How a peg is actually held

Graduate · enrolled learners

This lesson opens with Neutrino USD (USDN), 2022.

What happened

USDN was a dollar stablecoin in the Waves ecosystem, and its peg was held not by dollars in a bank but by WAVES, the ecosystem's own token, through an algorithmic mint-and-burn mechanism: the system relied on the value of WAVES and on arbitrageurs to keep USDN at a dollar. The flaw was that WAVES and USDN were bound to the same fate. When confidence in the ecosystem fell, WAVES fell, which weakened the very backing that was supposed to defend USDN's peg, which weakened confidence further. USDN lost its peg on 4 April 2022, falling more than 15 percent to 0.83 as WAVES slid, recovered, and lost it again on 11 May 2022, dropping to 0.88 as the collapse of Terra's UST spread and WAVES fell 26 percent in a day, the reflexive loop running the wrong way. USDN's market capitalization had nearly doubled to about 850 million dollars in March, just before the first break, and holders who did not exit early were left holding a token backed by an asset that had fallen with it. The reserves were not fake and not illiquid; they were the wrong kind, backing tied to the coin's own survival.

The decision point

A peg is only as strong as what actually backs it, and the decisive property of that backing is whether it is independent of the coin. Exogenous collateral, dollars, Treasuries, assets whose value has nothing to do with the stablecoin, holds its worth whether the coin thrives or fails, so it can defend the peg under stress. Endogenous collateral, the ecosystem's own token, is bound to the coin's fate: it is worth a lot while confidence is high and little when confidence falls, which means it provides the most backing when the peg needs it least and the least when the peg needs it most. USDN is the demonstration: its peg was held by WAVES, so a loss of confidence hit the coin and its collateral at once, and the backing evaporated exactly when it was called on, in a reflexive loop. So the decision when reading any stablecoin is to ask not merely whether it is backed but what backs it, and specifically whether that backing would still be worth a dollar if the coin itself were in trouble, because a peg defended by a correlated asset is defended by something that disappears in the one scenario the defense is for.

Recorded loss

$850,000,000

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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