A couple weeks ago, we covered some recent developments of Optimism following their announcement of their first airdrop and new governance structure. The OP token airdrop was made claimable on 1st June 2022.
OP price and volume chart. Source: CoinGecko
Upon launch, the OP token rose to an ATH of $2.10 but shortly after plunged ~49% to a low of $1.07. Price action has since consolidated somewhat, and the token currently trades at $1.22 at time of writing.
The airdrop did not go smoothly. Long story short, the Optimism team deployed the token contract and claims UI, which some users managed to find prior to their official announcement. This overwhelmed their public RPC endpoint, and the team took down their claims UI to decrease load while addressing the issue. Some users, however, constructed their own custom-built claims UIs which circumvented this measure. After several hours of work to stabilize the RPC, the team finally announced the drop on Twitter. The combination of these issues roused some frustration within the community who had trouble interacting with claims UI / chain, as well as felt it was unfair that some users were able to claim tokens earlier than others.
Optimism Drops
While some have been quick to attribute the subsequent drop in token price to this hiccup, as mentioned previously, the phenomenon of ‘airdrop dumping’ has been observed repeatedly and does not come as a surprise. Although some early airdrop claimers were eager enough to set up very small pools of liquidity on Uniswap, most saw the opportunity to sell some of their tokens at $5, albeit in small amounts. However, the delays in claiming helped to ease the dumping pressure for awhile as more tokens entered the market, allowing the price to stabilize $2. Once users managed to access their airdrop through makeshift UIs, the sell pressure accelerated, before hitting a bottom of just over $1.
The strange part here is that unlike most high-profile airdrops that came before it such as the Ribbon and LooksRare airdrop, the price swings were not all that volatile within the first few days of trading. But then again, this has been the case for more recent airdrops such as CoW Protocol, which fizzled out quickly before it had a chance to take off.
CoW Protocol price and volume chart (Source: CoinGecko)
Perhaps it is a sign of a completely weakened DeFi sector, or more appropriately, market-wide bearish sentiment has truly taken hold of the space, as most traders have become more pessimistic, taking their free money and exiting as fast as they can, while those with more conviction are left to support the price until the selling stops.
What’s interesting is that the ‘claim and dump’ phenomenon was evidently captured through outflows of liquidity from Optimism back into Ethereum, as users took out their airdrop proceeds into other networks rather than injecting them back into the Optimism ecosystem. At one point, Hop Protocol, a cross-chain bridge, ran out of ETH liquidity and ran low on USDC as users were bridging their assets out of Optimism and back onto the Ethereum mainnet.
However, the TVL on Optimism seems to show a different story as it has continuously increased ever since the airdrop was launched, rising by 24% to $362 million.
Total Value Locked on Optimism (Source: DefiLlama)
Daily Transactions on Optimism (Source: Optimistic Etherscan)
Additionally, daily transaction volumes are still much higher on Optimism even after the initial launch-day spike, probably due to the launch of Velodrome Finance on the network, an improved fork of the Solidly protocol originally launched on Fantom. Velodrome allowed users to provide liquidity for OP and various other tokens on Optimism to receive VELO token rewards.
As of 7th June 2022, over 68% of the OP airdrop has been claimed by over 133,000 eligible addresses. Now that things have calmed down a little and the airdrop hype has tapered off, let's look at some of the key impacts of the airdrop and how it will affect existing holders on Optimism. First of all, with the introduction of the OP token, the Token House is now live, where holders can vote for future protocol upgrades, or delegate their tokens. However, direct governance seems to be a responsibility that many users have chosen not to participate in for now, as over 24% of claimed OP tokens were delegated for voting. As of the time of writing, the top 2 delegates are Quixotic, an Optimism NFT marketplace, and Linda Xie, the co-founder of hedgefund Scalar Capital, controlling close to 10% of all delegated OP so far.
Governance kerfuffle
Controversially, in response to the subsequent token dumping a governance proposal was put forth by community member 0xJohn to ban initial users who immediately sold off their airdropped tokens from receiving future airdrops.
Though this proposal never went to a vote, Cobie, in his characteristic satirical style, voiced his thoughts on the original proposal by writing a proposal of his own. As a nod towards how much attention this controversy attracted, within the initial 24 hours of posting the two proposals rose to become the all-time highest-viewed posts in Optimism’s governance forum. Sarcasm aside, Cobie shortly after replied more seriously about the flaws he saw in the original proposal, which is worth reading in full.
The stir caused by the original proposal has managed to provoke a discussion regarding the game theory of token distribution. While the initial proposal was ostensibly regarding contributions to governance, it seems more motivated by the short-term price action of OP. An obvious solution to decrease or avoid immediate sell pressure would be to have the airdrop immediately locked/auto-staked, similar to how LUNA was distributed to the community following the launch of Terra 2.0. However, some downsides to this measure include possibly causing continuous sell pressure on the token instead of allowing uninterested holders to exit immediately after receiving the tokens, which helps hasten price discovery in the days following the airdrop.
Nevertheless, some ideas and insights can be gleaned if the proposal is taken beyond face value. Banning airdrop sellers from future airdrops might be patently paternalistic, but incentivising holders or allocating a higher percentage of future airdrop tokens for active governance contributors may be a more constructive way of incentivizing desired behaviors.
Another governance proposal, again motivated by short-term OP price action, was to implement OP as the gas fee token for Optimism instead of existing ETH. While Vitalik may have shown his disapproval at the focus of some token holders on OP price action, Hasu pointed out that the choice to not implement OP as the gas token also serves as a ‘numba-go-up’ strategy, albeit on a longer and more sustainable time horizon. This is because long-term and future OP demand will come from its ability to accrue value via staking to get a share of sequencing fees, where ultimately the amount of fees generated will depend on the success of Optimism to offer a chain with superior UX to attract users / developers. Additionally, if OP were to be used as the gas fee, this would actually run counter to the intended goal of raising the price of OP in the long run, as OP would need to be sold for ETH when transactions on the L2 are settled on the Ethereum mainnet which would create a permanent sell pressure on the OP token.
Smoke & Mirrors
LUNA and UST were at the center of attention with the collapse of the Terra ecosystem. However, this downfall led to the opening of a can of worms, which revealed that not everything has been as it seems.
The highlight of this fracas was Mirror Protocol, a synthetic assets provider which allowed users to access traditional stocks and indices without the need for a brokerage account. To take it a step further, the platform allowed users to take long or short positions on these assets. As it turns out, Mirror has been in trouble way before the collapse of Terra, having been hit by a major exploit.
The Undiscovered Exploit
In October 2021, Mirror fell prey to an exploit costing users $90 million, but this wasn’t discovered until users started having issues unwinding their positions in the wake of the UST depeg.
The exploit was discovered by a Terra community member called “FatMan” on Twitter. As mentioned previously, Mirror allowed users to take long and short positions. Through their shorting feature, users would need to lock collateral for a minimum of 14 days. Once the short trade had been closed, users were able to unlock the collateral to release the funds. The unlock was handled by ID numbers generated by smart contracts.
However, buggy code in the contract failed to check whether the same ID was being used to withdraw funds more than once. This was discovered by the attacker, who used a single ID to withdraw collateral multiple times, netting around $90 million over time.
Unfortunately, the team only noticed the bug months later when users were having issues withdrawing their own collateral. The vulnerability was quietly patched, but eagle-eyed users were able to sniff it out. At the time of writing, Mirror has yet to make an official statement regarding the exploit.
Not Alone
While on a much smaller scale, Anchor too fell prey to a vulnerability, though the team was quick to respond to it. In its case, the launch of Terra 2.0 and the new LUNA led to pricing issues on Anchor. Instead of displaying the price of Terra Classic (LUNC) which is utilized on the platform, LUNA was shown instead.
The oracle showcased LUNC at $5 (it was trading below $0.0001 at that time), allowing a user to deposit 20 million Lido Bonded Luna tokens which were mistakenly valued at $100 million. A loan of $40 million UST (worth $800,000) was then taken and withdrawn.
Subsequently, other users tried taking advantage of the vulnerability but were unable to as the team had already patched it.
Tron’s Climb
Top 8 chains by TVL (excluding Ethereum) in past 2 months. Source: Defillama.
With the Terra fallout dominating crypto news several weeks ago, Tron had somewhat quietly climbed to third largest chain by TVL and has remained there since unseating Avalanche’s spot on 18th May. It now has a TVL dominance of 7.4%, behind only BNB (7.9%) and Ethereum (59.5%).
Just 2 months ago, Tron sat in 7th place behind Ethereum, Terra, BNB, Avalanche, Solana, and Fantom. Going back a bit further, Tron was last sitting in third place over a year ago on 16 May 2021, back when alt-L1s such as Terra, Solana, Avalanche had not really started their precipitous rise (or decline) yet.
Tron TVL. Source: Defillama
Additionally, Tron is the only chain in the Top 10 chains by TVL to have a positive TVL change in the last month, increasing by about 30% to now sit at ~$6B, just $500m shy of BNB’s second place at ~$6.5B.
USDD market capitalization. Source: CoinGecko
This rise in TVL is no doubt contributed by the growth of USDD whose rise in market share also began roughly two months ago (when it launched May 5th), which makes Tron’s ascension in TVL ranks uncannily reminiscent of Terra's. USDD now has a market cap of ~$700M, slightly over triple from where it was 30 days ago, and is now the 9th largest stablecoin by market cap.
The lion’s share in TVL accrual stemmed from JustLend and Sun.io, which gained ~$1.4B and ~$548M in TVL respectively in the last 30 days. JustLend was one of the protocols which offered ~40% APY on USDD initially, though the supply APY has now dropped to 15.6%, drawing comparisons to how Anchor was the predominant growth factor of Terra. JustLend is also now also the 10th largest protocol by TVL across all chains. Meanwhile, Sun.io features a stableswap DEX where users can provide liquidity for USDD pools. As the top supplied assets on JustLend are BTC and USDC, while the top borrowed asset is USDD, this suggests that some users may be depositing these assets as collateral and borrowing USDD to re-deposit into JustLend as well as supply liquidity into USDD pools on Sun.io, spurring TVL growth on these two protocols.
USDD metrics. Source: Tron DAO Reserve
A couple of days ago, Tron published a medium post claiming to now be the ‘first’ over-collateralized stablecoin, spurred by the collapse of UST. It is purported that USDD now has a collateralization ratio of >200% and a minimum ratio of 130%, supposedly one-upping the gold standard of DAI’s 120% collateralization ratio. However, users should definitely remain cautious and skeptical of these claims.
1/ This is nuts@usddio @trondaoreserve & @trondao are deceiving the market with $USDD
— Res ®️ (@resdegen) June 5, 2022
They are claiming that $USDD is collateralized at over 200% and this information is technically FALSE
I'm gonna explain why 🧵👇 pic.twitter.com/jPkMp0y2LE
Res of Proximity Labs pointed out some holes in these claims. The >200% collateralization ratio included burnt TRX as well as TRX in its reserves. Without including burnt TRX and the TRX in the TronDAO reserve, the collateralization ratio from the BTC and USDT in its reserves would amount to ~95%.
This means that the underlying mechanics of USDD mimics UST’s, with the ability to burn TRX to mint USDD, and vice versa. The extra collateral is analogous to the LFG - which in the final few months of UST amassed a treasury of BTC and AVAX to back UST; however, in the case of USDD, TRX is also considered as a reserve asset. This of course can give rise to similar issues to the LUNA-UST model, where if the price of TRX plummets, things could get ugly fast.
This article was written in collaboration with Shaun Paul Lee and Khor Win Win. You can follow them on twitter at https @ShaunPaulLee and @0x5sff3r.
Wendy is a research intern at CoinGecko. Follow the author on Twitter @alfalfawm
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