[Xangle Originals]
Written by Jehn, Do Dive
Translated by elcreto

WAVES has recently been hit by one of the most savage incidents in crypto history. What is the project’s position on this?

During our Xangle Analyst Call on Apr 7, we spoke with Max Pertsovskiy and Inal Kardan of the Waves Protocol Team and asked them about the recent Ponzi allegation that sent a shockwave across the crypto market. The allegation started when crypto influencer '0xhamZ' raised an accusation against the Waves team in his tweet. The project came out to clear the allegation, explaining that the issue the Twitter user raised with the platform was caused by an alleged weaker link manipulated by the whales, and the team was engaging the dapp governance process and making their best effort to come up with the solution. It also added that in the mid-to-long term, it would leverage its dapps to grow its ecosystem.

The following is an edited excerpt of the interview. You can find more details about this interview and Xangle analysis of the Waves project in our XCR (Xangle Credibility Rating) report soon to be released.

Analyst Call

Xangle: Please walk us through the current status of the project.

Waves: In Feb of this year, Waves started to draw a lot of attention in the market. Both daily users and transactions were on the rise, and the amount of assets deposited in the protocol (TVL) grew to a peak of $5billion. The team believes that this was driven by high stablecoin APYs on Vires Finance, the first lending protocol launched by Waves. The fact that Waves founder Sasha Ivanov was born in Ukraine might have had some kind of impact on such attention due to the ongoing conflict there, but most of those rumors the team believes are groundless. During this time, not only TVL but transactions and staking spiked on the Waves platform. This included transactions on the decentralized exchange (Waves Exchange), the lending protocol (Vires Finance), and algorithmic stablecoin protocol (Neutrino), all of which worked to drive up the price of WAVES.

Xangle: Could you give us your take on the recent developments surrounding 0xHamZ's tweet?

Waves: 0xHamZ called WAVES a Ponzi because he believed that WAVES was only used for minting USDN, which is a claim that lacks understanding of the protocol. The Waves project has been out there for as long as 6 years since its launch in 2016 and has secured various token utilities within the ecosystem.

0xHamZ identified and claimed that there was a 'whale' who was manipulating the market and that it was Waves founder Sasha. We can assure you Sasha does not engage in price manipulation of any kind he is purely focused on building a top blockchain ecosystem. These accusations were based on the assumption that the Waves ecosystem does not have a whale that can make such a move except the Waves founder, which is totally incorrect. We’ve confirmed that there are many 'whales' within the network. Waves is a decentralized blockchain ecosystem, there are thousands of daily active users all acting in their best interest at any one time, the theory there was one whale who was working to manipulate Waves price to the upside is possible, just as we also found evidence of whales working to manipulate price to the downside. This is not only possible on Waves, it is possible with any cryptocurrency even up to the level of Bitcoin, where it is well known ‘Whales” try to influence price by placing large buy/sell orders in order to influence a particular behavior. Investors are motivated to, and massively incentivized to build large positions and work towards protecting those positions in any way they can by gaining an edge on the market. This happens in traditional and regulated markets too, look at the LIBOR scandal where traders were found to be colluding to rig the interest rates of the world’s debt products. To point fingers at the entire protocol though and accuse a company founder that has been working for 6 years to build a blockchain ecosystem with many different utilities is an unfortunate sign of our times. These people are not elected, have no thought to due process or reviewing facts and yet they receive widespread coverage even influencing the partners that want to work with us. Unfortunately yes market manipulation is possible, but it is not a practice that is engaged in by any of the core team.

For the teams building on Waves, after seeing the evidence of market manipulation there is then an ethical question: Do we intervene in free markets to protect the community? Or do we let it go an allow manipulation to continue? These types of decisions are kind of like Facebook having to decide what content appears on its platform. While we are not responsible for the behavior of individual users on the platform, we do want to protect the whole from bad actors. As a team we decided we needed to protect the community so we proposed some solutions that we believed would limit market manipulation for the community to vote on. These were proposals that every holder of the Vires governance could vote on - we put it to the community to decide. In the end they chose to respect free markets above restricting market manipulation and voted down the first proposal. We understand their reasons and are working on new proposals that are not as severe in order to protect the community and adjust to the change in sentiment.

Xangle: Thanks for the detailed explanation. You’ve just mentioned earlier that Waves tokens will have more utility in addition to the minting of USDN. Isn’t minting of USDN the most used utility that has grabbed the market’s attention?

Waves: Yes, that’s right. We have Waves Exchange, which has a large base of users, along with various other token swap protocols, for which WAVES tokens are used for fee payment. Vires.Finance is probably familiar to you and an NFT game called Waves Ducks has more than 300,000 cumulative users as well as considerable daily active users. We have built this ecosystem for 6 years, and WAVES is the currency for all transactions within the ecosystem. As a layer 1 blockchain WAVES has an almost infinite number of use cases in DeFi, NFTs, Gaming, Metaverse, DAO and Web 3. Just like Avalanche, Solana and Ethereum.

While there are many utilities, it is true that the most utilization of Neutrino, the USDN minting protocol has grown the fastest recently. So it is only natural that USDN depeg was taken very seriously. Currently, USDN is used the most in Curve Finance, where users can perform arbitrage by way of Neutrino. Yet, Neutrino made it a policy to only allow arbitrage trading for those with its governance token NSBT. 0xHamZ’s tweet created a selling pressure and resulted in USDN depeg – one side of the Curve liquidity pool was drained of liquidity. And the NSBT policy meant that not enough people could arbitrage the inefficiency away, only widening the gap. Again we intervened to protect the community and created a governance proposal for community vote, that passed and reduced the amount of NSBT needed to arbitrage. We believe we’ll soon be able to restore the 1-to-1 peg with the U.S. dollar in a matter of a few days along with the natural flow of the market. In fact, we’ve already seen a little bit of recovery.

Xangle: Notably, Vires.Finance offers a very high APY (currently over 100%) for USDT and USDC deposits. Is there a specific reason?

Waves: The drivers behind Vires.Finance’s high APY are supply and demand. In other words, Vires.Finance’s yield is determined by the dynamic between supply and demand. The yield currently stands at such an exorbitant level because the protocol has borrowed all the loanable amounts of USDT and USDC, making lending impossible and generating excess demand. I believe 0xHamZ’s tweet has caused a repercussion. As I said, there are people who hold a long or short position in Waves, each claiming to have logical grounds to take that position. It seems to me that the recent attention and support are disproportionately skewed towards only one side of the arguments.

Xangle: Right. Does the Waves team have a plan to step up its response in the near term?

Waves: We have no intention of gearing our actions directly towards boosting the price of WAVES. Price is what the market determines, and WAVES will get back to fair value eventually over time. And each protocol team is already putting their governance processes in place to take measures. Currently, a proposal on Vires.Finance is seeking to adjust its high yield, yet we are not sure if it could actually pass. There are a couple of other proposals on Neutrino directly addressing this issue. One of them proposed radical easing of USDN’s daily maximum supply assigned to NSBT stakers, and the governance swiftly passed the proposal. The other proposal is seeking to allow arbitrage trading for non-NSBT holders but the suggestion is not considered a priority and highly unlikely to pass since the proposal may strip NSBT holders of their merits. Other discussions include creation of a fund comprised of Bitcoin or other blue-chip coins with strong growth potential over the mid-to-long run to enhance stability of USDN as in the case of UST-LUNA. These efforts illustrate our determination to tackle such challenge at play. So to answer your question we are actively engaging with the community using our decentralized governance process to find win-win solutions with the community. The Waves team is working closely with these protocols and, we do have such confidence in the market that it is bound to move towards the fair value in the most efficient manner over time.

Xangle: To sum up, the fundamental causes behind this issue seem to be: i) a part of the on-chain mechanism manipulated by the whales; ii) DeFi investment strategies that fueled price volatility; and iii) greater volatility intensified by crypto influencers.

If each protocol is proactively engaging in its governance process to come up with solutions and if WAVES eventually finds its way to fair value, Waves team’s mid-to-long term plan will surely be of greater importance. Do you have plans other than the roadmap unveiled?

Waves: Vires.Finance has contributed the most to the protocol's TVL growth, but we see it as unlikely that it can continue to keep its APY high. Although it is entirely up to Vires.Finance‘s governance, we will prioritize technological advances and broader use cases of Vires.Finance and USDN as they are at the core of the Waves ecosystem.

As much as we are aware that the USDN depeg has had an impact on the credibility of our protocol, we are seriously considering partnership as well as technological improvements for the coming years to grow our liquidity and use cases.

For better or worse, the recent developments have brought Waves and USDN to the spotlight, and we’re planning to leverage this as momentum. Waves has been in operation for many years, and our financial stability is strong. We set up Waves Labs in the U.S. as a base for expansion at the beginning of the year and will start offering incubation programs for dapps. Since already, some of the dapps that have gone live are run in close cooperation with the Waves team, we have great expectation for the expansion of our ecosystem. This year, we have many more on the table, including partnering with VCs, so please keep watching.

Xangle Analyst's View

The Waves team confirmed that a part of its on-chain mechanism manipulated by the whales had led to the recent USDN depeg and radical price swing of WAVES, and that the artificial price manipulation led by the Wave team was an unfounded rumor. Throughout the analyst call, the Wave team came forward with a strong commitment to clarifying the allegations, and their passion for the project and commitment to growth were evident.

Still, there seems to be some possibility that the attack might have become even more extreme and brutal because the project somewhat lacked community management and marketing support as it does not have much connection with VCs or high-profile crypto figures (since Waves has never raised venture capital funding).