The stablecoin ecosystem was severely tested over the past weekend. What started with a USDC depegging event related to the Silicon Valley Bank collapse quickly spread to other stablecoins including DAI, FRAX, MAI, and BOB. Like many of these tokens, BOB was impacted by market forces responding to risks associated with underlying collateral.
Fortunately, stablecoins throughout the ecosystem have re-pegged, largely due to actions taken by the US federal government to ensure depositors (Circle/USDC) will receive all of their funds from the failed bank. While this is welcome news in this situation, the BOB protocol cannot rely on future government interventions as a way to maintain a stable peg. Below is an explanation of the timeline of events, how these events impacted BOB, and plans to improve BOB stability mechanisms to better handle future challenges.
March 10, 2023
Silicon Valley Bank (SVB) failure. SVB was unable to meet all withdrawal requests. Approximately $3.3 billion, which accounts for 8% of the total reserve backing USDC, could not be withdrawn at the time.
USDC was depegged from the dollar, reaching a low of $0.88. Many other stablecoins including BOB followed suit as they had exposure to USDC as a source of collateralization or were impacted by the general market fallout.
March 11, 2023
Protocols and projects responded to the situation. Coinbase announced they were suspending USDC conversions during the weekend. Aave DAO analyzed and froze some stablecoin positions, MakerDAO introduced an emergency proposal to limit exposure to potentially impaired stablecoins.
March 12, 2023
Stablecoins including BOB began a recovery towards the dollar peg as the US government and others announced 100% of deposits in SVB would be redeemable and available on Monday.
March 13, 2023
USDC reserve risk was removed and Circle announced partnerships with new banking partners for minting and redemption. Stablecoins impacted by the events returned to their approximate pegged positions.
While there are BUSD/BOB and USDT/BOB inventory pools, the majority of BOB pairings contain USDC as a mechanism to maintain the peg. Most inventory pairs hold BOB/USDC, and when USDC lost its peg, BOB pricing followed relative to the price of USDC. The mechanism worked as expected; unfortunately, too much reliance on USDC for stability resulted in BOB also losing its 1:1 stability with the US dollar.
The flawed assumption in this model is that USDC will maintain its peg to the dollar. Unfortunately, this is no longer an appropriate assumption. Due to the fact that a majority of the BOB inventory is held in DEXs such as Uniswap, Quickswap, and Kyberswap, the protocol had little control over any parameters that could have been tuned to manage stability fluctuations. Despite the market turmoil, it is worth mentioning that the zkBob application was unaffected by price volatility and users were able to make transfers, and complete deposits and withdrawals throughout the weekend.
In light of these events, BOB protocol is exploring ways to add additional tuning features and lessen reliance on DEX-based inventory pools to maintain stability.
The BOB protocol will work on multiple levels to avoid future deviations from a stable peg. Items being explored include:
Inventory positions deferral. Additional inventory positions to DEXs will be paused for the time being. Inventory pools have been used as a primary pegging mechanism for BOB and this does not work in the context of a mass depegging event. Since stablecoins have returned to their pegs, no assets will be moved manually. Assets should continue to migrate organically as current inventory pools become collateralized (with 50/50 utilization) over time. Peg mechanisms can then be widened in these pools and collateral can be gradually moved to BobSwap.
BobSwap utilization. BobSwap is a headless, stable automated market maker (AMM) currently deployed within the 1inch environment. BobSwap contains a peg stability module (PSM) where stables can be traded 1:1 for BOB. The current design needs to be improved (see 3 below), however with these improvements BobSwap will be more resilient to volatility risks. Currently, BobSwap does not hold a majority of BOB, but liquidity from inventory continues to move in this direction, and the process can be expedited if needed. BobSwap offers more parameters to help maintain BOB stability. Plans also include adding additional aggregator environments in the future.
BobSwap parameter updates. BobSwap contracts are upgradeable and new features designed to mitigate risks will be explored. This may include enabling additional fees and introducing pricing limits and/or circuit breakers to make swaps expensive or unattractive in times of extreme volatility. Research will continue in these areas along with learnings from other stablecoin protocols to introduce new mechanisms and best practices into BobSwap.
Dynamic pricing accommodations: Rather than depending on 1:1 parity with USDC for BOB pricing, oracles can provide dynamic pricing algorithms when stable prices are not equal between pairs. This model will be explored to help protect the BOB peg if the asset with which it is paired suddenly gains or loses value.
Continued security focus. The protocol is committed to conducting additional security audits to maintain integrity. In the context of the current events, the depegging and repegging were not a result of any exploits or bugs within the Bob protocol. All necessary steps, including prudent security audits, will continue to ensure the BOB protocol is sound and all updates are completed in a responsible and secure manner.
This unprecedented depegging event was a wake-up call for the stablecoin ecosystem. Luckily, impacted stablecoins have mostly returned to their pegs and the "collateral damage” has been contained. Once again, a reliance on a singular entity (in this case USDC which was relying on SVB) resulted in a point of failure. The lesson of centralized failure continues to be taught. However, it has yet to be fully learned, and the results from the next depegging event could be even more severe.
The BOB protocol is taking measures to improve the protocol and reduce the impact of these events in the future. The BOB community is vitally important and your comments and input are welcome on Telegram/Twitter around this event including ideas you’d like to see implemented. BOB is built to support responsible, stable transactions for everyday users, and the protocol will continue to learn from these events, proactively address problems, and make ongoing improvements to the ecosystem.