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WAVES Founder Suggests Changes for USDN Stablecoin
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The USDN stablecoin depegged from its $1 value and fell to 83 cents. The collapse of this stablecoin happened before the Terra USD (UST) crash that left the cryptocurrency market in turmoil.
The USDN stablecoin belongs to the Waves ecosystem. The WAVES token suffered a significant price dip when the USDN depegged, with its price falling from $50 to $22 within a few days, as investors became spooked by fears of market manipulation. However, the token is currently showing signs of a recovery.
USDN stablecoin needs tweaking
The depegging of the USDN stablecoin led to around $200 million in the stablecoin’s market cap being liquidated from the market. The stablecoin first started declining in April, but it later started to dip in May, when its value fell once again following the crash of Terra’s UST.
The crash of UST caused ripples in the stablecoin market, and weak stablecoins could not withstand the stress. Tether (USDT) was also stress-tested, with its value dropping briefly to $0.99 before recovering shortly after. After UST crashed, UST followed the trend, and it fell to 88 cents.
In an interview with CoinDesk, Sasha Ivanov, the founder of the Waves stablecoin, said that the design of the token needed to change following the two incidents of depegging. “We have to work on the algorithm,” he said. “And what happens now is kind of inevitable, which is just a test of the whole system.”
Going to be on @CoinDesk live show today, in half an hour or so
Thank you for having me.— Sasha Ivanov 🌊 (1 ➝ 2) (@sasha35625) June 1, 2022
The peg of the USDN stablecoin is supported by the WAVES token. These WAVES tokens are locked into smart contracts to facilitate the minting process for the USDN stablecoin. The redemptions for this stablecoin usually harm the value because it tends to unlock the token supply for WAVES.
One of the recommended strategies is to maintain the value of USDN at $1 for each token. The risk posed by this is that the redemptions might not be adequate to provide the collateral needed to fulfill redemptions in case of a crisis. The UST stablecoin collapsed because the Terra team could not fulfill the redemptions when the demand was too high.
Ivanov noted that the crash of the WAVES token was being exploited by people looking to profit from it. He further noted that the dynamics of the USDN stablecoin were similar to those of the collapsed UST stablecoin. However, he mentioned slight differences, including limiting the redemptions that a user can make in a day.
The dynamics of the UST and the USDN stablecoin were inspired by the Basis protocol. The basis was an algorithmic stablecoin that was ultimately shut down after it was classified as a security. It is reported that the co-founder of Terraform Labs, Do Kwon, pseudonymously worked on Basis before its collapse.
Bringing change to USDN stablecoin
According to Ivanov, several developers were working on implementing changes for the USDN stablecoin. However, he noted that the stablecoin was still working as originally designed, and changes would be implemented once approved.
Ivanov noted that one of the weaknesses of this stablecoin was the lack of adequate backing.
It’s better to be fully backed and have over-capitalization, Ivanov added. The announcement that some changes could be introduced has aided in the recovery of USDN, and at the time of writing, it was trading at a 1% discount.
The Waves team also released a revival plan to restore the proper functioning of the network. “We have developers that are trying to make the stablecoin very stable. It’s a very natural process, and we will be better off once we have come out with some better algorithms,” Ivanov added.
To learn more visit our Investing in Waves guide.
