NEAR abandons its native stablecoin to avoid a Terra-style scenario

Like a spark, USN shined for a short time, then faded. Issued by Decentral Bank (DCB) in April 2022, it became the first native stablecoin in the NEAR ecosystem – one of the largest crypto communities comprising almost 900 crypto projects and boasting high scalability amid low fees. USN was designed to serve as an efficient tool for boosting liquidity of DeFi protocols built on NEAR, including Aurora, Octopus, and NearPay. DCB recently announced that it would gradually phase out its USN project. How did the team arrive at this decision? Here’s the full story behind the USN’s wind-down, as told by Mike Ermolaev, Head of PR and Content at Kikimora Labs, probably one of the most important venture studios in NEAR ecosystem.

USN in a nutshell

USN is a decentralized stablecoin that is (read “was”) widely used in the NEAR ecosystem. It is soft-pegged to the US dollar meaning that it correlates with its value but does not hold reserves in this currency. USN was launched by Decentral Bank, a DAO operating independently from NEAR. Its primary purpose was to develop and support USN. 

USN was designed to enhance composability of the NEAR token while adding liquidity to the projects within the ecosystem. Additionally, USN was supposed to open up yielding opportunities generated via NEAR staking rewards. There were plans to integrate USN in all NEAR and Aurora dApps, facilitate cross-chain minting, and enable off-chain loans. In fact, the widespread use of this stablecoin has resulted in its high utility. It has been made available in many NEAR-based wallets, including MyNearWallet, Sender, and Trust Wallet. MyNearWallet CEO George Goshanov commented on Decentral Bank’s plans to wind down USN:

“It must have been a difficult decision. The wide adoption and convenience of use have made USN a sought-after asset within the ecosystem. DCB had quite ambitious plans for its further development. But the fact is that safety and responsibility should always be the top priority for all members of the NEAR community. I’m sure this is a change for the better, as challenges prompt us to find more efficient solutions.” 

Is USN actually in trouble?

To start with, USN v1 was an algorithmic stablecoin meaning it was backed through an on-chain algorithm that regulated the supply-demand balance between the stablecoin and its collateral assets. This increased an already high under-collateralization risk. 

There was about a $10 million gap due to insufficient collateralization in spring 2022.

In June 2022, USN was upgraded to a non-algorithmic version. It became one-to-one collateralized with USD Tether (USDT), the largest stablecoin in terms of market cap. Other collateral assets of USN included USDC and DAI. These measures were aimed at making USN more resilient to market headwinds.

A great deal of bearish pressure was also exerted on cryptocurrencies due to geopolitical events wreaking havoc in global financial markets, thereby contributing to a large collateral gap in USN. As of now, the shortfall amounts to $40 million. To avoid further expansion of the collateral gap, NEAR advised Decentral Bank to wind down USN in due order and with full responsibility.

USN token remains unaffected; NEAR token holders regain their funds

There is no risk associated with the NEAR token since it has never been involved in the minting of USN. Hence, there is no chance that a scenario similar to the case of TerraUSD (UST) would unfold. The TerraUSD stablecoin was collateralized with the Luna token, and thus crashed together. 

However, there was speculation that the current collateral shortage was caused by too volatile collateral tokens. These are unfounded assumptions, and Decentral Bank has dispelled the myth in its recent tweet:  

Further on, the process of winding down is thoroughly controlled and held in a responsible manner. The Near Foundation has already launched the USN Protection Program to safeguard all NEAR users. As soon as USN minting is halted, and all double-minted stablecoins in existence are burnt, all eligible holders of USN will start receiving redemptions in USDT.e on a 1-to-1 basis. For that purpose, the foundation has set aside $40 million, a sum equal to the current gap, so it will be covered in full.

The NEAR community plans to refine its safety standards

Despite being a great idea in theory, the USN project did not deliver the expected results in practice. It is just another milestone in the development of the NEAR ecosystem. Though this measure is a hard pill to swallow, it is better than the death spiral Luna experienced. Besides, it has helped the community make valuable conclusions. Specifically, in its full statement, the Near Foundation expressed plans to establish more efficient stablecoin standards through a funded initiative.

Importantly, the launched USN termination is a controlled process rather than a sudden collapse that could undermine trust to both Decentral Bank and the NEAR blockchain. Just as importantly, this decision is supported by many projects within the community. One of them is NearPay, a crypto finance protocol bridging fiat and crypto payments. Ivan Ilin, Chief Operating Officer at NearPay, said:

“It’s a pity the USN project failed, but I’m glad DCB has taken a timely decision to wind down this stablecoin. As long as the situation is under control, NEAR users have nothing to worry about. This is the message we convey to all our clients, encouraging them to keep a cool head and make use of the offered Protection Program.”

Final thoughts

Under the ever-evolving market conditions, perhaps the most useful skills are prompt reaction and the ability to adapt to changes quickly. Taking measures to eliminate the vulnerability in time was a good move for NEAR. Though the USN termination may cause certain inconvenience, and this process may be a challenging one, the users’ peace of mind is ultimately the main thing the community should focus on. NEAR treated this issue responsibly, proving to be an open, transparent protocol that is committed to its long-term success.

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