The First Stress Test for the Sperax Design
Saddle Finance — one of the most recognized decentralized exchanges for trading stablecoins — was hacked on Saturday, April 30th. The hacker was able to net over $10 million due to repeated entry vulnerability. In response to the attack, Saddle paused activity on their metapools.
How was $USDs affected?
Although Sperax’s pool was not directly affected by the attack, LPs fled en masse, worried about further attacks. Furthermore, Sperax’s pool on Saddle was providing most liquidity and yield farming rewards for $USDs. Ultimately this episode led to a significant $USDs outflow, a contraction of $USDs supply, and a temporary peg deviation of 1.5%.
How does the stability mechanism behave?
One of the key mechanisms ensuring the stability of $USDs is arbitrageurs’ incentive to restore the peg. When the price of $USDs drops below the peg, arbitrageurs are incentivized to both redeem their existing $USDs, and buy $USDs from exchanges to redeem as well. Since the protocol will always pay one dollar for one $USDs, it becomes profitable for arbitrageurs to redeem their $USDs for a profit.
In addition, swap fees adjust to disincentivize redemption when there is a significant outflow. The burning of tokens via redeeming ensures that the supply of $USDs is sufficiently reduced, which pushes price upwards and restores the peg.
Did the stability mechanism work?
The steps outlined above show exactly what happened.
On Saturday, $USDs supply contracted by about 8% due to arbitrage action, rapidly restoring the one dollar peg. The temporary peg deviation was in line with redemption fees, which facilitated, then capped the arbitrageurs’ strategies, and the peg was totally restored within a few hours of the attack.
We can safely say that for how much this incident adversely affected Saddle and other protocols, our mechanism provided an essential safeguard, showing in real time that the key peg defense mechanism works.
What are we doing to mitigate any further disruption?
There are both short-term and medium-term strategies. We have immediately improved our liquidity in the $USDC–$USDs pool and actively repurchased both $USDs and $SPA. We are now working to diversify our liquidity and will announce new pools on different DEXs soon. Stay tuned!