Exploring $USN as a Stablecoin
UST was an UNDERCOLLATERALIZED algorithmic stablecoin.
USN is an OVERCOLLATERALIZED stablecoin which is DOUBLE-collaterized with $NEAR and $USDT.
In a worst case scenario, Decentral Bank* would be able to buy back the entire amount of $USN ever issued, making it very different than UST.
*Decentral Bank is a decentralized organization developing and supporting NEAR Protocol based stable assets.
Thus it is by design very different than UST and seems at face value a lot safer.
But the devil is in the details, so let’s dive in:
How $USN Maintains its Stability:
1. Initial double-collateralization with $NEAR and $USDT
2. Automatic rebalancing of the Reserve Fund
3. Conservative collateral strategy
4. On-Chain Arbitrage
Initial issuance of $USN is double-collaterized with $NEAR and $USDT. Even if $NEAR crashed, the value of the collateral will always be greater than the total circulating supply of $USN. Initially in the bootstrapping phase USN will have over 200% collaterization.
2. Automatic Rebalancing of Reserve Fund
The Reserve Fund automatically rebalances excess $NEAR in reserve with stablecoins such as $USDT to always support a 100%+ collaterization rate.
3. Conservative Collateral Strategy
$USN is collateralized with battle-tested stablecoins only, such as $USDT. These stablecoins are deposited by Decentral Bank to stableswaps to ensure $USN’s stability in the open market.
4. On-Chain Arbitrage
$USN is freely traded on exchanges. USN is exchanged to NEAR and vice versa through the on-chain smart contract.
When USN/USD exchange rate drops below $1:
a. Alice purchases USN from an exchange (e.g. for $0.99).
b. Alice then exchanges it for $1 worth of NEAR via the main on-chain contract. This offers an arbitrage opportunity.
When the USN/USD exchange rate exceeds $1:
a. Alice exchanges NEAR to USN through the main on-chain USN smart contract at a 1:1 USN/USD rate.
b. The acquired amount of USN can then be sold on an exchange, e.g. for $1.01. Again, this allows Alice to earn arbitrage profits.
Where does the yield come from?
If you don’t know where the yield is coming from, usually that means you are the yield.
USN on Bastion Protocol works in a similar way as UST on Anchor Protocol. There are native staking rewards, borrowing revenue and Bastion’s incentives. We know eventually some of those incentives run out, so similarly to UST the APY % will be unsustainable in the long run.
So technically, both UST and USN have a base APY of 11% since LUNA and NEAR staking reward APYs are similar.
The rest of UST’s APY is mostly made up by ANC incentives.
In the case of USN, it sources/distributes yield across multiple protocols (instead of only Anchor).
The Death Spiral
Because $USN and $UST are inherently different, a $USN Death Spiral would be a lot more UNlikely.
Different peg mechanism
USN is overcollateralized
Still there is a small chance for a death spiral, which occurs with both of these events happening at the same time:
Extreme NEAR depreciation: In this case Decentral Bank will automatically start buying NEAR with the stablecoins from the Reserve Fund to get back into the “safe” levels of NEAR.
2. Simultaneous dumping of USN: Theoretically someone could dump a large amount of USN at the same time of NEAR tanking, thereby initiating the death spiral.
Why the Death Spiral won’t happen:
Because it always has at least 100% backing of all issued USN by either NEAR or USDT. Which is inherently different in design than USDT. Also NEAR will not get minted in the way LUNA/UST works and thus can NOT become hyperinflationary and lose its value like we saw happening with LUNA.
Unless USDT depegs and Near crashes simultaneously, USN is safe.
Before you scramble to get that juicy stablecoin yield…
In March this year President Biden signed an executive order to get federal agencies to work together and write a report for the crypto ecosystem.
Regulators are licking their lips after the UST debacle, and I expect stablecoins to be one of the first things to get regulated.
Therefore stablecoins like USDT might face substantial regulatory pressure in the next 6 months as the report comes out.
And while Tether has indeed been battle tested for years and stood the test of time, there’s some more shady things going on with Tether;
Some people call Tether the “internal accounting system for the largest fraud since Madoff”. Last year Tether got fined for $41m. As said by the Attorney General: “Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie” Some of you may hear this for the first time. This is not a post to go into depths about Tether’s shady dealings. Many in-depth articles have been written on the subject that do a much better job at that and I invite you to have a look at them:
Here were Tether’s self-reported reserves:
There’s some speculation that a large part of the commercial paper (IOU’s) that previously made up the majority of Tether’s reserves were from Evergrande and other Chinese property developers that have been going under since last year. And are effectively worthless now.
Interestingly since then they have reduced their commercial paper reserves and increased US treasury bills:
While Tether may be undercollateralized, you can’t compare it to UST. Because Tether has a lot more funds to defend its peg than UST ever had.
Still the APY on USN ultimately falls back on USDT as well. If you want to get that stablecoin yield, please do so with eyes wide open:
Tether has a history of lying about their backing reserves. So why trust their own “transparency” reports?
inherent risks involved with the upcoming regulatory pressure.
My Two Cents:
It will be relatively safe to get the yield for the first few months as they will have 200% collateralization in the bootstrapping phase. But with the relative certainty of regulation later this year (and the % yield dropping) it will NOT be a play without risk. USDT and by extension USN will be among the first on the list to get regulated. Unless they can significantly diversify away from USDT I wouldn’t touch it for the long term and prefer to DCA into ETH and BTC.
That being said you may personally have a different opinion on USDT. Perhaps you believe all of the above is just FUD and USDT will be fine, then to it does make sense to farm that % $USN APY.
For what it’s worth, @thedefiedge talks about USDT in his stablecoin analysis and would put only 5% of his portfolio into USDT. Which implies that he’d put the same or even less into $USN.
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Oh, and none of this is investment advice. I’m not a professional and mostly am stumbling my way through the world the same way I was at age 13. Just documenting and sharing some thoughts and none of it is a science. I, like everyone else, am simply an aged baby walking blindfolded into a forest, startled by my own humanity.