algorithmic stablecoin

Hope Finance exploit results in $2M stolen from users’ funds

An Arbitrum-based algorithmic stablecoin project has fallen prey to a smart contract exploit, seeing $2 million stolen from users.

Prospective users of an Arbitrum-based decentralized finance (DeFi) project have been left out of pocket following a $2 million exploit.

Web3 security firm CertiK flagged the incident on Feb. 21, following an announcement from the Hope Finance Twitter account notifying users of the scam.

Details of the project are difficult to come by. The platform’s Twitter account was launched in January 2023 and outlined plans for an algorithmic stablecoin called Hope token (HOPE), which dynamically adjusts its supply relative to the price of Ether (ETH).

Posts on the account allege that a Nigerian national had executed the scam and transferred over $1.86 million to Tornado Cash shortly after the platform went live on Feb. 20. A member of the CertiK team told Cointelegraph that the scammer had changed the details of the smart contract, which led to funds being drained from Hope Finance genesis protocol:

“It appears that the scammer changed the TradingHelper contract which meant that when 0x4481 calls OpenTrade on the GenesisRewardPool the funds are transferred to the scammer.”

According to a tweet dated Feb. 13, the Hope Finance smart contract was audited by a Cognitos official. Cointelegraph reviewed the audit summary, which flagged two major contract function vulnerabilities. 

Cognitos audit of Hope Finance’s smart contract. Source: Cognitos

This included an incorrect modifier and the possibility of reentrancy attacks. Despite flagging these vulnerabilities, Cognitos found that the smart contract code had passed the audit successfully.

Following the scam, Hope Finance shared information with users to withdraw staked liquidity from the protocol through an emergency withdrawal function.

Arbitrum is an Ethereum layer 2 roll-up network that enables exponential scaling of smart contracts. Alongside Optimism, the two layer-2 protocols continue to handle an increasing amount of transactions within the Ethereum ecosystem.

Waves-backed stablecoin USDN drops further after regulator warning and exchange delisting

WAVES price and its USDN stablecoin lose value after the Digital Asset eXchange Association issues a caution notice and Upbit exchange delists the token.

Algorithmic stablecoins have had a rough year, starting with TerraUSD (UST) depegging to zero and the subsequent blow-up of Terra’s LUNA token, which was used for the asset’s backing. Algorithmic stablecoins are not fully collateralized and rely on different mechanisms to maintain their peg to a fiat currency, making them inherently fragile during market volatility. 

The UST implosion created a domino effect that caused another stablecoin, Magic Internet Money (MIM), to depeg. Despite the fragility of algorithmic stablecoins, new projects like Djed by Cardano are still planning on launching, but that doesn’t mean that the concept has improved since the crises seen earlier in the year.

Let’s look at the latest depeg event in the cryptocurrency space.

Warning issued for WAVES and its USDN stablecoin

On Dec. 8, the Digital Asset eXchange Association (DAXA), which consists of the five major crypto exchanges in Korea, issued a warning about Waves and its WAVES (WAVES) token.

The warning comes after the stablecoin USDN, which is backed by WAVES, depegged and has thus far failed to reestablish the $1 peg in more than 180 days. This means that the USDN protocol may liquidate WAVES through an automatic arbitrage process in an attempt to regain the peg. On Dec. 8, USDN was 16% below the peg.

USDN/USD 180-day chart. Source: CoinGecko

The move by DAXA to issue the warning has led Upbit to delist both WAVES and USDN. The delisting, combined with the DAXA warning, appears to be playing some role in the price decline currently seen in WAVES and USDN.

Algorithmic stablecoins are not alone in depegging. Constant concerns about Tether’s (USDT) backing and its general solvency continue to raise depeg fears among all levels of investors.

Over the years, USDT has lost its peg but never to the extent seen with UST and USDN.

As the community continues to reel from algorithmic stablecoins, regulators are taking notice and placing priority on regulating the space.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

New Cardano algorithmic stablecoin evokes old fears for the community

“I thought we already figured this out, algorithmic stablecoins, not the best option,” a community member wrote on Twitter.

With the new announcement that Cardano is on its way to release an algorithmic stablecoin in 2023, various community members expressed concerns, comparing the project to TerraUSD (UST), which caused great losses within the crypto space in 2022. 

According to its developers, the stablecoin project Djed will be pegged to the United States dollar and backed by Cardano (ADA). Apart from this, it will be using another token as its reserve coin. The project highlighted that it will be overcollateralized and will have on-chain proof-of-reserves.

Despite the assurances given by the team, various community members expressed concerns, with some bringing the recently collapsed UST to the conversation.

One community member was seemingly confused as to why another algorithmic stablecoin has come out despite Terra showing that they could go wrong. “I thought we already figured this out, algorithmic stablecoins, not the best option,” they wrote. Meanwhile, another Twitter user mentioned that they would rather keep using Tether (USDT). According to the community member, algorithmic stablecoins already proved that they are not stable.

Cointelegraph reached out to Djed but did not get a response.

Related: UST aftermath: Is there any future for algorithmic stablecoins?

With concerns spurred by the advent of Djed coming out, Cointelegraph asked some of the major stablecoin projects if algorithmic stablecoin projects still have the potential to succeed despite the example shown by TerraUSD.

In a statement, Tether told Cointelegraph that stablecoin projects like Terra had mechanisms designed to achieve stability, but failed in the end. The team explained that:

“Unlike collateralized stablecoins where each coin is fully backed by collateral, algorithmic stablecoins attempt to maintain their value via various market operations that have frequently been broken down dramatically.”

Meanwhile, USD Coin (USDC) issuer Circle told Cointelegraph in a statement that algorithmic stablecoins with complex collateralization structures and technological stabilization mechanisms do not have the same utility value as full-reserve, regulated dollar assets. “The collapse of Terra earlier this year underscored that not all stablecoins are created equal,” they said.