Viewpoint: Waves is essentially an unsustainable Ponzi scheme

Author: 0xHamZ

Compiled by: The Way of the Metaverse

Today, DeFi researcher 0xHamZ shared his views on Waves on his personal social media platform. In his opinion, Waves is currently running an unsustainable Ponzi scheme, with the following reasons:

1. Waves borrows USDC and USDT stablecoins at an annualized interest rate of 35%, which are then used to purchase its own Waves tokens, thereby boosting its token price.

2. By collateralizing Waves tokens, Waves can mint more USDN, its native stablecoin.

3. By collateralizing USDN, Waves can borrow more USDC and USDT stablecoins from users.

4. To maintain system stability, this requires the market capitalization of WAVES to continue to grow, thus the key lies in attracting more people to deposit USDC and USDT stablecoins into its lending platform.

5. When it fails to attract enough USDC and USDT deposits, the WAVES token will lose its buying source, leading to a negative cycle. When the market capitalization of WAVES falls below the outstanding debt of USDN, USDN will face the risk of de-pegging.

Here are his views:

WAVES is the largest Ponzi scheme in the crypto space.

It borrows USDC at an annualized interest rate of 35%, which is then used to buy its own tokens, thereby boosting its token price.

To maintain system stability, this requires the market capitalization of WAVES to continue to grow.

The ultimate outcome for WAVES is collapse, and USDN will experience de-pegging.

WAVES is a layer 1 blockchain, and its primary use case currently is to mint USDN (the native stablecoin of the WAVES blockchain).

You can compare WAVE with LUNA/MKR, while USDN corresponds to UST/DAI.

The market capitalization of WAVES has grown sixfold in the past two months, with the initial catalyst being the narrative around "Russian Ethereum," and its performance has significantly outpaced ETH.

WAVES needs to expand its market capitalization so that it can issue more USDN. The health of the ecosystem is defined as WAVES market capitalization/USDN. This ratio indicates how much USDN the system can issue. We have seen that once the ratio reaches 2.5 times, the supply of USDN decreases, which is the minimum target.

Due to the price surge, WAVES has created more USDN issuance capacity. Assuming the target value is 2.5 times, WAVES can issue an additional 1.38 billion USDN.

The USDN yield at this target value will be 5.4%, while the supply interest rate for USDC/USDT on AAVE is 3.5%.

We have recently seen USDN being minted at the fastest rate in history.

In the past four weeks, the market capitalization of USDN has grown from $475 million to $875 million, an increase of 85%, while the market size of DAI has decreased during the same period.

Why would anyone want to hold USDN?

1. USDN is backed by WAVES.

2. The native staking rate of WAVES is 3.13%.

3. USDN yield = WAVES native staking rate (x) backing multiple.

4. Currently, the USDN yield is 3.31% * 6.60 x = 21.8%.

As more USDN is issued, this yield will decrease.

To keep the train on the tracks, the market capitalization of WAVES needs to maintain continuous growth.

Once the backing multiple starts to decline, the yield of USDN will decrease.

At a backing rate of 6.6 times, the yield of USDN is 21.8%, while when the backing rate drops to 2.5 times, the yield of USDN drops to 5.4%.

When the yield is low, there is a risk of capital flight.

Next, I will introduce how the WAVES team uses leverage to cope with large-scale supply shortages.

Here is the process:

1. Deposit USDN on the Vires protocol;

2. Borrow USDC on the Vires protocol;

3. Transfer the borrowed USDC to Binance;

4. Use USDC to purchase WAVES;

5. Convert WAVES to USDN;

6. Start over;

You can track these actions through on-chain data.

In simple terms, Vires is the AAVE equivalent on the WAVES public chain, currently managing 70% of the total USDN supply (over 600 million USDN).

It also allows for lending and borrowing of USDC/USDT. Currently, the USDC supply APY on the Vires platform is 30%, which exceeds any other yield protocol.

In the past two months, borrowing of USDC/USDT on the Vires protocol has gone crazy, with borrowing rates exceeding those of any other yield protocols on other chains.

So who is borrowing money? Why are they doing this?

WAVES has been borrowing USDC and USDT by collateralizing USDN. WAVES sends the borrowed USDC and USDT to Binance, then uses them to purchase WAVES. They then transfer the purchased WAVES to their own wallets to mint more USDN.

Then, they collateralize the minted USDN on Vires.Finance to borrow more USDC/USDT stablecoins.

Repeat the above process.

The problem is that WAVES must attract users to deposit USDC and USDT into the Vires protocol so that they can borrow these stablecoins through newly minted USDN.

This naturally requires them to offer rates higher than the market to incentivize people to deposit USDC and USDT into the Vires protocol.

The WAVES token has a supply of 100 million, of which 85% is staked, leaving only 16 million WAVES in circulation. Additionally, some holders may not sell, so we can assume that 10.5 million WAVES are tradable. When only 10.5% of the tokens are available for trading, the market becomes very easy to manipulate.

But to make this plan successful, you need to attract "puppets" to deposit their USDC into Vires.

Thus, the market capitalization of WAVES is limited by the USDC supply pool.

Once USDN reaches its target backing multiple, the issuance of USDN will ultimately come to a halt.

And once the target is reached, there will be no more WAVES buying plans.

The entire cycle will quickly perish.

If the price of WAVES drops to a sufficient level, the market capitalization of WAVES may fall below the outstanding USDN.

This means USDN will be insolvent and will de-peg.

If de-pegging of USDN really occurs, users who deposited USDC will face huge losses, which would be a disaster.

I call this plan a Ponzi scheme because the entire scheme relies on borrowed money for support.

The system itself has no organic vitality.

You only need to look at the recent transaction count on the Waves platform to know.

Every two days, between 10 PM and 12 AM Eastern Time, WAVES issues USDN, borrows USDC, and then uses it to buy WAVES.

This high trading volume/price trend is enticing day traders to enter momentum long positions.

And South Korean exchanges have been the largest venues for WAVES trading volume.

The Ponzi scheme continues.

Here is the on-chain data evidence:

1. Borrowing USDC/USDT

https://wavesexplorer.com/tx/32Ng2T4URX5GsZszGwq5nwFFtjB3NtFotDEJPfeyzYV8

https://wavesexplorer.com/tx/5A9PKtnvf2w6WdEWTfuNE1Waq6J8gwpEXGntAX7ZTqjJ

2. Transferring USDC/USDT to Ethereum

https://etherscan.io/tx/0xfff2bf6dd9ad3a222450bf211b6e8c30ca5cafe9361da74eeb5a52d6934cb7a4

3. Withdrawing WAVES from Binance to native WAVES wallet

https://wavesexplorer.com/tx/2GxRVurxUjUogb3aquzTbtNESdJkoucTYsKsy96D9vhH

4. Minting USDN

https://wavesexplorer.com/tx/8soLgy8838tJUncVWmARqe7Hm3rxsmTiZCQSZrvApxLH

5. Collateralizing USDN

https://wavesexplorer.com/address/3PJKKT7gsWiPBJj11gkF3Xv7gKt8s2WPdTr/tx