Algorithmic Stablecoins

Draft US stablecoin bill would ban new algo stablecoins for 2 years

It’s reported the bill’s definition will cover “endogenously collateralized stablecoins,” which depend on the value of an attached cryptocurrency from the same creator for it to maintain a stable price.

Draft legislation in the United States House of Representatives would place a two-year ban on new algorithmic stablecoins such as TerraUSD Classic (USTC), which depegged from the U.S. dollar earlier this year, causing widespread crypto market contagion.

The bill would criminalize the creation or issuance of new “endogenously collateralized stablecoins,” according to a current draft of the legislation obtained by Bloomberg.

However, the legislation includes a grace period of two years for existing algorithmic stablecoin providers to change their models and collateralize their offerings differently.

The definition would reportedly cover stablecoins that depend on the value of another virtual asset from the same creator to maintain its price and is marketed as having the ability to be converted, repurchased or otherwise redeemed for a fixed price.

The bill raises concerns over whether stablecoins such as Synthetix USD (SUSD) would fall under the definition, as it is currently collateralized with the native asset of the same protocol in the SNX token. Other algo-stablecoins with a similar structure include BitUSD which is backed by BitShares (BTS).

Those well-educated on crypto understand that Terra doesn’t represent all stablecoins, Celsius wasn’t DeFi, 3AC had nothing to do with the technology, etc.

But as in all things, it’s a lot harder to engage with those nuances than to simply say “crypto bad, regulate it to death.”

— Jake Chervinsky (@jchervinsky) September 19, 2022

The draft bill also mandates the U.S. Treasury to undertake a study on algorithmic stablecoins and consult with the Federal Reserve, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.

It’s possible the panel could vote on the bill as early as next week, as Bloomberg reports people familiar with the legislation state Democratic Representative Maxine Waters and Republican Patrick McHenry have been working to reach an agreement on the legislation, although it’s unknown if McHenry approved the latest draft.

Waters Chairs the House Financial Services Committee, of which McHenry is a ranking member, both heard testimony at a hearing Tuesday that USD-backed stablecoins could enhance national security due to the perceived prestige and reliability of the dollar.

USTC, formerly known as TerraUSD (UST) is an algorithmic stablecoin that lost its 1:1 peg with USD in early May, hitting an all-time low of $0.006 in mid-June, resulting in tens of billions of dollars worth of losses.

Solana-based stablecoin NIRV drops 85% following $3.5M exploit

The $3.5 million flash loan attack Solana-based Nirvana Finance saw the price of its stablecoin NIRV and native token ANA fall around 85% apiece.

Solana-based algorithmic stablecoin NIRV has become the latest stablecoin to fail after dropping 85% from its United States dollar peg following a hack on adaptive yield protocol Nirvana Finance on Wednesday.

The flash loan attack, which also saw Nirvana Finance’s native token ANA drop by 85%, resulted in the loss of $3.49 million worth of Tether (USDT), with the SolanaFM team being the first to confirm that the funds were siphoned via a flash loan attack on Wednesday:

“Utilizing Solend Protocol’s Flash Loans, the hacker borrowed $10M USDC from the Solend Main Pool Vault which was used to exploit $3.49M USDT from the Nirvana Finance Treasury.”

At the time of writing, both NIRV and ANA are down roughly 85% to $0.14 and $1.33, respectively, at the time of writing. On Nirvana’s website, it confirms that the protocol was “maliciously hacked and reserve funds are stolen. NIRV and ANA have lost their collateral, and do not have secured market value.”

What we know so far:

Nirvana has been maliciously hacked and the reserves have been stolen.

A flashloan attack was used to steal money. This is not the fault of Solend, but an exploit of Nirvana’s program.https://t.co/NkmtHAbAAa

— Nirvana Finance (@nirvana_fi) July 28, 2022

The Nirvana team is now offering the hacker a whitehat bounty of $300,000 and a “cessation” of the investigation into their identity. So far, they revealed that the hacker’s wallet tied to a centralized exchange has been flagged.

“Please accept this good faith request and return our treasury for the good of the whole Nirvana community. You have not taken money from VCs or large funds—the treasury you have taken represents the collective hopes of everyday people,” it wrote.

To The Nirvana Hacker:

On behalf of the Nirvana Finance community, we humbly ask that you return the stolen funds from our treasury. 1/5

— Nirvana Finance (@nirvana_fi) July 28, 2022

Another algo bites the dust

The algorithmically collateralized NIRV is unironically described by the protocol as a “superstable” token. According to an explanatory thread on Solana Forums, the asset is backed by a network of stablecoins in Nirvana’s reserves via a “decentralized peg delegation.”

“NIRV is always treated as $1 from the protocol’s point-of-view. This dollar value is denominated in ANA tokens. For instance, if the spot price of ANA is $12, the protocol accepts 12 NIRV to purchase an ANA token.”

In this instance, it appears that NIRV was depegged as a direct result of $3.49 million worth of USDT being stolen from Nirvana’s coffers. It marks yet another algo-stablecoin that has been severely depegged in 2022. Beanstalk Farm’s algorithmic stablecoin is sitting at $0.0022 after the protocol was hacked for $182 million in April.

Terra’s first variation of its algo-stablecoin TerraUSD Classic (USTC) also famously imploded following a death spiral that resulted in $40 billion being wiped from the market in May.

How it worked

According to blockchain audit platform OtterSec, a hacker used a program to artificially pump the price of ANA from $8 to $24 via the flash loan. They were then able to mint ANA against the flash loan at the inflated price and subsequently exchanged the asset for $3.49 million worth of USDT which was drained directly from Nirvana’s treasury.

OtterSec noted that his hack shared similarities with the attack on Crema Finance worth $10 million earlier this month, in which the attacker took out a flash loan from the Solend decentralized finance (DeFi) protocol to inflate pricing data and raid the protocol.

2/ This hack beared many similarities to previous hacks. Similar to the @Crema_Finance hack, this too used Solend flashloans.

The attacker’s program was also uploaded on-chain and closed immediately afterwards. https://t.co/kgg7C2M2Gq pic.twitter.com/GJaAZlfJZD

— OtterSec (@osec_io) July 28, 2022

SolanaFM also noted that the hacker exited the attack by converting “the full USDT amount into USDCet, transferring the funds into an Ether (ETH) account” via Wormhole’s cross-chain bridge.

Pain ahead for algorithmic and non-cash backed stablecoins: IMF director

IMF Director Tobias Adrian believes uncollateralized and algorithmically-stabilized stablecoins pose too great a threat to holders and may experience further sell-offs.

The International Monetary Fund (IMF)’s director of capital markets believes there could be further failures of “coin offerings,” including algorithmic stablecoins amid the ongoing crypto winter.

In the interview with Yahoo Finance on July 27, Tobias Adrian, director of monetary and capital markets for the IMF stated that there could be further failures of some coin offerings, in particular algorithmic stablecoins:

“We could see further selloffs, both in crypto assets and in risky asset markets, like equities… there could be further failures of some of the coin offerings — in particular, some of the algorithmic stablecoins that have been hit most hard, and there are others that could fail.”

The IMF director also noted on Wednesday that he saw “some vulnerabilities” for certain fiat-backed stablecoins, referencing Tether, which he claims are not “backed one to one” with the United States dollar (USD).

Adrian also mentioned that stablecoins need a “global regulatory approach” to better protect investors. Adrian stated that while it would be difficult to assess whether each cryptocurrency constitutes a security or not, regulators should first focus on ensuring that crypto exchanges and wallet providers do their due diligence on coins before marketing them.

Terra USD (UST), now known as TerraClassicUSD is the most notable algorithmic stablecoin to have lost its price peg, which wiped out $40 billion in market value in May, and is currently priced at $0.04 USD.

Tron’s algorithmic stablecoin USDD also fell to as low as $0.91 in June, however it regained its price peg after $700 million of USDC was added to its reserves.

Deus Finance’s DEI stablecoin also collapsed in May and currently sits at $0.18.

Earlier this month, the founder of Frax Finance, the company behind the FRAX stablecoin, Sam Kazemian told Cointelegraph that he believes purely algorithmic stablecoins “just don’t work.”

Instead, Kazemian stated that “decentralized on-chain stablecoins […] need to have [traditional] collateral”.

Pain ahead for algorithmic and non-cash backed stablecoins — IMF director

IMF Director Tobias Adrian believes uncollateralized and algorithmically-stabilized stablecoins pose too great a threat to holders and may experience further sell-offs.

The International Monetary Fund’s (IMF) director of capital markets believes there could be further failures of “coin offerings,” including algorithmic stablecoins amid the ongoing crypto winter.

In the interview with Yahoo Finance on Wednesday, Tobias Adrian, director of monetary and capital markets for the IMF, stated that there could be further failures of some coin offerings, in particular, algorithmic stablecoins:

“We could see further selloffs, both in crypto assets and in risky asset markets, like equities… there could be further failures of some of the coin offerings — in particular, some of the algorithmic stablecoins that have been hit most hard, and there are others that could fail.”

The IMF director also noted on Wednesday that he saw “some vulnerabilities” for certain fiat-backed stablecoins, referencing Tether (USDT), which he claims are not “backed one to one” with the United States dollar.

TerraUSD (UST), now known as TerraUSD Classic (USTC), is the most notable algorithmic stablecoin to have lost its price peg, which wiped out $40 billion in market value in May and is currently priced at $0.04.

Tron’s algorithmic stablecoin USDD also fell to as low as $0.91 in June. However, it regained its price peg after $700 million of USD Coin (USDC) was added to its reserves.

Deus Finance’s DEI stablecoin also collapsed in May and currently sits at $0.18.

Earlier this month, Sam Kazemian, the founder of Frax Finance — the company behind the FRAX stablecoin — told Cointelegraph that he believes purely algorithmic stablecoins “just don’t work.”

Instead, Kazemian stated that “decentralized on-chain stablecoins […] need to have [traditional] collateral.”