Waves Network has been experiencing a serious issue due to Vires Finance Liquidity Crunch. For quite a while, lots of people have been waiting for the day that they will be able to withdraw their USDT and USDC. Not only that, everybody is looking for a way to do the withdrawal without any loss. The Vires Finance team has been working on solutions to satisfy depositor needs. Therefore, they are offering new proposals to solve the withdrawal issue. The last proposed strategy makes users lead to withdrawing through SURF conversion. In this article, we will question whether is this last proposal the right way to claim your assets back or another attempt to stop the bleeding temporarily.
Now, thousands of hearts are united in one question: should we really do this conversion? Here are all the answers we gathered in this article.
What Happened on Vires Finance?
Last month, Vires Finance experienced a serious liquidity issue due to the insufficient USDT and USDC amount to repay depositors. We called it the Vires Liquidity Crunch. Following that event, Vires Team proposed and implemented new terms on the protocol governing the withdrawal and conversion of assets. No new deposits for USDT and USDC pools were allowed after that implementation. For those who would like to withdraw could convert their balance to USDN with a 5% bonus. With the bonus amount, the total could not be withdrawn right away but kept in vesting. They allowed every account to withdraw a certain amount daily. For a comprehensive review of the Vires Liquidity Crunch, you can review our article here.
However, that conversion could not cure the wound. The daily withdraw amount was used by many bot-related account and lost of depositors could not withdraw USDN even at the limited terms. Hence, Vires Team proposed another solution: converting USDN to SURF tokens.
What is SURF?
The derivative token SURF (Smart Utility Recapitalization Feature) is intended to enhance the current NSBT mechanics of recapitalizing USDN reserves.
Users can only purchase SURF when the BR (Backing Ratio) is lower than 100% by locking WAVES or USDN on the smart contract. While the locked USDN is burned, reducing the overall amount of USDN in circulation while also increasing BR, the locked WAVES are added to the current reserves to offer additional capitalization for USDN reserves.
The current BR and the quantity you intend to issue determine the price of the SURF token created via smart contract.
For instance, if BR is 45%, the contract price of SURF is 0.45 USDN; nevertheless, the average SURF price of your transaction increases when you acquire more SURF (price impact).
Withdrawing with SURF
The USDN is currently undercollateralized. That means the peg is broken and its value is below $1. This has an impact on its stability and allure as a medium of exchange within the Waves Ecosystem and beyond. SURF token, as part of The Neutrino protocol, enables consumers to purchase USDN at a discounted rate depending on the Backing Ratio (BR). The Neutrino contract’s total collateral value divided by the total market supply value is known as the BR. Through the Neutrino contract, SURF can be purchased when BR is less than 100%.
Users can instantly switch their full vesting balance into SURF by creating this direct connection within Vires Finance. However, the important point is that they can only profit when the BR rises to 115%.
The SURF protocol will liquidate 10% of the USDN reserves. The smart contract automatically pays SURF holders the same amount of USDN equal to the amount of SURF they hold once the BR reaches 115%.
In theory, swapping your USDN for SURF is very advantageous for the Waves Ecosystem. This conversion can lower the supply of USDN and raise the backing ratio.
This article may help you to understand SURF and its position within the network better.
What if you convert?
Now, let’s dig down a bit and explore some scenarios. Assume that you had 1000 USDT deposited to Vires Finance before the crunch. Then you converted them into USDN and got your 5% bonus. Now, you convert it to SURF. You receive 2,602.818 SURF from the current BR at 18.61%. (The BR rate and the SURF value in Waves Exchange belong to the 3rd of October. The rate and the value may change daily manner.)
Now, the question is: what can you do with the SURF?
The first scenario is the best one possible. Once you convert your USDN to SURF, you can directly stake them. The staking APR may seem low, but there is no other chance than staking until the Backing Ratio reaches 115%. Let’s say it takes a year for BR to reach 115%. However, keep in mind that this calculation and scenario are entirely hypothetical. You had 1000 USDT, converted them into USDN, and had a 5% bonus for 1005 USDN. Then, you convert 1005 USDN to SURF and receive 2602,818. Later, you receive 2709,53 after staking SURF for a year. As we mentioned earlier, a year later BR is 115% and your SURF tokens are instantly turned into USDN and now you have 2709,53 USDN.
Although this may seem profitable at first glance, we all know that first BR must reach 115%. Yet, nothing is certain about when the BR can reach that threshold.
Well, this scenario is a little bit cloudy. Previously, you converted your USDN for SURF tokens. You may need liquidity urgently, and do not want to stake either. So, having indisposable SURF tokens in your portfolio means nothing to you.
As a result, you can instantly sell your SURF assets on Waves Exchange for USDN. Here comes the tricky part: you converted your USDN on Vires Finance on smart contract price but the price on Waves Exchange is below that! If you wish to withdraw your money right away, that would mean a serious loss of value. Let’s make some calculations and see them in more detail.
You previously had 2,602.818 SURF. Once you sell them on Waves Exchange for USDN at a 0.153 rate, you get 398,231 USDN. It is not over yet. You want your USDT back and once again convert your USDN to USDT and receive 388 USDT. It does not look that good, does it? You wanted to act quickly but your 1000 USDT is now 388 USDT.
Here is a user Comment to sum up all the debate:
2967usdt -> 2967 usdn -> 7249 surf -> 700usdn -> 679 usdt :))This comment has been made by one of the users in Vires Finance Telegram channel.
woww, this conversions help us a lot 🙏 thanks team
What if the BR decreases instead of going up? We know that SURF tokens will automatically be converted to USDN at a 1:1 rate when BR reaches 115%. But, things may go sideways and SURF value may decline as well. At the time of writing this article, it is 0.153 USDN in Waves Exchange. Let’s say it decreases down to the level of 0.05 USDN. One more thing! You still want to sell your SURF tokens. Here is the math:
You previously had 2,602.818 SURF. Considering the hypothetical rate of 0.05 USDN, you will get 130.14 USDN. Now the cherry on top: you get 127 USDT after converting your USDN to USDT. This does not seem fair at all.
|Scenario 1||Scenario 2||Scenario 3|
|Initial Investment on Vires Finance||1000 USDT||1000 USDT||1000 USDT|
|USDN Conversion with 5% Bonus||1005 USDN||1005 USDN||1005 USDN|
|Conversion to SURF when BR at 18.61%||2,602.818 SURF||2,602.818 SURF||2,602.818 SURF|
|Selling SURF on Waves Exchange at 0.153||N/A||398,231 USDN||N/A|
|Selling SURF when BR decreases to 0.05%||N/A||N/A||130.14 USDN|
|Automatic USDN conversion when BR hits 115%||2709,53 USDN||N/A||N/A|
|Final Balance after USDT Conversion||2641,79 USDT||388 USDT||127 USDT|
What is Next?
Of course, we do not take any sides and these cannot be considered investment advice. Under all circumstances, the choice is yours and yours alone. Considering the current situation in the Waves network, you can follow the Waves Exchange Emission Distribution Voting to have a sense of what is going on. Pool positions and market conditions may change instantly and there is a fair chance that you may get affected. In the meantime, you may consider investing in ENNO/USDN pool for passive income opportunities.
Besides, you may have not converted your USDT/USDC to USDN yet. That means you can still get 2% APY but cannot withdraw your assets from Vires Finance. However, that situation may change if the Vires Finance team decides to implement a withdrawal strategy when sufficient liquidity is raised. In that case, those who converted to USDN and wait for the vesting period to end can also withdraw their assets right away. Last but not least, you may have converted your USDN to SURF. Then, you may kindly consider what we discussed above while taking your own context into account. However, Enno Wallet will not integrate this feature in a short term.
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