Saving Private Sasha Ivanov-Part 2: Neutrino is a Matrushyka Doll(ar)
By Afsar Akal
Image Credit: Courtesy of Amazon
In a Matrushyka set, only the smallest doll is solid. The larger ones are painted nicely and look prettier than the smallest but resemble a fragile currency that can easily break if you accidentally step on it. Today the public perception of the Neutrino dollar is like the ‘large and pretty’ matryoshka doll yet with a backing ratio of less than 10%, it’s merely the smallest in the set. This is a “cognitive dissonance” and makes everyone uncomfortable. To understand how we arrived at this state, we need to look into a brief history of the liquidity crisis at Vires.
A brief history of ‘liquidity crisis’ time at Vires
The liquidity crisis of Vires Finance started in earnest around mid-April 22 in a typical bank-run fashion when USDN de-pegged following Terra Luna/UST collapse. After a temporary freeze on all withdrawals, the situation has partially been improved by adding exit liquidity, halting any new borrowings and establishing adaptive limits on daily withdrawals. For a good 3–4 months, most Vires users managed to withdraw part of their USDT/USDC deposits at an average daily limit of $1000 per account per day.
During this period, ‘factoring’ type financial engineering were deployed as well. Those that wanted a haircut on their deposits exported their synthetic liquidity tokens and sold them on WX exchange losing at least half of their face value. Some users did not mind given that during the preceding 9 months since Vires Platform went live, most depositors enjoyed extremely high returns to the tune of 55% APY on average. USDN quickly re-pegged to parity with dollar as deposits and withdrawals could be matched on a one-to-one basis in the same denominated crypto asset.
While it appeared as bank-run panic was over, it became clear that there was more bad money (USDN) backing good ones (USDT/USDC). The overall crypto market cap declines which weighed downward on Waves coin price did not help either. Thus the liquidity crisis elevated to a near moratorium on all withdrawals until USDT/USDC was halted altogether and users were asked by Private Ivanov to be converted to USDN with a 5% bonus. This was at a time when USDN was exchanging around 95c. As it stands, most USDT/USDC depositors have settled with a USDN conversion by taking the bonus and accepting a lower APY which is reportedly derived from Waves validator rewards and currently subjected to an adaptive vesting regime.
Governance Response to the Crisis
Those who are not familiar with governance methods of Vires may look into a series of Vires improvement protocols that have passed so far. The ones such as VIP-26, VIP-28 summarize the most recent situation and the measures that have been taken so far. Most depositors are currently sitting at this stage. In essence, daily limits are a function of the peg and there is a withdrawal limit per account as well as a global cap on how much could be claimed by all depositors in total. While these limits can vary dynamically as the peg improves, the practice so far has been fairly negative. What started as a $100K global cap per day and $100-$500 withdrawal per account (which also varies on deposit amount), the protocol ended up with a $10-$50 account per day for a $10.000 global cap per day.
Adding more than one insult to the injury
To add insult to the injury, the claims that work on a first come first serve basis does not work either as some users created smart contract bots to front run global competition for withdrawals before the daily global cap for all users ran out. No human users can practically withdraw their daily limit at all. The second insult to the injury convoluted the problem further as all depositors were allowed to withdraw their accumulated interest without any caps yet the calculation engine for interest distributes just around half of the accrued interest to users.
This was reported to developers to solve the problem as firstly it looked like only some accounts were negatively impacted. This is even more of a drastic finding as had all accounts been impacted the same way, it would have been a simple smart contract or oracle call issue. When the error occurs in a discretionary fashion, the already tarnished trust gets even more of a beating. Are some developers or the protocol owners gaming the code to advantage some account holders at the expense of others? Should users be withdrawing just half of what their god king considered fair or should they wait till some new messiah comes and fixes the error and distributes what each subject is properly owed.
More importantly, when will Neutrino users be able to rely on “In Code We Trust” rather than ‘In God we Trust” type of money?
The Unfair Game
The game that existing users of Vires Finance found themselves in, is not a pretty sight as far as fairness goes. The protocol seems to be punishing its long-term loyal customers at the expense of casual visitors. At the end of the day, those that have deposits were the ones that kept their funds during the bank-run as they believed in the vision set out by Private Ivanov which makes him a god king. Most users feel they are kept hostage to a country which they were not born into but chose to reside in when the whole blockchain-tech led crypto revolution with its libertarian talk invited them to move and live. The country they chose to leave happily ever after is now imposing currency controls and barriers to trade. The country that they chose to live in, which offered democratic governance, is now ruled by a dictator. And what does a dictator do best when he needs to stay in power? As beautifully put by Yuval Noah Harari, create fractions in the polity with divisive measures and let them fight among themselves which would keep the dictator immune during this fight and hang him clinging to power. What are the current dividing lines? Shrimps (the good) versus Whales (the bad) or humans (the good) versus bots (the bad). How does a dictator look? He is all innocent and has nothing to do with all this fight. And innocent he is poor (emphasis added) Private Ivanov needs to be saved from his own persona so as to clear his name and pride too.
Continue reading to Part 3
To start from the begining, see Part 1
