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To the Haven Protocol community:
Satoshi himself said that an algorithmic stablecoin (ASC) is the holy grail of crypto. So it should surprise no one that they are an extremely challenging project.
Luna/UST is not the first ASC to collapse and possibly not the last. However, it has been the most spectacular. The dust is still settling and we do not yet know the full details, but we want to reassure the Haven community about our mission.
The situation with Luna is a tragedy and we feel a deep pain for everyone who is suffering. It is one thing to lose money in a speculative asset but another thing entirely to lose what you thought to be protected in an ASC. Hopefully, UST can redeem itself and regain its peg.
However, if crypto is to succeed in changing the world, the market has to be ruthless in dealing with weakness because eventually, someone will. The brutal truth about Luna is that it grew before it was ready. A “risk-free” 20% APY on staked UST built a bonfire of gigantic proportions. All it took was a wider market collapse to light the match.
Luna/UST employed a burn and mint protocol similar to Haven. TL;DR: One asset is destroyed to mint the equivalent amount of the other asset, resulting in an elastic supply. However, there are some key differences that we want to reassure you over:
- Haven does not offer magical risk free APY. A perpetual motion machine is impossible and bound to fail eventually.
- Haven’s on-chain conversions are not arbitrarily capped so users are always incentivised and able to arb xUSD back to $1.
- Haven utilises long conversion lock times to protect the network. This means that the supply of xUSD can take up to 3 weeks to replenish.
- The price used for a conversion is the least favourable of a 24hr MA and the spot price. This prevents price manipulation without the benefit of being able to see into the past.
- Haven decided against implementing loans and liquidation systems into the mechanism. These are in large part responsible for deleveraging the Luna price. This mechanism does not exist on Haven.
We can see clearly that there is a second mover advantage here. Haven can learn from the mistakes made by Terra, and not repeat them. That being said, the Haven system is not that big and advanced yet, and we will improve on their systems to not suffer their failures.
In our recent tokenomics discussions, we recognised that we cannot control the market price for xUSD and to attempt to do so is futile and dangerous. 1 xUSD will always be redeemable on-chain for $1 worth of XHV. By collateralising a stablecoin with a non-stable asset that they would dump on the market to protect the peg, Luna provided a guaranteed bid for anyone wanting to exit the system. This had everyone running for the exit and they did not have enough money for everyone.
As more details come to light, we will fully analyse the situation, challenge our assumptions, and keep building towards the future. We will provide a longer write-up in the near future.
We believe that the world needs a private, decentralised stablecoin and we are fully committed to this mission. The alternative is trusting surveillance blockchain dollars in a bank. This is antithetical to freedom, particularly in a world where the surveillance net is drawing tighter.
We recognise that this is not a quick nor easy journey and we will not rush this. We are grateful for your support.