The recent events around Gemini and GUSD is a good opportunity to discuss the infrastructure that would allow the Gearbox community to promptly react to deppeging events.
We first give an overview on the recent news about GUSD, then discuss how it can be monitored, and mechanisms that allow for prompt responses.
Recent events
Gemini dollar (GUSD) is issued by Gemini, a New York trust company regulated by the New York State Department of Financial Services.
Last weeks there were 2 events the raised some concerns on its stability:
- Genesis trading filed for a bankruptcy, and reported that Gemini is its biggest creditor, with over $600m exposure.
- MakerDAO had a very tight community vote to off-board GUSD from its system. Had the vote passed, it would result in a massive redemption of $0.5b of GUSD.
While these news are somewhat alarming, the insolvency of Genesis, and the exposure of Gemini were already known. Further Gemini CEO repeated his early statements about the segregation between Genesis trade, and the Gemini company (and GUSD, which, according to his words, is not a property of the company).
Further, even a minimal decrease of the GUSD liquidation threshold in Gearbox would have result in liquidations of over $3m.
Hence, during this period of time, the RiskDAO did not issue a strong recommendation to take any actions. However, the situation is on-going, and it is a good opportunity to discuss on the infrastructure that would allow the Gearbox community.
How to monitor stable coins
The DeFi stable market (including custodial coins like USDC, USDT and GUSD) is dominated by Curve finance price formula. While these coins are also traded on centeralized exchanges and on uniswap v3, it is eventually the passive curve liquidity that dictates the price (as opposed to the active binance and uniswap v3 liquidity).
Further, curve formula is asymmetric, so when the price pegs away from 1, the effective liquidity is getting smaller, which in turns, contribute more to the future deppeg.
The graph below shows the USDC/UST liquidity changes that led to the eventual deppeg.
The timelines are in millions of blocks.
Other than dex liquidity, we also measure the backing of the entire coin, however this is relevant only for decenteralized stables such as LUSD and sUSD.
Finally, like for all other assets, we also check for open liquidations and big accounts.
However, our system is not real time, and parts of these checks are only executed daily.
A more robust backend can be built that would track, in a real time manner:
- DEX liquidity - with focus in uni v3 and curve.
- Decenteralized stable backing.
- Open liquidations.
- Big accounts.
We note that (1) would naturally also alert when the price deppegs, as a sharp liquidity drop would precedes it.
Our code is open source with an MIT license, and we would be happy to provide it to gearbox backend team as a reference and use.
Further, it is also important to monitor crypto news and twitter. We are investigating an automatic system for it, but currently it is at a very experimental phase.
How to react
Currently the only allowed promptly reaction is to freeze the operation of the contracts.’
This makes sense in catastrophic events, such as chainlink oracle errors.
A more standard response to an increase of risk is to:
- Reduce the liquidation threshold; and/or
- Decrease the total collateral cap for this asset (will be supported only in v2.1)
The daily stress tests we run are trying to predict the behaviour also under tougher market conditions, but of course cannot fully model the likelihood for big accounts or to concerning market news.
One way to improve the response time is for the community to nominate a multisig with a clear mandate to promptly react to new events.
The on-going events around GUSD makes this discussion not only theoretical.
I think the discussion should focus on 3 possible actions:
- Do nothing
- Have a multisig with a clear mandate to act quickly for a given objective/measurable metrics (e.g., dex liquidity change). And RiskDAO can work on accurately defining these metrics.
- Have a multisig with a mandate to work also based on fud and news. This is somewhat of a slippery slope, but the current GUSD events are a good example for how an action might be needed, despite the fact that nothing tangible happened.