Waves Community Backs Plan to Reimburse $500M of Lost DeFi Funds

The community behind blockchain protocol Waves has voted to reboot non-custodial lending protocol Vires.Finance following the depegging of the Waves stablecoin USDN back in April. 

At that time, the dollar-pegged cryptocurrency fell as low as $0.68, wiping out millions in value for holders. 

As the contagion gripped Waves and Vires.Finance, it became impossible for investors to withdraw their funds from the Vires.Finance, a lending platform akin to Aave or Compound, resulting in $500 million worth of lost funds.

In an attempt to revive Vires.Finance and reimburse lost funds, governance token holders have passed a vote, launching the so-called DeFi Revival Plan.

It’s a multi-pronged plan, too. For governance token holders possessing more than $250,000 in their Vires accounts, they’ll be given two options for how to be reimbursed, according to the proposal.

The first option involves swapping their holdings in exchange for Waves’ algorithmic stablecoin Neutrino (USDN), with a 365-day vesting period and a 5% liquidation bonus. 

The second option would allow governance token holders to remain on the platform, but they would earn 0% APY for all USDC- or USDT-denominated funds above $250,000.

Additionally, Waves’ founder Sasha Ivanov would continue to liquidate USDN to repay the $500 million worth of debt incurred by investors by absorbing USDN loans into his own wallet. 

Calling out “institutional greed,” Ivanov has thanked the “loyal and decisive community that always has the last word in the matter.” 

All eyes on stablecoins, DeFi

The collapse of a lending protocol and associated algorithmic stablecoins has become something of a theme in 2022. 

Algorithmic stablecoins, which can offer comparatively higher returns, are neither fully backed nor fractionally backed by hard dollars. Instead, they rely on code to predict how people will react to macroeconomic and market momentum. 

In stark contrast to this kind of stablecoin are the collateralized offerings from Tetherand Circle, who both service USDT and USDC, respectively.

Since the code that underlines such stablecoins is written by people, it’s extremely difficult to create a perfectly autonomous set of code that can contend with all market eventualities. Perhaps the most infamous example of a floundering algorithmic stablecoin was Terra’s UST.

Just after USDN fell below its peg in April, Terra, which serviced the stablecoin UST and a native governance token LUNA, also imploded, wiping out over $40 billion. The wipeout led to the demise of various crypto firms, including, Celsius, Voyager, 3AC, and others.

Terra’s implosion also triggered intense regulatory scrutiny given the size of its collapse.

U.S. treasury secretary Janet Yellen immediately called for the regulation of stablecoins, and UK regulators introduced the Financial Services and Markets Bill bringing stablecoins into the remit of regulators. 

Like central banks, academics too have taken an interest in the mechanics of stablecoins. A 2022 research paper by Ben Charoenwong, Robert Kirby, and Jonathan Reiter suggests the only type of stablecoin that guarantee to hold its dollar peg is one fully backed by hard cash and short-term debt. 

And as Both Terra and Waves have revealed, algorithmic stablecoins represent a high-risk and unstable enterprise.

At present, USDN still remains slightly under its peg at $0.99, while WAVES and VIRES are trading at $5.66 (down 6%) and $22.66 (up 0.76%), respectively.