Waves Founder: Crypto needs regulation to deal with market manipulation
Sasha Ivanov, founder and CEO of Waves smart contract blockchain, said the crypto industry needs regulation to deal with issues of market manipulation and to protect users from bad actors.
In an interview with Be[In]Crypto, Ivanov also talked about “six whale accounts” that had oversized loan positions they couldn’t repay, risking the USDN’s dollar peg, and how he stepped in with $500 million of his own money to save the day.
But the stablecoin has remained volatile, falling to around $0.90 on August 28. Neutrino dollar, or USDN, is an algorithmic stablecoin native to the Waves ecosystem.
Below is an excerpt of the interview.
How did you manage to recover USDN’s bond, which fell to $0.80 in April? We understand you took on $500 million worth of personal debt to defend the bond. How did it actually work?
Yes, the problems first arose in April when six whale accounts borrowed the vast majority of Vires Finance’s liquidity and the overall crypto market crashed. Since the price of WAVES dropped quite quickly – just like every other cryptocurrency at the time – the six surrendered whales were unable to repay their loans as the amount of interest they owed continued to grow. That’s when I had to step in to take about $500 million worth of this bad debt into my own wallet to gradually repay it. Not doing so would have allowed these accounts to be liquidated, creating more selling pressure due to the amount of USDN sold.
This selling pressure would in turn have massively increased the risk of depegging. Since then, we have worked with the Waves community to take a number of steps – all approved by majority consensus via decentralized voting – to prevent this situation from happening again. Apart from subsuming the bad debt and preventing future depegs, we have also introduced new incentives to support USDN through the Smart Utility Recapitalization Feature (SURF) token. In addition, we have implemented a new system of dynamic borrowing and withdrawal limits to ensure that Vires Finance can continue to operate even in extreme crypto market conditions.
You had a public discussion with Sam Bankman-Fried over allegations of manipulating the price of WAVES. How did that situation resolve itself?
Crypto market manipulation is a sign of the times; as much as we in space wish it weren’t, it’s still there. People with large balances and high intelligence levels are able to make money at the expense of retail traders. Our resolution is regulation, which is on its way. In the meantime, we have been working on our own solutions, such as the upcoming launch of PowerDAO to help us regulate our own ecosystem.
By doing so, our users will be kept safe. We are still working out the details of how this will work, but it will be truly unique for the Waves community to have a DAO built to protect their interests. PowerDAO will have a new governance method that will reward actions and decisions that support the community and punish actions and decisions that harm it. It is a new design for decentralized governance and one that we hope will be adopted across the crypto sector.
Stablecoins such as USDC have become major talking points following the recent sanctioning of Tornado Cash. How does USDN relate to regulators when it comes to enforcement of sanctions, in relation to issues of user privacy?
Although this may not be the most popular opinion, I believe we need regulation to protect users. As such, we are certainly positive to find some real and effective solutions through intelligent conversations with regulators. That said, we must respect the values of immutability, censorship resistance and decentralization when we regulate – there must be some consensus here or the core values of crypto will be compromised.
Blanket bans on accounts linked to Tornado Cash and arresting developers for creating code used for illegal means is totally ridiculous. Imagine imprisoning the inventor of a knife for crimes committed with it! Ridiculous that this is where they have gone with enforcement actions. There needs to be an informed discussion about what blockchain technology is before knee-jerk enforcement actions like this are taken. We are happy to talk to regulators at any time about how we can do this sensibly while respecting the values of the people in the space.
What is the risk that USDN could ever see a death spiral similar to Terra’s UST?
First, USDN is built completely differently than UST, otherwise we would already suffer the same fate. Our system was designed to prevent such “death spirals” with USDN and Waves in the first place, and I think it’s safe to say that USDN’s unique design has demonstrably proven its resilience in extremely volatile conditions.
Not only that, the SURF token I mentioned earlier was designed specifically to provide backup security for USDN in emergency situations. This is a critical feature for an algorithmic stablecoin to have since extreme market conditions are inevitable. If the support ratio of USDN goes below 100%, SURF becomes available for purchase. The price will be set to whatever the ratio of USDN is at the time, so for example if it is 50%, a SURF will be priced at $0.50. When the ratio reaches 115%, all SURF tokens are liquidated back to USDN.
This creates a profit incentive to provide security for the stablecoin and help keep the peg stabilized. Another feature of our recovery plan is the ability to dynamically limit withdrawals and loans if the platform is overutilized. For example, when more than 95% of funds are used, withdrawals will be limited to $1,000 per day per account. This limit will automatically be lowered as fund utilization decreases. When it falls below 80%, all withdrawal limits will be lifted until these thresholds are reached again. This means that USDN will not collapse even in the worst case scenario going forward.
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