As one of the more prominent networks, the NEAR protocol is a building block for many blockchain ecosystems.
One of these is USN, a stablecoin built on top of NEAR in April and run independently by Decentral bank. In an effort to prevent a catastrophic collapse mirroring that of Terra earlier this year, Decentral Bank implemented safeguards that would sound the alarm should there be a danger of undercollateralization.
Protection Program Activated
Unfortunately, the alarm was sounded on the 24th of October, warning devs that approximately 40 million USN were currently in circulation without being backed by funds held in USN vaults. Early warning signs were visible as far back as spring but were reportedly not strong enough to warrant the decisive action taken now.
“In spring 2022, risk of undercollateralization did in fact materialize, resulting in a collateral gap or shortfall of approximately $10M growing to $21M as of now, considering that ~5M NEAR were left in the reserves and kept falling in price.”
In response to a recent issue with USN, the @NEARFoundation is funding a protection Programme to safeguard USN holders.
More details below 👇https://t.co/NDMZUO2Wim
— NEAR Protocol | Create Without Limits (@NEARProtocol) October 24, 2022
As a result, the team at the NEAR Foundation decided to implement a protection program to save the stablecoin and protect consumers from the fallout.
It consists of a cash injection to bring the stablecoin back to full collateralization and is funded by a $40 million grant by the NEAR Foundation to White Knight Protection, a subsidiary of Aurora Labs.
The funds will be granted in order to provide transparency to the situation, which would be hard to offer if they were provided directly to Decentral Bank.
Minting of USN Halted Until Further Notice
The funds granted through the protection program will only be transferred once rigorous KYC and AML measures have been taken to ensure the legitimacy of the final recipient. Additionally, Aurora Labs have committed to only using the funds in order to make users whole. Minting new USN has been halted, and only claims for burned USN minted before the announcement will be taken into consideration.
For the moment, it is uncertain when the minting of the stablecoin will resume. However, the team at the NEAR Foundation is optimistic about the future of the project and believes a similar intervention will not be necessary for the future.
Although this sort of intervention should not have been necessary in the first place, let alone in the future, the choice to halt minting in order to protect end users instead of trying to fix things on the go is a respectable one that, in all likelihood, prevented another complete meltdown like that of Terra Labs.