Limit USDN->WAVES burning when BR < 1


SURF profitability and attractiveness comes from a revaluation over WAVES, that is, BR grows faster than waves price. Otherwise, it is better to conserve WAVES instead of swaping WAVES->SURF, or buy WAVES instead of swaping (or buying) USDN->SURF.

There are some two mechanisms which makes BR grow faster than WAVES:

  • transaction fees from neutrino nodes
  • issuing of SURF itself

SURF was introduced because the first mechanism is not enough to help in BR recovering, as it acts very slowly. The problem is that, there is a mechanism that reduces BR, and so SURF profit performance, disabling the capacity of SURF to help when is most needed. This factor is the classical neutrino burning of USDN->WAVES.


In order to understand the performance of SURF, the sole index to monitor is the smart contract WAVES/SURF ratio. If this ratio grows, then SURF is doing its work. If not, then it isn’t. When SURF was introduced on August 8, this ratio was 0.0275. After three days, it is 0.0259. So, that means that USDN->WAVES burning is the dominating force, and SURF not only is not doing its work, but also is not attractive at all in order to do it.

At the end of this post, I include the demonstration that, in order BR to increase, or not to decrease, for each USDN burned by USDN->WAVES mechanism, (1-BR)/BR USDN or more must be burned via USDN->SURF mechanism. Under the current BR, 0.16, more than 5 USDN has to be burned via USDN->SURF mechanism, for each USDN burned via USDN->WAVES one. And this is not happening.

So, the proposal is to disable or limit USDN->WAVES burning when BR < 1.

However, as someone pointed out in the room, disabling USDN->WAVES burning will remove the arbitraging mechanism that helps to conserve the USDN peg. So question arise here: how do we conserve a peg mechanism under the effects of this proposal, when USDN market price is below 1.0?

Alternative 1

May be we can think in an hybrid mechanism: to add the requirement, in case BR < 1, to burn part of the USDN by SURF, in order to allow to burn USDN by WAVES.

For example (exact numbers can vary, I just want to illustrate the concept) I want to burn 1,000,000 USDN. At BR=0.16 as now, 16% of the USDN will be burned against WAVES. The remaining (84%) will be burned against SURF. In order to compensate the partial loose of arbing profit, burn fees can be removed. Notice that by ensuring this proportion of USDN->SURF burning over USDN->WAVES burning, we ensure that BR don’t decrease. A variation can be to increase this ratio in order to make the burning to result in an increase of BR. So the person doing the burn is ensuring that the SURF he receives don’t devaluate or even increase value. Thus avoiding to make the operation undesirable.

The effect for the investor is that, the instant arb profit will be reduced significantly, and the remaining of the profit will be posponed via the SURF mechanism. With BR=0.16, the burning result in 16% of arb profit and 84% of delayed SURF profit.

We must also consider that the sole burning of USDN, despite not having direct impact over peg, helps to reduce depeg pressure as USDN supply decreases. Even if this proposal may reduce repeg effectiveness, it is preferable to have some depeg than run out of collateral quickly, which will cause anyway a bigger depeg later.

Alternative 2

Ensure another external mechanism that burns USDN->SURF, after certain accumulation of USDN->WAVES burn operation has been performed, in a way to fulfill or surpass the minimal ratio between the two mechanisms. This requires the availability of a big USDN pool to burn via SURF. And that pool is on vires, which is where all this problem started. So, a possibility is to burn part of USDNs locked in vires, via SURF. There are hundreds of millions of USDN locked there, either by locked supplies or in reserve for the 1 year vesting reconversion program.

This alternative presents some risks, and may be they are less risky at higher BRs, in order to get faster the return. But it is a matter of doing computations and check how much can increase BR. If it is able to raise BR over 1.0 (there are hundreds of millions USDN there), the yield of staked SURF from this action will allow the slow payment from USDN deposits and vesting reserve. Also, even by increasing BR significantly without reaching 1.0, it can greatly increase the attractiveness of SURF, making more people to invest on it and relieving vires investment additionally.

And after all, the problem with BR right now is the excess of USDN issued some months ago, and all that excess is stored in vires.

Alternative 3

This one could be considered a more acceptable variant of the alternative 1: swap power need to be restablished via appropiate rate of USDN->SURF burning when BR < 1. That is, when BR < 1, each gNSBT can be used only once. And daily restablishment is disabled. This can increase a lot the demand for SURF under depeg situations.

The requirement of ensuring (1-BR)/BR USDN->SURF burn for each USDN->WAVES burn, implies, in addition, to adjust the swap capacity of gNSBT by a factor equal to current BR.

Some conclusions

Alternatives 1 and 3 implies a limited arbitrage capacity, and so depeg can grow bigger before people start to arb, but in the long term it will avoid BR run out.

On the other hand, a simultaneous application of alternative 2 can be used to reduce this problem. For example, the (1-BR)/BR requirement of alternative 1 and 3 can be moderated, that is, allow some amount of BR reduction. And use alternative 2 to complete (and improve) the required ratio of burns.


In order BR to increase, or not to decrease, for each USDN burned by USDN->WAVES mechanism, (1-BR)/BR USDN or more must be burned via USDN->SURF mechanism.

Lets call X the fraction of USDN that has to be burned by WAVES. So the portion that will be burned by SURF will be (1-X). Lets compute the X that ensures that, after the burn operation, BR does not decrease.

We know that:

amount of waves collateral = total issued USDN * BR / waves price on SC


BR = waves collateral * waves price on SC / total issued USDN

Under the constraint BR before = BR after

we have:

WAVES collateral before * waves price on SC / total USDN before = WAVES collateral after * waves price on SC / total USDN after

As waves price on SC don’t change because of burning, it can also be considered a constant during the burning (despite in the process may have a variation due to market changes, but they are not relevant for our purposes). So lets cancel the waves price on SC in both sides and we get:

WAVES collateral before / total USDN before = WAVES collateral after / total USDN after

or more formally, in order to conserve BR:

initial WAVES collateral / initial total USDN = final WAVES collateral / final total USDN

Let be UB the total burned USDN. So:

WAVES collateral extracted = UB * X / waves price on SC

Combining last two equations:

initial WAVES collateral / initial total USDN = (initial WAVES collateral - WAVES collateral extracted) / (initial total USDN - UB)


initial WAVES collateral / initial total USDN = (initial WAVES collateral - UB * X / waves price on SC) / (initial total USDN - UB)

After some movements, we get:

X = initial WAVES collateral * waves price on SC / initial total USDN

That is, X is exactly equal the BR. So, in conclusion, if we want to burn USDN for arbing, without affecting the BR, then the fraction that has to be burned against WAVES is BR. The remaining fraction, 1 - BR, must be burned against SURF.

Or, put in a different way, for each BR USDN burned with WAVES, (1-BR) USDN must be burned with SURF. Or:

for each USDN burned with waves, (1-BR)/BR USDN must be burned with SURF.


Yes, the continued drain of WAVES collateral from the smart contract via USDN->WAVES swaps is an existential threat to Neutrino and the entire Waves ecosystem.

SURF was introduced as a way to deal with this threat, but SURF lacks any power. Instead, it is simply a bet that the account 3P87zrU6UmJq7wEZz84Fm9PJXr9tLGfEwPB will stop making large swaps and BR will recover organically. This account has drained over 16 million WAVES from the contract since 1 April, and it has continued after the launch of SURF. This account sends the WAVES to Binance and sells them using the account 3PEK2kwvKtwRqenqRbBy6jEcMZfv7YLV3u3. These accounts are also owned by the same person who owned the problematic “3PEE” and “3PPuz” Vires accounts.

Back to the problem, which is that there is an incentive via arbitrage to remove WAVES collateral from the smart contract. But that collateral is needed to ensure that every USDN can be redeemed for $1. Furthermore, USDN is hard-coded to $1 rather than market price on Vires, which caused the liquidity and solvency crisis there.

What is lacking is the mirror counterpart power to NSBT that SURF lacks. There must be an arbitrage incentive to put WAVES into the contract rather than take it out. And when BR is low like now, this incentive must be stronger than the incentive to take WAVES out.

Potential solution: This may sound counterintuitive given the situation, but swapping WAVES->USDN into the contract should, under current BR critical conditions, pay a premium of, say, 3% more USDN than market value. For example, if 1 WAVES = $6 on the market, the contract should pay out 6.18 USDN. I realize that increasing the circulating supply of USDN may sound scary, but the value of adding WAVES collateral to the contract and decreasing the WAVES circulating supply is actually far more beneficial. (Think of it as the inverse of what is currently happening, which is lowering the BR.)

Consider the potential consequences with this example:
Starting point: 18M WAVES collateral @ $6 = $108M. $700M USDN circulating. BR=0.154.
Now imagine the 3% profit incentive to swap WAVES in, get USDN, buy WAVES, swap WAVES in…
This would increase WAVES market price. Let’s look at the point where it doubles to $12.
Assume $108M newly issued USDN (times 1.03 incentive) at average cost of $9 put 12M WAVES into the contract.
Now the updated situation looks like this:
30M WAVES collateral @ $12 = $360M. $811M USDN circulating. BR=0.443!
The double boost of more WAVES collateral and higher WAVES price far outweighs the increase in circulating USDN.

In short: There is too much concern with burning USDN rather than replenishing WAVES collateral. Replace the current flawed mechanism (incentive to deposit USDN->get WAVES) with the inverse (incentive to deposit WAVES->get USDN). Do not be afraid of the increase in USDN supply; the BR will increase drastically.

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FAQ to make my suggested solution easy to understand:

What is the problem?
The market value of the WAVES collateral in Neutrino must be greater than the value of all circulating USDN so that every USDN can be redeemed for $1, but the smart contract is currently undercollateralized. In other words, the backing ratio (BR) is below 100%.

What could be done to fix the problem?
Returning WAVES to the smart contract and an increase in the price of WAVES are the most effective. Returning USDN to the contract has a smaller effect.

What is the currently utilized solution?
The current flawed solution is to remove a large amount of WAVES from the smart contract in exchange for returning USDN. This is actually lowering the BR because draining WAVES collateral and then market selling it significantly outweighs the minor benefit of burning some USDN.

What about SURF?
SURF helps, but only on a small scale, since it does not provide the necessary counterbalance to the USDN-to-WAVES arbitrage swap incentive.

What is your proposed solution?
We need to do the inverse of the current solution that is lowering the BR. The arbitrage incentive must favor the side of returning WAVES via WAVES-to-USDN swaps rather than draining WAVES via USDN-to-WAVES swaps. Therefore, the smart contract should pay out 3% more USDN than the market value at the time of the swap. Although some USDN would be released, the net result is that the BR would rapidly increase toward 100% and beyond because of the increase in WAVES collateral returned to the smart contract and the increase in WAVES market price. (See previous post for more detail.)

Would this cause a depeg?
No, depegs happen in a panic when confidence is lost. The first major USDN depeg was because of loss of confidence in Vires when liquidity was pulled, and the second major depeg was because of loss of confidence in Terra, which spread to stablecoins in general. Neither were directly related to USDN supply. They were irrational and temporary. Even USDT depegged, temporarily, until panic subsided. This solution restores full confidence and full backing, so a panic would make no sense.

What if there were a depeg for some other reason?
Swaps can still be done in either direction. But the solution suggests making the arbitrage incentive greater (3%) for returning WAVES to the smart contract. Therefore, if a depeg of more than 3% occurred, the incentive would again temporarily become greater for restoring the peg. But then once the peg is restored, arbitragers would resume returning WAVES to the smart contract and increasing the BR.

But… you’re creating more USDN!
But even more WAVES collateral is being returned in exchange, and so the BR increases. It is not money-printing, it is not inflation. There is an exchange. The overall benefit of returning WAVES to the smart contract is greater. It is the inverse of the current situation in which draining WAVES by burning USDN lowers the BR. The BR would go up instead of down.

I still don’t get it. Isn’t there too much USDN?
Is there too much USDC in existence? There’s 53.8 billion USDC in circulation but it never depegs. Why? Because there is confidence that every USDC is backed by a real US dollar. There is no such thing as excess as long as it is all backed.

Ok, your solution works. What do we do when BR reaches 100-115%?
Enjoy a fully functioning ecosystem and SURF profits. If variables need adjusting at that time, they can be adjusted. The priority right now is to put all efforts into increasing both the amount and value of the WAVES collateral to restore the BR.


I love this idea, however it is slightly flawed. We would need a penalty for usdn to waves or otherwise, they could create an endless loop of new USDN.

Step 1: deposit waves for USDN + 3%

Step 2: Exchange USDN for waves of equal value.

Step 3: Repeat.

You would need an equal opposite fee on the USDN to Waves to offset the extra USDN.

Step 2: Exchange USDN - 3% for waves of equal value.

However if you kept the fee to minimum. Like just a half a percentage. It would allow arbs to keep peg while doing what you said. Even just half percentage is enough. A person would earn 5$ instantly for each 1,000 they put through. It doesn’t sound like much, but it’s instant.

As I explained in the chat, your arguments are wrong. But I think you don’t want to hear.

The first observation to do is, if there were demand for issuing more USDN, then why people don’t do it now? Why do you need to pay a subsidy for issuing? In order to issue USDN and not create an additional supply on market, you need additional demand for USDN. There is not. So, you will only create dump of the issued USDN on market, and then an extra depeg. That extra depeg will drive more burning back USDN->WAVES, neutralizing the effects.

Your comparison with USDC is absolutely flawed. Whether there is an excess or not is not a function of total issued. USDC access to much more markets than USDN, and it is used much more. So there is much more demand of USDC. Whether there is excess is not a function of total in circulation. It is a function of supply and demand. If you issue without additional demand, you will create an excess supply that will drive USDN price down.

So, tell me, what will you do to increase the demand of newly issued USDN in order to prevent sell and depeg, that will finally turn out on reburn what was just issued, and extraction back of collateral just added?

You cannot ignore market laws. And market laws, contrary than what you want to believe, are not a textbook theory. It is the opposite: textbook only tell us what we know from thousand of years of hard experience. So, you are not a rebel with new ideas, against a textbook theory. You are a naïve against thousands of years of hard experience.

You argue in circles, falsely assuming a depeg has to happen.
People fear USDN currently because it is insufficiently backed; restoring BR restores confidence and demand as mentioned repeatedly.
I “don’t want to hear” you because your arguments are weak.

You are the one arguing in circles. In first place because you are not explaining how to restore BR. You are only saying that your proposal will restore it, while I am explaining why it will not work: because any new issuing will be burned back.

So, again, tell me what will prevent burning back that will prevent BR to be restored. You seem to think that, once your proposal is in place, BR suddenly will be restored so people will not burn back. On the contrary, you need people not to burn back in order to restore BR!

Circling arguing.

dude… you just described what a ponzi is. a system that requires new investor money to get it in, in order to pay for the previous investors.

the system will only work if loss is recognized. which can be done by introducing fees when the reserve is low. to intentionally depeg the currency and let the people that want to take the least risk lose the most.

bankruptcy of the system has to be recognized. otherwise it’s trying to go deeper and deeper into the debt rabbit hole. bankruptcy isn’t the end. whatever you are suggesting is.

The idea, on the contrary, if you read carefully, is to protect the existing collateral and by this allow the depeg to increase, as stated in the conclusion.