WAVES is LUNA but a circular Ponzi that is almost impossible to exit
This blog post details how WAVES will collapse.
Written together with @teemulau.
LUNA was already a disturbing affair – a loss of wealth in the tens of billions across a few days and savings lost in what was supposed to be a stablecoin. But at least the UST peg was defended with billions, there were plenty of smart people who believed in the system – most of whom were not malicious.
WAVES and USDN have a similar setup, except that USDN doesn’t have any collateral such as BTC that could be sold to defend the peg. This is as pure as they come Ponzi scheme.
WAVES has a much more convoluted token economics that makes it harder to figure out how the collapse will play out. For LUNA, it was clear that if UST needed to be minted, this would lead to hyperinflation.
USDN has clever financial engineering to make exiting the system harder than UST.
WAVES system has three tokens:
WAVES = LUNA.
USDN = UST.
NSBT = ???.
NSBT is a bond that you mint by locking WAVES – it absorbs the losses with the promise of future payout once USDN is safe. “Traders buy NSBT for WAVES via smart contract, expecting returns in the future, once BR [Backing Ratio] has been recovered” from the Neutrino docs.
This is from the classic algorithmic stablecoin playbook, where the system is recapitalized by the expectation of future profits.
If there’s a bank run, you’d expect the NSBT supply to go to infinity and the price zero if WAVES worked like LUNA. However, this game has another level, which defines a max supply for NSBT. Instead, the price of NSBT artificially moons as it becomes more expensive to acquire in WAVES terms.
The conclusion for someone trying to exit USDN is that they need to buy NSBT – and you need it exponentially more as the further the bank run goes on. This is because after liquidity has been removed from other markets (e.g. Curve), there’s no way to get out of the system except via swapping it to WAVES on the official UI. You need to buy NSBT to get out, and to do that you need to buy WAVES.
USDN → WAVES → ETH/USDC (goal of exiting the system) requires doing ETH/USDC → WAVES → NSBT (buying into the system). Yes, to exit the USDN Ponzi scheme, WAVES requires you to participate in it.
It’s so convoluted that @teemulau and I were honestly more impressed than anything.
There’s a reason why NSBT markets don’t exist outside the circular markets of WAVES and USDN. If there were open markets it would lead to collapse.
The entire system is constructed in a way where it’s difficult to get out.
If NSBT wasn’t already worthless, to get the benefits you have to stake it and there are massive time-based exit penalties involved.
Results:
USDN collapses (but no liquid markets to short). It’s a race for USDN holders to get out by purchasing worthless NSBT.
WAVES should collapse because USDN is the only product of the ecosystem.
NSBT goes to infinity in WAVES terms (you can’t long it or sell it high). USDN and WAVES liquidity has been converted to worthless NSBT.
As a forced NSBT staker (to exit USDN), you are betting that WAVES hasn’t gone to zero before you can unstake your NSBT in some years without paying a massive exit penalty. The price of NSBT going to the moon happens in WAVES terms because it’s the only way to acquire NSBT.
If there is a run on USDN, it’s very likely that WAVES will follow LUNA’s path to zero.
The backing ratio right now is 35.17% and the collateral ratio is the previously mentioned 0%. There is no real backing in the system. The backing ratio calculation methodology is the same as MKR claiming it is backed by around half the market cap of ETH.
This feels like it’s low enough for the collapse to happen soon.