by Afsar Akal
Cognitive Dissonance-The USDN Backing Ratio
The textbook definition of cognitive dissonance ‘is the perception of contradictory information, and the mental toll of it”. The Waves ecosystem has not just one but a number of these phenomena so let’s start with the elephant in the room: ‘The backing ratio of USDN’.
As of mid-December 22 BR stands at less than 10%, meaning there is not enough “gold or silver” type real money to back the algorithmic stable currency.
The de-pegged USDN trades between 0.50–0,95 on the dollar when in reality, it should fairly be valued around 8.3 cents so Private Ivanov and the community are divided on this matter too. As per the Private, USDN is “un-peggable” meaning nothing could de-peg it as it belongs to the people. Well if it belongs to the people, why can’t the holders withdraw and use what they already own? This is the cognitive dissonance the two sides are trying to reconcile with, else they will lose their minds and go “luna” but wait, USDN is not the same as UST, the now collapsed and defunct algorithmic stable coin of Terra Luna chain. This is yet another cognitive dissonance matter to reconcile with. Is USDN really different from UST? On one hand it isn’t because there is no infinite supply of mintable crypto-currency. Unlike Luna protocol, Waves coin can not be minted infinitely to back USDN’s peg. In the Luna case, the protocol could easily inflate Luna supply to protect Terra Dollar UST’s peg. Another argument is that it has not fallen to zero or at least it should have fallen to the value of its backing ratio. It hasn’t so far but that is only because there are currency controls in place.
Putting Theory to Practice
Let’s now combine the two theories; Gresham’s Law from Economics and Cognitive Dissonance from Psychology and get into the turf of behavioral economics. While doing so, let’s also tap on to basic math to reconcile the dissonance. Given we have no gold and silver content in USDN’s backing, we need to deploy a method that mobilized funds from the entire Waves Ecosystem where USDN is used, albeit with limited demand. These are Vires Finance and WX DEX Liquidity Pools and to a limited extent Swop and Puzzle platforms which we will ignore just this time .
Given users are allowed to lend BTC and ETH on Vires, or can open BTC/USDN and ETH/USDN liquidity pools in WX, why does the backing ratio calculation method exclude them? The reason is rather subtle. None of these hard crypto assets are locked in Neutrino reserves. But why not? If the value of a currency depends on supply and demand dynamics, and if the BR value now excludes “out of market USDN”, there is no reason for not playing with the BR calculation method. Given we have already been made accustomed to “how to fool with statistics” games so far, we all need to reason that these measures are taken for reconciling with the “cognitive dissonance”. At the end of the day, we all would like to feel that “USDN will not de-peg”, “USDN is not de-peggable”, that Vires Finance will keep all customers ‘whole’ and allow full reimbursement of deposits in about one year. Any factual evidence that conflicts with these “like to believe objectives’’ create dissonance and should be changed.
Where is the yield coming from?
The way interest rates are calculated in Vires Finance for deposits and borrowings are denominated in the same crypto asset. Private Ivanov on the other hand is actively seeking methods to increase demand for USDN. To boost demand, we need to add incentives to depositors like BTC and ETH as these are like gold and silver. Instead of paying interest in BTC and ETH, it should well be considered to boost APR/APY in USDN. This entails a depositor of BTC while earning x% in BTC may be offered 2x of the same denomination APY if he/she prefers to collect interest in USDN. The same incentives could be offered to USDC and USDT depositors as well.
The Fair Game
Much of the behavioral economics literature taps on Game Theory. Instead of going into any length on this, let’s remember that the current games played with First Come First Basis withdrawal rules and setting dividing lines between whales versus shrimps and bots over humans is unfair. A fair game is to incentivize recapitalization of Vires protocol.
Let’s look at this scenario with two users. Both depositors have legacy USDN deposits and are willing to withdraw their principal without avail as bots are clearing the measly $10K global cap. On the other hand they are both eligible to withdraw the interest without caps. Assuming both of these users wish to withdraw their principal as quickly as possible, let’s assume the first user brings in $5K in hard assets (BTC and ETH) whereas the second user stays put in his/her position. As soon as the BTC and ETH deposits are made, let Vires protocol move the USDN equivalent amount from legacy USDN account to regular USDN deposit. At the moment the APY on regular USDN accounts is around 13–14% whereas legacy accounts get 5% at best (which as noted is not properly calculated and paid). This way, the first depositor will be able to receive USDN interest on both BTC, ETH as well as a higher APY on USDN.
This game theoretical construct creates competition between those that have additional funds and those that don’t, assuming both users have the same level of trust or faith in Vires. If a user has no faith, obviously he/she would not be able to improve his/her situation. And this is a fair game as the new rule would benefit those that have faith in the protocol. The real loser in this scenario would be those that still have faith but have no further funds to commit. This is obviously bad but not as bad as being served on a FCFS basis. And for those who have funds but no faith would be losers at their own free will. This is why this game construct is fairer than the status-quo.
Note that once existing users start recapitalizing across the Waves based DeFi protocols, there is little need to keep hard assets like BTC or ETH on Vires Finance for lending. You can simply move them to the Neutrino Treasury and increase the BR. We will explain why this cross-funding is needed in the next blogpost.
Continue reading to Part 4
