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Altchains & DeFi
TABLE OF CONTENTS

The UST Epidemic, A Little Optimism

by Wendy M.

Last week we covered the contagion effects of UST’s downfall on other stablecoins. This week, we take a look at some of the other DeFi protocols and entities that were affected. 

One way which UST achieved its meteoric growth was through expanding to other chains. In its relatively short lifespan, UST had been integrated into (at least) 12 other chains as per Defillama. The chains with the largest amount of UST circulating include Ethereum, BNB chain, Avalanche, and Solana. Aside from cross-chain integration, there were also so-called “fintech startups” which leveraged Anchor to generate returns for investors.

While we can’t cover all the protocols that were affected, here are some that were hit hardest.

 

Kava Network

Kava, an L1 blockchain built using the Cosmos SDK, was one of the chains outside Terra that experienced the biggest losses due to the UST depegging. Over the course of a week from 7th - 13th May, it had shed ~$280m, close to 50% of its TVL .

Source: Defillama

The flaw which contributed to this nosedive was the fact that UST was hard-coded to $1 on the platform. Kava also has its own native collateralized stablecoin USDX which can be minted in return for depositing other assets as collateral, among them being UST. Due to this design flaw, users were able to exploit the demise of UST by minting USDX at a 99% LTV ratio against UST. As USDX was quickly traded for other assets on Kava’s native DEX KavaSwap, the huge selling pressure naturally led to the depegging of USDX as well, which at time of writing has yet to recover and trades at $0.83. 

USDX price & volume chart. Source: CoinGecko

The team seems to have taken the necessary steps to purge UST from USDX’s collateral, and the project is still alive and kicking. 

 

Stablegains

Stablegains as its name suggests - offered gains on stablecoins deposited into their app. Many users were sold with their pitch “Earn a stable 15% APY interest with our simple savings account.” However, what investors weren’t told upfront was that their USD was simply being placed in Anchor for a 20% interest rate. 

This came to light after UST depegged, leaving many users with valueless UST. Out of the deposited $47 million by nearly 5,000 users, it is most likely that a majority has been lost. While Stablegains claims they’ve disclosed since the beginning that funds are held in UST and in Anchor, FatManTerra on Twitter has disputed this statement. It is purported that the original webpage stated “The main stablecoin we use is USDC (USD Coin). The other stablecoins we also use are UST (Terra USD) and DAI.”

The same webpage has since been updated to “The main stablecoins we use are USDC and UST.” With the majority of users' funds lost, Stablegains has announced that they’ll be shutting down their operations. However, this may not be the last time we hear of them, as users have already started filing lawsuits against the startup.

 

Alice Finance

Alice Finance was working on bringing UST to the masses. It was developing an all-in one app which provided yield farming, and also UST as a payment option. The protocol was also in the midst of introducing a Point-of-Sale (PoS) system which accepted UST. 

However, like other protocols in Terra, it is possible they have suffered immense losses throughout the UST depegging event. At the time of writing, users haven’t been able to retrieve their funds to their bank accounts via wire transfer. However, the company has a restitution plan for its users impacted by the collapse, though no further details have been provided.

 

Orion Money

Dubbed as a way for users across various chains to take advantage of the high stable yields offered by Anchor, Orion Money held over $50 million before the Terra collapse. By using their service, users on Ethereum could deposit various stablecoins (USDT, USDC, and BUSD), which would then be deposited into EthAnchor which could be converted into UST. This UST was then deposited into Anchor. 

At the height of the depegging event between 9 May and 11 May, many investors with their stablecoins in Orion were unable to withdraw their funds due to the number of withdrawals being processed. In the end, Orion gave UST out in lieu of other stablecoins, which resulted in many disgruntled investors. 

Source: Defillama

The total value locked (TVL) in Orion has since dropped to a mere ~$460k with the majority being held in UST.

 

Gro Protocol

Gro, a DeFi protocol aiming to make it easy to earn stablecoin yield, included UST in one of their strategies with a 60% weightage. This backfired when UST collapsed, causing any user making use of the Vault Gro strategy to suffer losses. 

Argent users in particular were affected due to a partnership whereby Gro strategies could be accessed straight from the Argent app. Overall, the Vault strategy lost 45% in funds, though a specific figure is yet to be determined. 

Source: Defillama

Since the depegging event, Gro has seen its TVL drop by over 50%, falling from ~$58 million to ~$27 million. At the time of writing, there is an ongoing community discussion for a reimbursement plan which you can view here.

 

Other victims

Mushrooms Finance was a small yield-farming protocol which accepted WETH / WBTC deposits, which they used as collateral to mint DAI from MakerDAO, then farmed on Curve in the UST-3Pool. UST’s depeg to ~$0.6 led to heavy imbalances in the Curve pool, which coupled with the wider market drawdown led to Mushrooms’ team being unable to redeem sufficient DAI from Curve to cover their MakerDAO positions which resulted in the liquidation of their WETH / WBTC collateral. This has led to the ~$8m in TVL draining by over 99%, and the team has decided to shut down the protocol following the event. 

Other than that, at least a couple of protocols were also impacted by Chainlink’s LUNA/UST price feed circuit breakers, which set a minimum price limit in times of extreme market volatility or other forms of market manipulation. In these protocols, Chainlink stopped updating the price of LUNA below $0.1, whereas market price went as low as $0.01. This allowed exploiters / arbitrageurs to borrow against LUNA through the platform where the notional value of LUNA was ~10x higher than its market price. Blizz Protocol on Avalanche had its entire ~$10m TVL drained via this attack vector, and has announced the discontinuation of the project. Venus also suffered a loss of ~$13.5m for the same reason, though this loss was very small relative to its TVL.

Fortunately, the systemic collapse of UST may have also prevented future catastrophes. There were no doubt projects which were inspired by Terra’s LUNA-UST model which experienced growth at an impressive pace. One such project was Shade Protocol, which was an upcoming privacy-centric algostable project on Secret Network whose mechanism mimicked LUNA and UST. After the fallout, Shade announced a remodeling of the protocol to instead be overcollateralized, which according to the team was a model already in development since early this year. 

 

Learnings 

While such black swan events are hard if not impossible to predict, each comes with their own takeaways. The collapse of Terra, and the subsequent fallout which affected various other protocols has once again highlighted the risks of trusting centralized services with your funds. As the saying goes, “not your keys not your crypto”.

However, decentralized services with UST strategies were affected as well, with some users not even knowing they held UST through these protocols. This just goes to show that users need to be aware of how such services work before trusting them with funds. But of course, the blame doesn’t lie solely with the user, as the projects are equally accountable. Some seem to have thrown risk management out the window by trusting the peg. Improvements and changes clearly need to be made in order to safeguard users' funds.

Finally, never blindly trust. We’ve seen time and time again investors getting rekt by blindly following project leaders, and putting their entire trust in them. Instead, make informed decisions by researching and questioning projects constantly. If it sounds too good to be true, it probably is. 

 

Beyond the Terra debacle - A recap + update on Optimism developments 👇🏼

About a month ago on the 19th of April, the Optimism team published a blog post titled ‘A New Chapter’ which alluded to the fast incoming token launch and airdrop.

Source: L2Beat *Note that TVL data from L2beat is >50% higher than from Defillama

We saw a spike across the board on various metrics such as TVL, transactions, and daily addresses following shortly after the announcement. TVL (in USD) had already been on an uptrend for several weeks prior beginning mid-March 2022 likely due to circulating airdrop rumors, and the small spike following 19th April was short-lived.

TVL (in USD) slid back to April 19 levels shortly after the official announcement of the airdrop on April 27th, but took a definitive nosedive following the LUNA / UST incident two weeks ago, in line with the overall decline in the markets.

Source: L2Beat 

ETH TVL tells a slightly different story, however. While TVL in USD terms have dropped, total ETH locked continues on its uptrend which started almost a year ago despite the broader market downturn (chart above only shows the past 90 days), seemingly unaffected by the Terra meltdown. According to Defillama, Synthetix, Uniswap and Lyra make up ~60% of TVL on Optimism.

Source: Dune Analytics @optimismpbc 

Transactions have been increasing more gradually over the past several months, though there was a spike in activity from the 9th-13th May which coincided with Terra’s unraveling. By number of transactions, Perpetual Protocol, Uniswap V3, and Kwenta (powered by Synthetix) are the largest protocols on Optimism.

Source: Dune Analytics @optimismpbc

In terms of transacting addresses per day however, the spike in activity post-April 19 is more apparent than the spike in TVL / transactions. This could be explained by Optimism’s announcement of multiple rounds of airdrops which continues to encourage more users to participate in Optimism’s ecosystem. 5% of the token supply was distributed in Airdrop #1, with a remaining 14% for future airdrops. 

It may be worth checking your allocation / eligibility again here, as the Optimism team has just announced a reshuffling of airdrop allocations due to newly implemented filters to exclude sybils. The 14 million $OP recovered will be distributed proportionally to the other recipients of the first airdrop.

An aside: A little more on Optimism’s recent development – a novel governance modelSource: Optimism Docs

With the $OP airdrop, the Optimism Foundation also announced a new governance structure for Optimism going forward. The Optimism Collective is the governance DAO of Optimism, which will be initially stewarded by the Foundation. The foundation consists of Optimism founding members as well as contributors from The Graph Foundation, MakerDAO, and Radicle Foundation. The collective will be governed co-equally by two houses i.e. the Citizens’ House and the Token House.

Along with the announcement of the $OP airdrop, the Token House was also launched. The Token House will consist of $OP token holders, and follows the traditional token governance model where token holders will be able to vote on project incentives, protocol upgrades, etc. In this model, governance rights are transferable / tradable between users based on (fungible) token ownership.

The novel and experimental governance element is the Citizens’ House (due to launch later in 2022), which will be responsible in deciding the distribution of funds towards retroactive public goods funding (RetroPGF). RetroPGF will be funded by 20% of the total $OP allocation (see token allocation figure below) as well as from sequencer profits. Currently, the Optimism Foundation runs the sole sequencer for the platform, with plans to decentralize sequencing sometime in 2023. In the meantime prior to decentralization, 100% of profits from the sequencer will be directed towards RetroPGF.

‘Citizenship’, or voting power within the Citizens’ House is conferred by “soulbound”, non-transferrable NFTs which serve as digital on-chain identities. These NFTs in turn would be given to individuals who have invested things beyond capital (e.g. time, energy, reputation) to contribute to Optimism’s long-term development. This is amongst the new paradigm shifts which seek to avoid traditional shortcomings of the token holder / one-token-one-vote model which among other things, can enable plutocracies. 

Certain topics will also have an overlap in governance from both houses, which enables checks and balances in power between the two. It is worth noting that this novel two-token governance mechanism is experimental, and the team plans to take an iterative approach to improvements based on experiential feedback.

On May 4th, the Token House had enacted its first formal action – the OP Stimpack – which activates the Governance Fund (5.4% of OP initial supply, or ~232M $OP) to begin incentivising growth on Optimism.

Source: Optimism Docs

The governance fund will be deployed in 2 phases - 0 and 1. Phase 0 (3 - 24 May) earmarks 15% of the Governance Fund and seeks to reward early projects deployed on Optimism, allocating to projects according to their daily transaction volume and TVL. Perpetual Protocol and Synthetix are tied for the highest allocation while Lyra came in third, with 9 million and 3 million $OP tokens allocated respectively. See here for full details on Phase 0 allocations. It’s important to note that these projects need to submit a proposal on how they intend to utilize these tokens, which has to be approved by the Token House, in order to receive their allocation. 

In Phase 1, which runs from Airdrop #1 until the exhaustion of the Governance Fund, any Optimism project can submit a proposal requesting for $OP tokens from the remaining 85% of the fund.

So, watch out for the upcoming ecosystem incentives!

 

Other Potential L2 Airdrops to look out for

With expectations and anticipation raised following Optimism’s airdrop announcement, the community is eyeing other prominent L2’s which have yet to release a token: Arbitrum, ZkSync, and StarkNet.

On May 10th, Arbitrum published a status update regarding their NFT giveaway program ‘Arbitrum Odyssey’ which aims to promote exploration and experimentation in the Arbitrum Ecosystem. They recently confirmed that the program will launch mid-June. There are no prerequisites to participate in the upcoming 8-week long program, which will give out up to 17 NFTs for participants completing all the required tasks (these have yet to be announced). 

ZkSync is another zk-rollup L2 which has long confirmed that there will eventually be a token in their documentation. While the mainnet of zkSync v1 has been live since mid-2020, zkSync 2.0 only had their public testnet live from ~3 months ago in late February 2022. However, testnet users farming for airdrops are out of luck as zkSync’s team has asserted in their Discord channel that there will be no rewards for testnet users.

Lastly, while some have speculated that snapshots for an Arbitrum token airdrop may have already been taken due to the duration since their mainnet launch, you can be sure to be an early user of StarkNet’s alpha mainnet, whose Ethereum mainnet bridge just went live on May 9th. 

 

This article was produced in collaboration with Shaun Paul Lee. You can follow him on Twitter here.

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Wendy M.
Wendy M.

Wendy is a research intern at CoinGecko. Follow the author on Twitter @alfalfawm

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