Statement in full: NEAR Foundation to fund USN Protection Programme – NEAR Protocol

Statement in full: NEAR Foundation to fund USN Protection Programme

October 24, 2022

The NEAR ecosystem has always been at the cutting edge of innovation – many projects building on the NEAR blockchain are pushing boundaries – creating new value and experiences for users, and radically redefining how traditional markets and processes operate. The road of innovation is one of constant learning, evolution, and sometimes challenges that need the community to rally together in support of our shared goals and values to find a clear path forward. 

Decentral Bank and USN

USN, a NEAR-native stablecoin, was created and launched by Decentral Bank (DCB) on 25th April 2022 (v1). This is an independently operated community run project which had no direct financial assistance from the NEAR Foundation. 

In June 2022, DCB upgraded the algorithmic USN (v1) to a new non-algorithmic version (v2) due to the potential risks, including undercollateralisation, inherent in algorithmic stablecoins. DCB has confirmed that USN v2 is a non-algorithmic and fully 1:1 USDT-backed version. This can be seen and verified within the smart contract code from DCB.  

DCB recently contacted the NEAR Foundation to advise it that USN had become undercollateralised due to it originally being an algorithmic stablecoin (v1) susceptible to undercollateralisation during extreme market conditions. DCB has also confirmed that there was some double-minting of USN, associated with the v1 algorithm, which contributed to the undercollateralisation. 

The known collateral gap is $40m USD and cannot expand further assuming DCB burns/destroys all the double-minted USN and promptly winds down the project in an orderly manner. This gap is not related to the value of the $NEAR token (and USN has never had any burn/mint relationship to $NEAR).

On this basis, the NEAR Foundation believes the collateral gap to be contained.

The USN Protection Programme

Stablecoins in general have faced many headwinds over the last few months with increased regulatory focus, and changes in market perception from recent high profile incidents. Although this situation is fundamentally different to other incidents (as USN never had a hardcoded burn/mint relationship to $NEAR), the headwinds still remain. 

Given the issues described above, the NEAR Foundation is recommending that USN should wind down. The Foundation encourages DCB to do this at the earliest opportunity in a responsible and professional manner that protects all of its users.

The NEAR Foundation’s purpose is to support the NEAR ecosystem and its users. In order to safeguard users and to facilitate the orderly winding down of USN by DCB, the NEAR Foundation has elected to set aside $40m USD in fiat (equal to the known collateral gap as described above), to be made available via a grant for the creation of a USN Protection Programme. The NEAR Foundation has already provided this grant to a subsidiary of Aurora Labs, – one of the NEAR ecosystem’s most prominent contributors – to set up the USN Protection Programme which is now live on Aurora Labs’s website. 

As conditions of the grant, Aurora Labs have agreed that the USN Protection Programme will operate with the sole purpose of making users whole and will be subject to various conditions including KYC/AML, sanctions checks and certain geographic restrictions. In order to prevent abuse of the Programme, only legitimately minted USN in existence immediately prior to the time of this announcement will be eligible (a snapshot). The USN Protection Programme is live and redemptions will begin once the USN smart contract has stopped minting and the double-minted USN has been burnt. The DCB team and their affiliates will not be eligible to participate in the Programme. 

With the USN Protection Programme, NEAR Foundation understands that USN is now overcollateralised, as there is also approximately 5.7m $NEAR in the DCB treasury which the Foundation expects DCB to donate to the NEAR community.

Given that the undercollateralisation gap is contained, based on the information and assumptions set out above, the Foundation are confident that this action best safeguards users and the wider NEAR ecosystem.

A look ahead to the future

The NEAR Foundation is confident that as the ecosystem grows and matures, this type of intervention should not be required in the future. 

Moving forward, the NEAR Foundation will be working with the NDC and wider community to set up a funded initiative with the remit of developing robust community standards & guardrails, in particular in relation to stablecoins, to help ensure that users are protected in situations of rapid innovation, and evolving markets and regulations.

Note: Nothing in this statement is intended to be, and is not, an offer or sale of any tokens or securities. Certain persons, including US persons, as defined in Regulation S under the US Securities Act will not be eligible to participate in the USN Protection Programme.

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