Turbo
Latest governance topics on governance forum.
Impermanent Loss: Advantage of 80/20 over 50/50 Pools (Silver):
Bancor
Recent blog posts and news
Closed proposals
- BIP15: Proposing Bancor 3
- BIP17: Bancor 3 Initial Whitelist, BNT Funding Limits, and Swap Fees
- BIP18: Proposed Bancor 3 Liquidity Mining Program
- BIP20: Quorum and Supermajority Requirements
- BIP21: DAO Multisig Intervention Policy
- BIP16: Bancor 3 Beta Release
- Disable deposits on AXS
- Increase the trading liquidity limit in the ICHI pool from 1M BNT to 2M BNT
- Incentivize users to migrate to V3 by matching token side LM rewards with up to 50,000 BNT per pool. Available once per pool.
- Extension of Liquidity Mining Rewards on the wBTC pool ahead of Bancor 3
- Extension of Liquidity Mining Rewards on the ETH pool ahead of Bancor 3
- Extension of Liquidity Mining Rewards on the USDT pool ahead of Bancor 3
- Extension of Liquidity Mining Rewards on the USDC pool ahead of Bancor 3
- Extension of Liquidity Mining Rewards on the DAI pool ahead of Bancor 3 #
- Extension of Liquidity Mining Rewards on the LINK pool ahead of Bancor 3
New and ongoing discussions
- BIP16: Bancor 3 Beta Release
- BIP20: Quorum and Supermajority Requirements
- BIP21: DAO Multisig Intervention Policy
- BIP18: Proposed Bancor 3 Liquidity Mining Program
- BIP17: Bancor 3 Initial Whitelist, BNT Funding Limits, and Swap Fees
To read more about the different proposals and take part in the decision, check out the forum.
Bancor Community Call — April 3:
Proposing Bancor3: A Quick ELI5 (Part 4A):
Compound
Closed proposals
- 099 OpenZeppelin Security Partnership — 2022 Q2 Adjustment V3 queued
- 098 Risk Parameter Updates for YFI and SUSHI
- 097 Reduce MKR Borrow Limit
- 096 Update Low-TVL cToken Implementations
- 095 OpenZeppelin Security Partnership — 2022 Q2 Adjustment V2
New and ongoing discussions
- COMP Reward Change: Impact Analysis
- Reducing MKR Borrow Cap
- Proposal: OpenZeppelin Security Partnership — 2022 Q2 Adjustment
- Certora Formal Verification Proposal
- Gauntlet Q2 2022 Sablier Update
Latest governance topics on governance forum.
Curve
Active snapshot proposals
New and ongoing discussions
- Proposal to add XSTUSD-3CRV to the Gauge Controller
- Proposal to add ARTH.usd Gauge
- Adding a 2Pool base implementation of USDC/USDT
- Proposal to Add LendFlare Gauge on Ethereum
To read more about the different proposals and take part in the decision, check out the forum. Vote here.
April 11, 2022: Curve Smart Router 🧠💱 New Curve frontend, cross-chain boosties:
Gitcoin
Closed proposals
- Partnership & Mutual Grant with Wonder
- Ratify the Results of Grants Round 13 and Formally Request the Community Multisig to Payout Matching Allocations
New and ongoing discussions
- [Proposal] Partnership & Mutual Grant with Wonder
- [Proposal] dCompass — Season 13 budget request
- [Discussion] dCompass — release plan and beyond
- Constructing a Mutual Grants Committee
To read more about the different proposals and take part in the decision, check out the governance forum.
DAOVibes Call April 13 2022:
Gnosis
Recent blog posts
Active proposals
- GIP-33: Send vested COW tokens to daughter Safe for treasury management
- GIP-34: Should Gnosis DAO support in a reimbursement plan to the Agave Community?
- Allow sGNO holders to vote and include in upcoming airdrops
Closed proposals
- GIP-29: Spin-off SafeDAO and Launch Safe Token
- GIP-32: Reimburse expenditures to the Gnosis Chain Core Development Unit (formerly xDai Chain team)
- GIP-27: Gnosis Guild 🪐 Treasury Allocation to Gnosis Ltd
New and ongoing discussions
- GIP-38: Should GnosisDAO fund a Gnosis Chain ecosystem growth initiative?
- GIP-33: Should Gnosis DAO send vested COW tokens to daughter Safe for treasury management
- GIP-39: Should GnosisDAO fund the DAOstar One initiative?
- Should GnosisDAO plan to deploy to Terranova: the Terra EVM?
- Should the Trustlines Network move onto Gnosis Chain?
Find out the latest GnosisDAO proposals here.
Idle
Recent blog posts
Active proposals
Closed proposals
- stkIDLE Whitelisting Process Implementation
- IIP-20: Activate Idle Gauges, Transfer 50k IDLE from ecosystem fund for Uniswap v3
- [Temperature Check] Initial Gauges & Whitelisting process
New and ongoing discussions
- [IIP-21] — Set final $IDLE distribution rate on Gauges
- stkIDLE Whitelisting Process Implementation
- M1–2022 Perfomance Report
- M2–2022 Coordinators Applications
To read more about the different proposals and take part in the decision, check out the governance forum.
Index Coop
Closed proposals
- IIP: 147 Build LAYER1 on a Managed Balancer Pool
- [Compound-99] OpenZeppelin Security Partnership — 2022 Q2 Adjustment V3
- [Aave-69] — Risk Parameter Updates 2022–03–31
- [Aave-undefined] Aave <> BGD Labs. Request for Approval
- [Compound-98] Risk Parameter Updates for YFI and SUSHI
- [Compound-97] Reduce MKR Borrow Limit
- [Uniswap] Polygon 1bp Fee Tier
- IIP-146: Reduce $icETH Fees Pre-launch
- IIP-120: DG — Launch Forefront Social Token Index ($SOCIAL)
- IIP-145: DG — Launch the Layer 2 Index (LAYER2)
- IIP-138: MVI Revised Fee Split and Streaming Fee Increase [Second Submission]
- IIP-144: DG — Launch the Basis Trading product suite (BASIS-ETH et al)
- [AAVE-undefined] Optimizing ETH rates
- [Compound-95] OpenZeppelin Security Partnership — 2022 Q2 Adjustment V2
- [Compound-93] Contribute funding to the Nomic Foundation
- [Balancer] — Polygon: Authorize Batch Relayer V2 for USD+ Boosted Poollification Factor Control to the BalancerDAO
- [Balancer] — Hand Over Swap Fee and Amplification Factor Control to the BalancerDAO
- [Balancer] — Symmetric Friendly Fork
- [Balancer] — veBAL Activation
- [Balancer] — Hexagon Friendly Fork Proposal
- [Uniswap] Should Uniswap governance contribute funding to the Nomic Foundation?
- [Uniswap] Gnosis Chain Deployment
New and ongoing discussions
- IIP-147: Build LAYER1 on a Managed Balancer Pool
- Owl Levels for Index Council Snap Election April 2022
- Governance House
- IIP-145: DG — Launch the Layer 2 Index (LAYER2)
- IIP-148: Delegate Aave to Governance House EOA Address
Find latest Index Coop proposals here.
To read more about the different proposals and take part in the decision, check out the governance forum.
Kleros
Recent blog posts
There were no active KIPs these weeks.
To read more about the different proposals and take part in the decision, check out the governance forum.
Lido
Recent blog posts
- The Next Chapter for Lido
- A New Era For Lido on Solana
- Modelling The Entry Queue Post-Merge: An Analysis of Impacts on Lido’s “Socialized Model”
Active proposals
- Should the Lido DAO add the 5 shortlisted Polygon operators to its Lido on Polygon operator set?
- Proposal to fund the Protocol Guild Pilot via a Lido Grant
Closed proposals
- Lido on Terra wave 3 validators onboarding
- Top up referral program’s budget and reduce rewards to Ethereum referral program
- Yearly Budget & Apr 1, 2022 — June 30, 2022 Budget Request for DAO Hiring Committee
- Vote for Hasu to join Lido as Strategic Advisor
- Lido on Solana — Proposed Transition from Chorus One to P2P
- Refund money spent on deposits on Ethereum to the dev team
- Fund the depositor bot in Ethereum
- Top Up LEGO Treasury Wallet w/ 300,000 LDO
New and ongoing discussions
- [reWARDS] April ’22 Budget + Q1 update
- Lido Referral Program on Solana
- Proposal to fund the Protocol Guild Pilot via a Lido Grant
- Lido on Solana — Proposed Transition from Chorus One to P2P
To read more about the different proposals and take part in the decision, check out the governance forum.
MakerDAO
Active Polls (12 Polls — Ending Apr 25)
- Ratification Poll for Governance Communications Core Unit, COM-001, Mandate Refresh (MIP39c2-SP30)
- Ratification Poll for Dissolution of Content Production, MKT-001, Multi-Sig Request (MIP47c3-SP1)
- Ratification Poll for Modify Protocol Engineering Core Unit Budget, PE-001 (MIP40c3-SP68)
- Ratification Poll for Add Data Insights Core Unit Budget (MIP40c3-SP64)
- Ratification Poll for Modify Core Unit Budget, COM-001 (MIP40c3-SP62)
- Ratification Poll for Modify Core Unit Budget, COM-001 (MIP40c3-SP63)
- Ratification Poll for Adding CES-001 as a Collateral Onboarding Domain Team
- Ratification Poll for Modify the Collateral Application Form (MIP6c3-SP2)
- Ratification Poll for Adding Events Core Unit (EVENTS-001)
- Ratification Poll for Methodology and Review Process for Structured Finance Transactions (MIP67)
- Ratification Poll for Pairwyse Licensure (MIP66)
- Ratification Poll for Update Data Insights Core Unit Mandate (MIP39c2-SP31)
Executive
- Copy Stub For Out-Of-Schedule Executive [expires at May 14]
New and ongoing discussions
- MIP39c2-SP32: Adding Events Core Unit (EVENTS-001)
- MIP40c3-SP64: Add Data Insights Core Unit Budget
- MIP73: Pando Investment Grade Climate Assets Collateral Onboarding
- Feedblack Loops LLC Delegate Platform
- GFX Labs Delegate Platform
and many more!
Read more about the different proposals and take part in the decision.
Governance Portal, Governance Forum
Governance and Risk | Ep. 186:
Meet Your Delegate | Ep.11 Ft. Penn Blockchain:
mStable
Recent blog posts
- mStable Governance Updates — 13 April 2022
- mStable x PopcornDAO — mUSD now integrated with Butter
- mStable Governance Updates — 4 April 2022
Closed proposals
- MCCP 20: Overhaul the Governance Fee Flow
- TDP 38: Addendum to Pre-approve BPT Locking & Voting for veBAL
- TDP 37: Pre-approve BPT Locking & Voting for veBAL
- MCCP 19: Disable automated collection of fees for Mainnet Save Redemptions
- MCCP 18: Add Idle Finance dial for 3pool PYT
- TDP 36: DTOP Liquidation
New and ongoing discussions
- [Discussion] Consolidating the GrantsDAO with the Community subDAO
- [Discussion] Questions surrounding what it means to be a Metanaut
- [Discussion] Balancer Bribes for MTA Pools
To read more about the different proposals and take part in the decision, check out the governance forum.
Governance Call April 2022:
Nexus Mutual
Recent blog posts
Closed proposals
Vote on governance proposals to decide the future of the protocol here.
To read more about the different proposals and take part in the decision, check out the governance forum.
Pie DAO
Closed proposals
New and ongoing discussions
- Partnership Proposal with DeFiato
- Revisiting the minimum distribution
- [Epoch-6] MerkleTree Notarization
- NFT Index Creation (Updated PFP Index proposal)
To read more about the different proposals and take part in the decision, check out the governance forum.
PoolTogether
Recent blog posts
There were no active proposals these weeks.
New and ongoing discussions
- PTIP-68: OTC Settlement for Ondo <> Fei LaaS Program
- PTIP-64: single-sided POOL staking with IL protection on Bancor
- PTIP-56: V3 Transitions
To read more about the different proposals and take part in the decision, check out the governance forum.
Synthetix
Recent blog posts and news
Closed proposals
- SCCP-184: Update Open Interest Limit
- SCCP-183: Update Dynamic Fees
- SCCP-182: Open Interest Limits
- SCCP-181: Unpause Futures Markets
- SCCP-179: Update Futures Fees
- SCCP-180: Unpause Futures Markets
- SCCP-178: Disable New Loans against renBTC
- SCCP-170: Update Parameters of ETH Wrappr
- SCCP-177: Update Base Fees
- SCCP-176: Update Base fees
- SCCP-175: Update Base Fees
To read more about the different proposals and take part in the decision, check out the governance forum.
Uniswap
Recent blog posts and news
Active proposals
Closed proposals
- [Consensus Check] Deploy Uniswap V3 on Moonbeam
- Polygon 1bp Fee Tier
- [Temperature Check] Deploy Uniswap V3 on Moonbeam
New and ongoing discussions
- [Consensus Check] Should Uniswap v3 be deployed to Gnosis Chain?
- [Temperature Check] Deploy Uniswap V3 on Moonbeam
- Temperature Check — Should Uniswap v3 be deployed to Gnosis Chain?
- [Consensus Check] Deploy Uniswap v3 to Moonbeam
To read more about the different proposals and take part in the decision, check out the governance forum.
UniGrants Phase 2: UniswappeR Updates:
Yam Finance
Closed proposals
New and ongoing discussions
- Partnership Proposal with DeFiato
- A Roadmap for YAM (Part 3 — Tokenomics)
- 2022–03 — E Monthly transparency report
Check out the latest YIPs discussions here.
Yearn Finance
Recent blog posts
- Yearn Finance is Sponsoring the ETHAmsterdam 2022 Hackathon
- People of Yearn : RestlessMik3
- Tips for new DAO contributors
There were no active proposals these weeks.
Check out the latest YIPs discussions here.
MISC
Terra and Frax Propose Creating Curve 4pool with UST, FRAX, USDC, and USDT
The move will help concentrate incentives from both protocols into a single pool, and also consciously excludes DAI to limit growth of a main competitor.
Terra and Frax Finance dominated the defi news cycle over the past several weeks with a partnership announcement seeking to dominate stablecoin liquidity across Ethereum and other EVM chains.
How does Terra UST work? Terra protocol supports the UST stablecoin using an algorithmic stabilization mechanism. UST can be swapped for a $1 equivalent value of Terra’s native token LUNA at the protocol level (with additional swap fees and time base slippage added to mitigate oracle risk). This creates arbitrage incentives to maintain price stability; when UST is above $1, users can trade $1 of LUNA for UST and sell on the market to earn a risk free profit, and conversely users can by UST and then swap for $1 worth of LUNA when below peg.
In normal times this is sufficient to stabilize the price of UST, but there is a potential “death spiral” risk if a large share of UST holders decide to exit the Terra ecosystem in a short period of time. In this case, persistent selling pressure would force UST below the peg, which incentivizes arbitrageurs to swap UST to LUNA and market sell for risk free profit. This would put downward pressure on LUNA price, requiring an ever greater amount of LUNA to be minted in exchange for each UST token redeemed. In a worst case scenario, there would be insufficient LUNA demand to return UST to peg, and remaining holders of UST would face a loss. The potential late redeemers to face total losses creates a bank run dynamic during market crashes.
Terra has recently sought to address this through formation of the Luna Foundation Guard, a Singapore based entity focused on maintaining UST’s peg through reserves of external collateral. Initially the reserve focused on Bitcoin, but have also expanded to hold significant quantities of USDT and USDC stablecoins as well as Avalanche’s native token AVAX. While these reserves have grown significantly in the past three months, they total below 20% of outstanding UST with the system still primarily relying on algorithmic backing from LUNA.
How does FRAX work? Frax bears similarities in design to Terra, but as indicated in the name it relies on “fractional algorithmic” backing rather than pure algo stabilization. In practice, this means the majority of FRAX is backed by investments in traditional stablecoins like USDC; funds are typically lent or deposited in 3rd party defi protocols to earn yield for the protocol. FRAX peg is maintained through arbitrage incentives like UST, but typically around 85% of each buy or sell is redeemed in USDC or another stablecoin, which reduces in potential death spiral risk if FRAX were to face a surge in redemptions (people trading FRAX for alternative stablecoins).
While FRAX’s algorithmic backing rate is nominally only 14% (with 86% collateralized by external investments), the inclusion of FRAX based Curve liquidity pools (listed as Curve AMOs) as ⅔ of collateral creates significant intrinsic leverage. If FRAX were to trade below the peg, the vast majority of the Curve pool would be made up of FRAX tokens rather than external stablecoins, which shifts FRAX’s effective backing away from collateralized assets towards increasing algorithmic backing. But even with this effect included, FRAX has much less reliance on algorithmic backing than its peers.
Recent events: Currently, most stablecoin liquidity on Ethereum is held within Curve “meta-pools”, which link a single stablecoin with the primary Curve 3pool consisting of USDC, USDT, and DAI. Both UST and FRAX currently focus their liquidity around these metapools. But while these pools serve their purpose reasonably well (maintaining liquidity and price stability), they have a few strategic drawbacks.
First, using a metapool for liquidity makes it impossible for your asset to serve as a base reserve asset for other stablecoin liquidity pools. And beyond this, utilizing the 3pool for base liquidity creates steady state demand for DAI, which both Frax and Terra consider to be a primary competitor. Terra and Frax also raised the prospect of increasing efficiency of their existing Convex voting and bribe activity (both projects are large CVX holders and pay incentives for bribes). But this supposed efficiency is dubious, due to the fact that each stablecoin will make up only 25% of the proposed 4pool compared with 50% of their individual metapools; while they would be effectively providing joint incentives, the concentration of rewards on each of their individual stablecoins would be the same as before. These projects hope to become the preferred base liquidity pool for 3rd party stablecoins to link with. If the 4pool is able to compete with or supplant the existing 3pool, many additional projects (eg. Abracadabra, Jpegd, and others) could passively subsidize UST and FRAX demand and reduce these protocols’ own liquidity costs.
The greatest challenge for this vision to play out is users’ and projects’ perception of relative risk between DAI, FRAX, and UST. DAI’s overcollateralized backing, decentralized governance mechanisms, and long track record of solvency make it a relatively low risk option among decentralized stablecoins. FRAX is primarily backed with fiat stablecoins which reduces solvency risk, but has partial algorithmic backing and is also exposed to smart contract risk through various integrations. And UST is perhaps the most risky of the 3 assets, with less than 20% backing of circulating tokens with volatile BTC and AVAX reserves making it vulnerable to a bank run. If users demand a higher rate of return to hold Curve LPs paired with the 4pool versus the 3pool, projects should only be willing to use a 4pool metapool with additional incentives from Terra and Frax. This would reduce or eliminate the passive liquidity benefits of serving as a base metapool on Curve. But the 4pool’s competitive prospects may be boosted by Frax and Terra’s significant partnership and business development efforts, with projects including Redacted Cartel (large CVX and CRV holder), Tokemak (liquidity management protocol), and Alchemix (credit protocol focused on self-repaying loans) showing support.
Curve governance has already indicated support for the 4pool (as well as a slimmed down USDC-USDT 2pool) in a snapshot poll, so launch is likely in the coming weeks. From there attention will shift to liquidity flows between competing base pools, as well as decisions by third party stablecoin projects on where to focus their own incentives. Regardless of the 4pool’s direct impact on stablecoin liquidity, Frax and Terra have clearly demonstrated their influence across top defi protocols.
Waves Protocol’s USDN Stablecoin Recovers After Losing Peg
A sudden buildup of leverage within the Waves ecosystem triggered a bank run, and while USDN is recovering the Vires money market protocol remains under pressure.
While algorithmic and undercollateralized stablecoins have been gaining significant traction (eg. Terra and Frax joint initiative), there were also seen recent examples of their fragility. The USDN stablecoin, based on the Waves blockchain, dipped as low as $0.70 last week before recovering to around $0.98 at present.
How does USDN work? USDN uses an algorithmic backing mechanism on top of the Waves blockchain’s native token. While this is somewhat similar to Terra’s UST, the specific backing mechanisms differ. USDN includes a separate equity token, NSBT, to recapitalize the system by purchasing additional WAVES whenever backing falls too low. USDN earns a base yield based upon the WAVES native staking rewards rate and current WAVES to USDN collateral ratio, which serves as an additional demand incentive. But this is somewhat pro-cyclical, as declining WAVES price causes both declining collateralization ratio and USDN yield (which may lead some USDN holders to swap for other stablecoins during a market drop).
Recent events: Both the native WAVES token and USDN stablecoin had seen a spectacular spurt of growth in the past two months. But upon closer inspection, the surge in activity was largely inorganic. Vires Finance, a Compound style lending protocol built on the Waves blockchain, played a key role in both the run up and crash of the WAVES and USDN tokens in the past month. Large users (potentially team members) executed a strategy of convering WAVES to USDN, depositing to Vires, borrowing external stablecoins like USDC or USDT, and then swapping back into WAVES. This leveraged buying pressure forced WAVES price up, which in turn increased USDN yield and demand through the native staking mechanism. Crucially, the Vires market considered the USDN price to be fixed to $1, meaning that this strategy was free from liquidation risk.
At the beginning of April, the leverage fueled rally got overextended and public opinion began to turn against USDN due to some high visibility critiques. As sentiment turned negative, market maker Alameda became embroiled in the drama when it emerged that they had been borrowing WAVES tokens from Vires (likely as part of a delta neutral strategy rather than outright short position) and the Waves blockchain founder advocated to forcibly liquidate their position. In the following week since the initial depeg event, Alameda has closed their borrowing position and USDN has largely returned to peg. But while on the surface conditions have improved, the pent up leverage present on Vires remains with over $500 million in outstanding USDC and USDT loans (primarily against USDN collateral).
The presence of 100% yields for over a week, without new deposits or loan repayments freeing up liquidity, indicates low market confidence in Vires’ solvency. If the loans on Vires were to be forcibly unwound today, this would quickly deplete available liquidity in Curve and other decentralized exchanges and could kick off another bank run on the Waves protocol.
Ichi Protocol Faces Serious Test Due to Insolvent Lending Pool
Excessive leverage on the protocol’s native ICHI token resulted in a wave of insolvent loans and negative impact on linked algorithmic stablecoins.
Ichi protocol was top of mind over the past week due to serious disruption of their lending pool based on Rari Capital’s Fuse protocol. While the pool was not directly involved in Ichi protocol collateralization mechanisms, it kicked off a general market panic that triggered loss of peg for Ichi’s flagship oneUNI stablecoin.
How do Ichi stablecoins work? Ichi protocol allows users to create “branded” stablecoins such as oneUNI (based on the Uniswap UNI token) or oneBTC (based on WBTC). Similar to FRAX, Ichi stablecoins use fractional algorithmic backing and arbitrage incentives to maintain peg; when above $1, users can mint stablecoins with a mix of USDC and the given stablecoins base asset (eg. UNI for oneUNI), while redemptions below peg are backstopped 100% with USDC. This ensures tight peg in normal conditions and allows for a stablecoin’s reserves to gain from upside in the base token. But if a rush of withdrawal requests and exits correspond with price falls in the base token, there may be insufficient reserves for all stablecoin holders to withdraw $1; this creates negative bank run dynamics where users rush to be first to withdraw their funds if they fear insufficient collateralization.
Recent events: Initial evidence indicates the Ichi team or other large token holders may have fallen into similar lending pool manipulation schemes as occurred with the Waves and Vires protocols discussed above. One of Ichi’s products is so called “angel vaults”, which are automated Uniswap v3 strategies creating buy walls just below the current market price of a given token. While this can help build price support in the short term, it was used excessively to boost ICHI’s token price in the lead up to the market crash and lending pool insolvency.
Looking at ICHI’s price chart, can be observed several ranges where the buy wall on ICHI was progressively moved up (first to $70, then to $130), allowing users of the fuse pool to borrow assets based on inflated collateral values. When market conditions turned, selling pressure was able to break through the buy was and cause cascading liquidations. This was exacerbated by money for the buy wall being funded through loans against the ICHI token itself. With the fuse pool allowing over 5x leverage on ICHI token collateral, many loans quickly became insolvent as their collateral was no longer worth more than the borrowed amount. In hindsight, allowing such high leverage against the relatively illiquid ICHI token was a recipe for disaster.
As a permissionless lending market protocol, Rari Capital doesn’t control risk parameters or backstop default risk of pools created by third party protocols. This means the recovery process (including liquidation of remaining loans and potential compensation for lenders) relies entirely on Ichi protocol. But so far the outlook for investors in the fuse pool does not look good, with the Ichi team removing liquidation incentive seemingly with the intent to support ICHI price at the expense of users who cannot withdraw funds from the pool.
The Ichi fuse pool was oneUNI stablecoin’s largest supply sink (with borrowing fees as well as ICHI liquidity incentives), so the pool’s collapse led to a severe demand shock. With the stablecoin’s backing already falling due to decline in the price of UNI, there was insufficient USDC to meet all redemption requests and the stablecoin broke below peg. While exact backing percentage and potential haircuts are still up in the air, oneUNI holders can likely only expect to see a fraction of their initial investment. Other Ichi stablecoins such as oneBTC have remained stable due to better treasury performance, but they remain broadly vulnerable to similar price and demand risks experienced by oneUNI. Initial signs of stress are already appearing in the oneBTC liquidity pool which is heavily unbalanced with minimal USDC exit liquidity remaining.
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