What Next for WAVES After Neutrino USD Depegging?

Key Points:

• USDN lost its near-1:1 peg to USD this week, dropping to as low as $0.65 before recovering to around $0.88.
• The developers of the Waves blockchain, the native token of which (WAVES) backs USDN, stand accused of price manipulation.
• Ultimately, WAVES’ (down more than 27% this week) fortunes likely depend on USDN regaining its peg in the long run.

What happened?

Neutrino USD (USDN) lost its near-1:1 peg to the US dollar this week, collapsing as much as 30% to fall below $0.65 on Monday, before posting an aggressive recovery back to around $0.88 on Tuesday.

Neutrino USD is an algorithmic stablecoin that maintains its peg with the backing of the Waves blockchain. The sharp deterioration in its fortunes came as the Waves blockchain’s native token WAVES slumped on reports that the blockchain’s developers have been engaging in price manipulation to pump the price of the cryptocurrency, as well as increase the usage of USDN.

Indeed, in March, WAVES rallied as much as 400% from around $16 to as high as $64. But in the last four sessions, it has dropped around 35% back to the low $30s, with 25% of that decline coming on Monday. The developers of Waves were accused on Monday of utilising leverage to artificially pump the value of their own token.

A pseudonymous crypto analyst outlined the accusations in a long Twitter thread, essentially saying that the developers of the Waves blockchain had been collateralising USDN in order to borrow USDC on the Vires.Finance DeFi lending platform, only to then use these proceeds to purchase WAVES, then burn these tokens for more USDN and repeat.

Waves is the “biggest ponzi in crypto” and USDN could become insolvent if the price of WAVES crashes sufficiently, the analyst said. Unsurprisingly, the founder of the Waves Platform Sasha Ivanov fired back, accusing a crypto trading firm Alameda Research of holding short positions against WAVES and launching a social media campaign of paid trolls to undermine confidence in the platform and USDN.

Software developer at Waves Inal Kardanov said on Twitter that USDN will not collapse because it remains “heavily over-collateralized”, referring to the fact that the market cap of WAVES (about $3.8B), which backs USDN, remains significantly higher versus the market cap of USDN (last at about 900M).

What next for WAVES?

The fortunes of Waves blockchain’s native WAVES token and USDN remain entwined. If USDN can maintain recent progress back towards recovering its peg as arbitrageurs take advantage of its still hefty discount versus the USD (assuming they have confidence it can maintain its peg in the future), the outlook for WAVES looks good.

A return to stability in the value of USDN could see a return in inflows as crypto investors seek to take advantage of the excellent yields on offer for lending/staking/liquidity providing of USDN on DeFi platforms likes Vires.Finance. As the market cap of USDN returns to growth, that would inevitably exert further upwards pressure on WAVES.

But all of the above requires a recovery of trust and it remains to be seen whether recent accusations of price manipulation/abuse of leverage leave a lasting impact. Failure of the USDN token to maintain its peg to USD, in the long run, could spell disaster for WAVES. A return to 2022’s sub-$10 lows could very much be on the cards.