“Community wanted our blood” – interview with Sasha Ivanov

This year has been a tough year for cryptocurrencies.

No other coin illustrates this better than Waves. Its lending protocol Vires.Finance was one of many companies caught in the contagion crisis that has gripped the industry in recent months. However, unlike other parties like Celsius and Voyager Digital, it has laid out a plan to stabilize the project rather than raising the white flag (or undergoing complicated and lengthy bankruptcy proceedings).

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Vires’ liquidity crisis began when Waves-based stablecoin USDN fell below $1 and the ecosystem was severely tested by a bank run shortly thereafter. The prevalence of so-called whale borrowers was particularly interesting here. Many in the community were curious as to how these wallets were even able to lend out such a large amount of stablecoins.

As part of the recovery plan, Wave founder, Sasha Invanov, has stepped in to take on about half a billion bad debts. After a community vote, the plan is for Vires accounts worth more than $250,000 (in both USDT and USDC stables) to have a choice of two options.

The first is to exchange their positions for USDN with a 365-day blocking period plus an additional 5% liquidity bonus. The second option is to stay on the platform, albeit with 0% APY on all funds over $250,000 in USDT or USDC, with Ivanov continuing to liquidate USDN and repay this debt “depending on market conditions”.

There is a lot to explore here, and the story has caused quite a stir in the crypto scene. So who better to interview than the man himself, Sasha Ivanov?

Instead (IZ): Given that a liquidity crisis has happened before, do you think that even if this recovery plan works, something similar could happen again in the future?

Sasha Ivanov (SI): Along with our overall revival plan, we’ve also implemented a new system that reacts dynamically to limit withdrawals and loans in the event of platform overload, as was the case before.

Namely, although more than 95% of funds are used, withdrawals are capped at $1,000 per day per account. This limit will be lowered as resource utilization decreases. If the funds utilization falls below 80%, all withdrawal limits will be lifted until these thresholds are reached again.

This means that even under extreme conditions, the market can continue to function without incident.

FROM: How detrimental was the UST collapse for USDN as people are now much more cautious about algorithmic stablecoins?

AND: The USDN’s initial depeg actually happened 3 weeks before the UST collapse. By the time UST began to unravel, we had already restored the peg. However, the collapse of UST prompted a second Depeg event as the inherent dangers of algorithmic stablecoins became clear.

That being said, our system was built differently and was up to the challenge; There are some other changes we are making and the knock-on effects have been detrimental, but we had to expand the space to find creative ways to mitigate those risks.

We are currently working to ensure that what happened cannot happen again with USDN.

FROM: Why do you think USDN can avoid the same fate as UST? Doesn’t the fact that trust in UST has been broken pose a threat to the future of USDN?

AND: First, USDN is total anders structured as VAT. We would have already suffered the same fate if the system wasn’t specifically designed to stop any kind of “death spiral” with USDN and Waves.

Rebuilding faith is an important part of this, but taking the right steps to rectify the situation is critical now. In addition to our decision to take on the bad debt and prevent another depeg, we have also introduced incentives to support USDN and drive demand for it through the Smart Utility Recapitalization Feature or SURF token.

SURF is intended to serve as a backup for collateralizing USDN in times of need. When USDN’s coverage ratio falls below 100%, SURF becomes available for purchase. The value is set to the respective ratio of USDN at that time. So if it is 50%, 1 SURF equals $0.50.

Once the ratio reaches 115%, all SURF will be liquidated in USDN. This creates an incentive to collateralize the stablecoin, which will help stabilize the peg.

FROM: There has been a lot of talk about the Whale wallets borrowing massive amounts of stablecoins on the Vires protocol through March and April. Was there a concern that this would lead to a situation like today’s, and if so, was there a reason nothing was done?

AND: That’s correct. In fact, there were six Whale accounts that borrowed most of the liquidity from Vires Finance. These accounts performed a process known as “looping.” This involves posting collateral, borrowing tokens against the collateral, sending the borrowed tokens to a central exchange, buying more tokens with them, and bringing them back to Vires to post as collateral and borrow more.

To be clear, this strategy is very common everywhere; it happens openly and frequently on Ethereum. It has even been found that this process collapse by crypto fund 3AC Capital and is basically the same as “leverage” in any market, whether traditional or DeFi.

The reason this became problematic was because of the speed at which Waves price fell. These over-indebted borrowers were unable to repay their loans and interest rates rose, leading to critically bad bank accounts. This prompted me to take on the debt of these 6 borrowers myself.

Liquidating these accounts – as the platform is designed to do – with such large amounts of collateral would have been dangerous for the system and likely caused another shock to the community.

The reason nothing has been done up to this moment is that we are a decentralized platform with decentralized governance. We will never unilaterally impose policies that restrict free markets on users.

DeFi is about self sovereignty and unfortunately in this case some leveraged users have made bad decisions and created a big problem for our community. It really is a sign of the times – bad actors exaggerate and cause massive problems for the majority.

We’ve introduced two things that will limit this type of behavior in the future: non-borrowable collateral and adaptive withdrawal/borrowing limits. Non-lending collateral means you can choose to keep your deposit separate from the pool that is being lent, and the platform-level adaptive limits make it difficult to ever reach the same dangerous utilization level.

FROM: There has been a lot of talk about the Waves token and market manipulation. This became clear when you accused Alameda of tampering with the token in April. Do you stand by it three months later and do you think other manipulations are taking place?

AND: Unfortunately, market manipulation is a sign of the times; There are bad players in the space that are over-leveraged, have large balance sheets to toss around, and have smart resources to model scenarios to predict whether they can profit from retailers.

As much as space hates the idea of ​​it, we need regulation to protect the people who use it. We’re all for speaking intelligently with regulators to come up with real solutions that respect the values ​​of space.

We’re also working on our own initiatives, like our upcoming PowerDAO, which will help establish a charter to oversee and regulate our own ecosystem. The goal is to protect our users. We’re still figuring out how we’ll do that, but we’re very excited about this step toward building a more independent, battle-hardened blockchain ecosystem known for the protection it offers its users.

FROM: Looking back, would you do anything differently to avoid a liquidity crunch and suspended withdrawal situation? Do you think careless risk management was practiced?

AND: That’s the benefit of hindsight! There are many things we could have done. However, we are proud to have gotten through it. We had a major shock to the system – an unprecedented shock – that not only affected us, but also shut down hedge funds, a top ten project, and numerous centralized crypto banks. But here we are, and indeed stronger than ever after getting a community that wanted our blood to vote 3 to 1 on our plan.

We optimized the protocols, and we did it all through decentralized governance without ever affecting a vote. We have developed new solutions like SURF. Most importantly, unlike centralized institutions that have been through the same thing, we found a way to empower all of our users repayand clearly moving towards a fully functioning ecosystem.

This is an unprecedented achievement and really speaks to the skills of the team, the intelligence of the community, seeing the long-term perspective, and also the unstoppable advantages of a decentralized system over a centralized system. Centralized systems have buried their users in years of lawsuits. Our platform pays everyone out within a year with a 5% bonus. Which would you choose?

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