How the recent wonderland controversy links to your favourite stablecoins.
Defi Drama
It has been a dramatic week in the world of Defi. On Thursday, it came to light that ‘Sifu’, the mysterious treasury manager of the Wonderland protocol was in fact Michael Patryn, a convicted fraudster. Patryn co-founded the QuadrigaCX exchange, which defrauded over $190 million of funds from customers in an infamous Ponzi scheme in 2019. He has also previously pleaded guilty to charges of credit, bank and computer fraud, as well as burglary!
Wonderland was founded by Daniele Sestagalli, the populist leader of DeFi group ‘frog-nation’. Wonderland is described as a ‘decentralised reserve currency protocol that owns its own liquidity’. A fork of the OlympusDAO model, it promised investors mind-blowing returns of over 80,000% APY. Unsurprisingly, investors were not pleased about the revelations that a convicted criminal may have had access to their funds, especially when it transpired that Sestagalli had been aware of the revelations for over a month without taking action. Patryn was eventually stood down from his position, but not before Wonderland’s native $TIME token dropped 32% on the back of the news. At the time of writing, voting is ongoing to determine the future of the Wonderland protocol.
Spreading Damage
Daniele Sestagalli also heads up Abracadabra, a DeFi platform associated with the ‘Magic Internet Money’ ($MIM) stablecoin. On Abracadabra, $MIM tokens are minted and lent out to investors that deposit crypto as collateral. The token remains pegged to the US dollar by way of arbitrage trading. There are several different mechanisms involved, but essentially traders can take advantage of $MIM price fluctuations to make profit, and the effect of these trades push the price of the token back towards one dollar.
With all the negative press surrounding Patryn and Sestagalli, many investors and liquidity providers lost trust in the Abracadabra platform, leading to a large-scale sell-off of $MIM. Crypto trading firm Alameda Research withdrew $500 million of their $MIM liquidity from Curve in a single transaction. This rapid selling pressure and lack of liquidity helped to topple $MIM from its peg, and it fell to around $0.975 on Thursday. Sestagalli referred to Abracadabra as an ‘independent actor’ on Twitter, and said those spreading ‘FUD’ on the project related to the Wonderland fiasco were doing so for their own gains. $MIM has now recovered to $0.991, creeping ever closer to the $1 peg.
The $UST / $MIM Connection
$UST is the algorithmic stablecoin of the Terra ecosystem. $UST has become increasingly popular as trust in the Terra ecosystem has grown, and now has a market cap of over $11 billion. The peg to $1 is maintained by an ‘algorithmic market module’ involving the $LUNA token. The detailed mechanics of this are neatly explained in this whiteboard crypto video on Terra. Much of the demand for $UST currently comes from Anchor Protocol, a savings protocol within the Terra ecosystem that provides stable yields of around 20% APY to users that deposit their $UST.
Despite having no direct link to Daniele Sestagalli or the Wonderland protocol, the threat to $MIM’s peg has raised concerns over the stability of $UST. This is because the two coins are linked by the Abracadabra platform, more specifically the platform’s ‘degenbox’ strategy. The ‘degenbox’ works by using deposited $UST on Anchor as collateral to borrow $MIM, and then swapping this for even more $UST. This $UST can then be deposited back into Anchor and will thus accrue even more interest. By repeating this loop many times, the strategy can achieve an APY of up to 100%. Prior to the Wonderland allegations, over 1 billion $UST tokens were locked in the degenbox strategy, representing around 9% of all $UST in existence. Concerns over $MIM caused a max exodus from Abracadabra. The effect of people fleeing their degenbox positions created huge selling pressure on $UST, leading to fears that $UST could also lose its peg. $UST has so far appeared to cope well, experiencing a brief dip to $0.989 but a rapid recovery to regain its $1 peg.
There is no doubt that January has been a pretty big stress test for the algorithmic stablecoins. With ongoing concerns over Abracadabra leadership, confidence in $MIM is likely to suffer despite the fact that it has seemingly recovered to re-find its peg. The fact that $UST has managed to weather this storm in already difficult market conditions has been seen by many as a sign of strength. There are also incoming new developments on Terra that focus on stabilising the peg, which should further increase confidence. If indeed $UST continues through this downturn unscathed, this will likely be the catalyst for even more mainstream adoption of the coin, and the continued ascent of $UST up the stablecoin ranks.
