Market Volatility: After Action Report – Haven Protocol XHV

Introduction

Bitcoin’s volatility and price crash during April and May 2021 provided Haven’s team and community the first opportunity to analyze how Haven performed during a significant market correction.

The lessons learned for our team? Protocol performance has been nearly flawless, circulating supply of XHV is fluctuating as expected, and the tools put in place to prevent extreme supply swings are working.

As you may know from Haven’s whitepaper, the circulating supply of XHV is now dynamic, fluctuating based on the minting and burning of xUSD during different market cycles:

“XHV is a pure Proof-of-Work (PoW) coin with the same emission curve as Monero, it has an initial minable supply of 18.4 million and a small tail emission once those 18.4 million coins have been mined.

This is a standard, well understood supply scenario in the cryptocurrency market. Now that Haven’s offshore storage feature is live on mainnet, the above figures continue to apply to mining rewards, but no longer define the actual circulating supply of XHV since mint and burn will alter this dynamically.”

The whitepaper also contemplates and models how the dynamic supply of XHV will perform during different bull and bear markets:

“To understand the potential future supply of XHV and the effect of that supply on the Haven ecosystem, the following high-level macro scenarios are presented: 1) Expansion in XHV Supply; 2) Contraction in XHV supply; 3) Equilibrium in XHV supply.”

These models demonstrated the team’s expectation that as xUSD and xAssets are used over longer periods of time, the dynamic circulating supply of XHV will fluctuate between deflation and inflation. And that’s just what we’ve witnessed over the last 10 months.

xUSD in a bull market

Since its launch on July 20, 2020, Haven’s private algorithmic stablecoin xUSD was used during what has largely been a bull market for Bitcoin, crypto alts, and Haven (XHV). In this time, the price of XHV rose from around $2 to its high of $30 on April 14, 2021, while Bitcoin rose from $9,200 to $64,800.

The use of xUSD grew substantially during this time. Over 5,900 XHV <-> xUSD conversions resulted in $158 million in transaction volume, all within the private vaults of Haven users. During this time, the supply of XHV was slowly deflated as xUSD was minted and XHV price continued to rise.

On September 17, 2020, Haven launched xAU (Gold), xAG (Silver), xEUR and xCNY. And on May 4, 2021, Haven launched xAUD, xCHF, xGBP, xJPY, and xBTC. The volume of Haven Vault transactions with these new private assets has now exceeded $24 million.

Spring 2021 crypto correction

Beginning in mid-April, Bitcoin and crypto markets began a steep correction that resulted in a mini-bear market for Haven and other alt coins. The price of XHV dropped from its high of $30 to a low of $4.74 (-84%) on May 23, 2021, with Bitcoin dropping from its high of $64,800 to a low of $30,000 (-53%) on May 19, 2021.

On May 19, 2021 the circulating supply of xUSD reached a high of 25,293,492, while the circulating supply of XHV was reduced to 13,443,061. This was the result of many Haven users burning XHV to mint xUSD and protect the USD value of their holdings during the market downturn. This activity resulted in a 9.5% deflation of XHV supply (based on XHV emissions on May 19).

As the price of Bitcoin and XHV began to bottom out after the correction, users began burning xUSD and minting XHV. On May 28, the circulating supply of Haven reached a high of 15,066,341. This activity resulted in a 1.1% inflation of XHV supply (based on XHV emissions on May 28).

As of today (June 2, 2021), the circulating supply of xUSD is 14,309,929 and the circulating supply of XHV is 14,738,551. This represents a 1.2% deflation in XHV supply (based on XHV emissions to date).

Another metric that can help measure estimated deflation or inflation of XHV supply is the “maximum XHV” supply that could be minted today. If all xUSD and xAssets were immediately converted back to XHV today, the circulating supply of XHV would increase to 16,875,804. This would result in a 13.1% inflation in XHV supply based XHV emissions to date. This metric is not precise, as it doesn’t account for different lock periods for xUSD and xAsset conversions, but it is helpful in assessing extreme XHV inflation scenarios.

Lessons learned

We’ve learned some valuable lessons from observing the market activity and use of Haven’s protocol over the last few months:

Protocol performance has been nearly flawless. There was no down time or outages in Haven Vaults. xUSD and xAsset conversions were executed regardless of market volatility or conditions. And $1 worth of XHV was always redeemable for 1 xUSD. This is a testament to Haven’s battle tested protocol which continues to grow stronger every day.

The circulating supply of XHV is fluctuating as expected. During the run up to ATHs in Bitcoin and Haven prices, and immediately after, the use of xUSD resulted in deflation of the circulating supply of XHV. As Bitcoin and Haven prices experienced deep corrections, -53% and -84% respectively, the use of xUSD resulted in inflation of the circulating supply of XHV.

Both deflation and inflation of XHV supply is occuring based on broader market conditions. This is expected and natural, and neither scenario is better or worse for Haven over the long term.

The measures in place to prevent extreme inflationary/deflationary XHV swings are working. We can’t control the timing of bull and bear markets or black swan events. But the tools Haven has put in place – including xUSD time locks, moving averages for conversions, visible circulating supplies, and the xAsset ecosystem – are working to prevent extreme swings in XHV circulating supply.

An assessment of volatile xAssets. During Bitcoin’s most volatile periods, some traders attempted to take advantage of a pricing lag used for xBTC conversions. The 0.3% fee and 20 minute lock time for xBTC conversions did not mitigate this issue as expected. The team responded by modifying the xBTC conversion price to reflect a one hour moving average, rather than spot price, as reported by ChainLink. This has mitigated some opportunities to arbitrage the xBTC pricing lag, but not all. We are monitoring this closely and are ready to implement additional protections, such as longer lock periods and higher fees, if needed for xBTC and future volatile xAssets.

You can track the circulating supply of XHV, xUSD and xAssets via Haven’s block explorer. You can also review more detailed XHV/xUSD metrics on Haven’s network page.

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