Deep-dive: USN Stablecoin
In-depth analysis on USN and the difference between USN and UST
Terra was initially thought to be successful in its algorithmic stablecoin venture, as compared to many others who have tried previously but failed (Iron Finance). Their initial success saw numerous blockchain ecosystems dipping their toes into algorithmic stablecoins, one of which is NEAR Protocol.
When news of NEAR Protocol's algorithmic stablecoin USN was released, it spurred numerous discussions among the crypto community. If USN's mechanism follows closely to the mildly Ponzi-like UST, it will be disastrous when a bear market arrives and when massive selloffs happen which will trigger a- Oh, yeah, that already happened to Terra.
If you had no clue what happened to Terra, definitely give this a read to get a good update.
Many are under the impression that NEAR copied UST's mechanism, leading many to believe that USN = UST. Undoubtedly, people are now more wary about algorithmic stablecoins . Some go as far as vouching never to touch algo stablecoins anymore after the Terra UST crash. However, upon studying and analysing NEAR's Whitepaper, preliminary conclusion is that UST and USN's mechanisms are fundamentally different.
Before that, let me introduce what is NEAR Protocol.
NEAR Protocol is a Proof of Stake Layer 1 blockchain that is designed to facilitate the open web of the future and power its economy. It utilizes the same underlying technology as Bitcoin (as with every other protocol/project), but truly shines from its community consensus, sharding (especially this) and usability.
NEAR Protocol has implemented something called Nightshade Sharding for their PoS consensus mechanism. This is something special about NEAR as they have sharding fully implemented and live on their network. If you are unsure of what sharding is, watch this video to get a brief understanding.
This is compared to Ethereum, whose sharding implementation will not happen till 2023.
Launched in April 2020, NEAR has a Total Value Locked of less than $1 billion ($490.12M). Created by the team in NEAR, Aurora is also widely talked about. Aurora is a Ethereum Virtual Machine(EVM) compatible chain that runs on the NEAR Protocol, and supports all the Ethereum decentralized applications.
Around April this year, NEAR announced the launch of their new stablecoin USN. This created a lot of buzz as it reminded people of UST and LUNA, back before it collapsed.
What is USN?
USN is an algorithmic stablecoin native to the NEAR Protocol, and it is "soft-pegged" to the US dollar, meaning its price equals $1 without holding any dollar cash reserves.
They are hoping that the fast, cheap and stable USN can be utilized by NEAR Protocol users, thereby achieving their goal of increasing the TVL and liquidity in their network. Similarly, it wishes to give more utility to their NEAR tokens.
Why would anyone want to hold USN? Well, users get yield from holding USN. USN can be used to effectively bootstrap liquidity for Defi protocols. Protocols such as Ref Finance and Aurigami have chosen to integrate USN. Users get at least 11% APY, “at least” because staking NEAR gets you 11% APY, which is passed through the holders of USN, and protocols offer their token incentives on top of the NEAR rewards.
According to the DAO (Decentral Bank), USN yield will fluctuate based on the NEAR staking percentage and market value of the tokens, and will likely initially exceed 20% APY for early lenders through additional incentives.
Here are the various protocols that you can get these yields from.
How does USN maintain its peg / stability?
The last thing we want is for USN to crash and burn like UST.
There are 2 stability mechanisms working here, On-chain arbitrage and USN Reserve Fund.
Similar to the LUNA-UST swap, you send $1 worth of NEAR to the smart contract, it mints 1USN for you. Send 1 USN to the smart contract, and get $1 worth of NEAR back.
If USN is trading more or less than $1, we can perform arbitrage using outside exchanges and this on-chain swap to help bring USN's price back to $1.
The BIG difference here (between UST and USN) is that the NEAR that is sent to the smart contract does NOT get burnt. The NEAR is instead staked on the blockchain to generate staking rewards, giving USN holders their 11% APY base yield.
Furthermore, new NEAR is NOT minted when you send USN back to the contract.
It is evident that USN does not rely on algorithms to adjust its supply, but rather on sufficient reserve assets to maintain its stability. This is very similar to DAI's overcollateralized mechanism as compared to UST.
What this means is USN's minting mechanism has no direct ties to NEAR's issuance. NEAR's PoS yield and transaction fees etc are able to operate as before, giving some form of stability. In the event of a USN collapse, it will not have a direct impact on NEAR's underlying tokenomics (unlike LUNA-UST).
USN Reserve Fund
NEAR's endorsement mechanism has been created from the very beginning, to ensure that there is enough collateral to defend the peg at all times. Initially, the yield reserve is double collateralized (200%) with NEAR and USDT.
For example, if there are 1 billion USN initially, the reserve fund will be made up of $1 billion worth of NEAR and $1 billion USDT. This makes up a collateralization ratio of 200%.
Further down the line, as demand for USN (either from NEAR side or from other currencies) grows, they will contribute equivalent amounts of NEAR or other stablecoins to the Reserve Fund, gradually decreasing the overcollaterization ratio close to 100%, but still remain overcollaterized.
This means that in extreme scenarios of "panic sale" or "death spiral", Decentral Bank is able to buy back the entire issuance of USN from their reserves.
In order to ensure USN Reserve Fund has more than 100% overcollateralization, Decentral Bank needs to come up with a model to support the stabilization of the USN exchange rate. They have decided to utilize the classic model of the Currency Board.
A currency board is a monetary authority as well as a principle which is required to maintain a fixed exchange rate between currencies. One example would be Hong Kong, whose national currency is pegged to the US dollar using a currency board principle.
To put simply, when NEAR's price falls, the Reserve Fund will buy NEAR using USDT to stabilize NEAR's price. Similarly, when NEAR's price increases, the Reserve Fund sells NEAR for USDT to utilize when needed.
StableSwap (USN/USDT Pool)
StableSwap is part of Ref Finance, an automated market maker (AMM) dex running on NEAR protocol, similar to Curve Finance on Ethereum.
There will be a USN/USDT liquidity pool on StableSwap, which is beneficial for the stabilization of USN's peg due to the liquidity. When someone swaps their USDT for USN, their USDT is added to the pool.
So, how do all of these come together and help defend USN's peg?
Treasury Management is a set of principles that are aimed at helping support the balance of the Reserve Fund and keeping the USN/USD peg.
If you are interested (or geeky enough) to find out more, please read here for the in-depth USN rate stability and backing principles.
How are NEAR and USDT added to Reserve Fund?
People swap NEAR for USN (give you NEAR, give me USN, NEAR goes Reserve Fund)
Reserve Fund sells USDT for NEAR
People swap USDT for USN (give you USDT, give me USN, USDT goes Reserve Fund)
Reserve Fund sells NEAR for USDT
Will USN death spiral and fail?
What causes the death spiral?
When NEAR's price is relatively steady, people mint a lot of USN. However, during a bear market, the price of NEAR may decline severely, causing the market cap of USN to be greater than the market cap of NEAR.
This means that if all the existing USN was sent to the on-chain swap, you would not be able to get the dollar amount of NEAR as promised, leading to declined investors confidence and ultimately leading to the dumping of both USN and NEAR (similar to LUNA/UST's death spiral).
So USN is doomed to fail?
With the Reserve Fund and Treasury Management supporting the system, NEAR Protocol's team does not believe that this scenario will happen.
As previously mentioned, they are planning to buy NEAR with USDT when the price of NEAR drops, thereby stabilising the price of NEAR. However, it is hard to say if that will actually work... (just look at LUNA)
This highly depends on the liquidity out there . If someone dumps a large amount, the team may have difficulties defending the peg.
My point is, I will definitely feel safer if the collateralization ratio is higher and USN is backed by different sets of stablecoins (even USDT can depeg). A 100% to 100% collateralization ratio with NEAR and USDT does not feel as safe, especially when NEAR's price has the possibility to dump hard during a bear market.
Less Riskier than UST
However, with that being said, USN/NEAR is actually less riskier than UST/LUNA. Here are a few reasons:
Hyperinflation scenario that happened to LUNA will not happen to NEAR, as the on-chain swap will never mint new NEAR when USN is sent to the contract
USN/NEAR has a significantly higher collateralization ratio (200%), with stablecoins as part of the collateral, and is built into the system from the very beginning
USN's 11% APY yield comes from staking NEAR, a more sustainable approach as compared to UST's unsustainable 20% APY yield from the Ponzi-like Anchor Protocol
Conclusion and Personal Thoughts
So there you have it. Although both are algorithmic stablecoins, USN is fundamentally different from UST. NEAR/USN have considerably more stabilising mechanisms and protocols in place for black swan events (bank runs, death spiral, panic sales). Furthermore, it does not seem like NEAR protocol has an all-knowing, god-like leader (coughs Do Kwon) and a cultish-like community (coughs LUNAtics), but this may be too early to tell.
I definitely will not go all in on USN/NEAR like those who deposited their life savings in Anchor. This is definitely not a "set & forget" play here. One must constantly monitor USN's market cap and also how the Reserve Fund changes over time. With that being said, USN is still relatively underrated and one should definitely pay attention to it if they want to maximise their yields.
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