The NEAR Foundation and the market maker Wintermute are currently engaged in a dispute over the redemption of USN, a stablecoin on the NEAR blockchain that lost its peg last year. Wintermute's CEO, Evgeny Gaevoy, has publicly accused the NEAR Foundation of reneging on a commitment to redeem USN for USDT at a 1-to-1 ratio, following Wintermute's assistance in liquidating 11.2 million USN to aid the FTX bankruptcy estate. According to Gaevoy, the NEAR Foundation has refused to honor the full redemption, at one point offering only 20% of the amount.
The NEAR Foundation, on the other hand, contests Gaevoy's claims. They argue that Wintermute was attempting to profit from a system that was intended to make ordinary users whole, not to facilitate arbitrage. They also clarified that Aurora, who was initially involved in the redemption process, was not fully informed about the tokens Wintermute sought to redeem and only acknowledged the theoretical possibility of a large redemption. NEAR Foundation maintains that Wintermute's redemption request did not align with the program's original intent and that communication regarding the return of funds has not been reciprocated by Wintermute.
USN: Pretty Much a Disaster
In Q1 2022, NEAR Protocol released its own native stablecoin soft-pegged to USD called “USN.” Functionally, USN operates similarly to TerraUSD (UST) or Frax Finance (FRAX). The USN token can be minted by users depositing NEAR tokens as collateral, making it an on-chain stablecoin.
USN token is operated by an external independent organization called “Decentral Bank” (in collaboration with Proximity Labs). So far, USN as been adopted by multiple NEAR-native applications, including:
USN’s soft peg to the USD is secured through an arbitrage process along with a self-balancing reserve fund. It works through a smart contract that oversees a NEAR-USN exchange. When USN loses its peg to the USD (<1), profit-seekers can take advantage of the arbitrage opportunity and buy USN at a discount. The reserve fund is collateralized at a 2:1 ratio of NEAR:USN to maintain a level of over-collateralization.
USN’s largest existing pool is on Ref Finance, the main application where USN tokens can be swapped. Ref Finance and other applications are able to offer yields on USN through the Decentral Bank DAO’s ability to stake the NEAR reserve tokens. By staking the reserves, the NEAR automatically earns the equivalent of staking rewards on the blockchain or greater (~11%).
Staking NEAR tokens comes with a lock-up period which could prevent immediate withdrawals in case of a large redemption event. That said, because of the NEAR staking rewards, the NEAR blockchain could be one of the leaders for stablecoin yields in the market.
It only took ~three months (and the collapse of Terra’s UST stablecoin) before the Decentral Bank DAO released a new version of USN dubbed “v2.0.” The changes to the nascent stablecoin were made with hopes of making it more resilient in a bear market/volatile conditions and avoiding any “death spiral” as seen in UST. These changes included:
What the DAO calls “Phase I,” $USN will be 1:1 backed with . Users can mint and redeem USN only with USDT. A native yield will be sustainably generated from staking rewards. While USDT remains the top stablecoin in Q3 2022, it’s lost considerable market share to USDC throughout 2022. To bootstrap the Phase I period, 1 million USN will be distributed per month via Ref Finance in July and August 2022.
Phase II will begin in which USN will be collateralized by non-stable assets, starting with NEAR. Interestingly, the DAO (via its ) claims this period will only begin during a “bull market.” To quote, “As market conditions recover, the Decentral Bank DAO may vote to transition to Phase II, where non-stablecoin assets will be reintroduced to mint and redeem $USN? -? starting with.” This means the stability of the coin and its collateral will be altered based on one DAO’s decision of what constitutes a bear/bull market. This is obviously incredibly subjective and risky. Users of USN should be aware that humans behind the scenes are essentially making trading decisions around the coin’s collateral.
To make matters worse, it took less than one week into v2.0 (July 6th, 2022) before a bug was exploited and 10 trillion USN were minted. To the team’s credit, they noticed the bug immediately and rectified the situation by upgrading the smart contract and burning the 10 trillion minted USN. However, to do so, they paused the USN smart contract, illustrating complete control over the stablecoin.
To recap:
- The DAO plans to make changes and collateral decisions based on bull/bear markets
- The Phase I implementation is just a one-to-one representation of USDT (why not just use USDT, then?)
- It took less than one week for a catastrophic bug to be found
- The DAO can freeze the entire USN smart contract and funds
After failing to gain much traction and becoming undercollateralized in Q4 2022, Decentral Bank, the DAO responsible for USN, announced that it is winding down USN. The USN became undercollateralized by ~$40 million. Through the USN Protection Programme, which is supported by a grant from the Near Foundation, USN token holders can exchange their tokens for USDT. All told, the experimental stablecoin lasted less than one year.
