Stablecoins, or cryptocurrencies that attempt to maintain the same exchange value with other currencies, have one job: to remain stable. Neutrino USD, also called USDN, failed at that. Recently, the stablecoin plummeted over 20% from its target value of $1, after allegations of price manipulation rocked the blockchain protocol, Waves, upon which the coin relies.

However, the story doesn’t end there. Over the past few days, the stablecoin has surged, and now its market cap is higher than it was before the crash. The rollercoaster ride isn’t what investors are typically looking for when they turn to stablecoins — which are designed to be less volatile than other forms of cryptocurrency. Investors are now left with a quandry: Should they keep pouring money into a coin that failed at its core task? The issues may be more complicated than they seem.

The blockchain Waves has earned the nickname of “Russia’s Ethereum,” and its native stablecoin, Neutrino, is currently the seventh-largest stablecoin by market cap according to CoinMarketCap

How Russia’s invasion of Ukraine affected Neutrino

In order to comprehend why crashed, it's important to understand the relationship between Waves and Neutrino . Similar to other popular blockchains like Terra’s Luna and UST, Waves and Neutrino  have an inverse relationship, which is meant to control Neutrino’s price. Users are able to generate Neutrino tokens by depositing Waves as collateral at a 1:1 ratio. Then, users can swap between the currencies, taking advantage of small arbitrage opportunities and thus stabilizing the price.

Waves in the past few months saw an explosion of growth compared with Ethereum and Bitcoin and their associated blockchain protocols.Ethereum and Bitcoin are the two largest cryptocurrencies by market cap.

This explosion of interest in Waves was explained by some analysts as a reaction to Russia’s invasion of Ukraine, and the subsequent economic sanctions placed on Russia’s traditional finance assets. Waves is a public blockchain, but has had collaborations with major Russian entities like Rostec, a state-owned defense conglomerate, and Alfa Bank, the largest private bank in Russia. Though the founder, Alexandr “Sasha” Ivanov claims Ukrainian identity, crypto analysts predicted that Russian money might flow into Waves in order to evade traditional sanctions. 

Why Waves was rocked by fraud claims

There are benefits to holding USDN, as well. Stablecoins are popular in DeFi for granting significant APY yields through staking, a protocol in which cryptocurrencies are locked up in order to run or stabilize a blockchain. Waves estimates the annual APY from staking USDN at 12-15% on one section of its website, but its interactive tool currently shows a much more modest projected return of 6.1%. 

While money flowing into the Waves ecosystem helps its stablecoin maintain its price target, sudden drops in the value of Waves can destabilize the whole system. On March 31, pseudonymous crypto analyst 0xHamZ alleged that Waves is the “biggest ponzi in crypto” and that its founders engaged in a complicated scheme of borrowing and swapping cryptocurrencies in order to artificially inflate the perceived demand for its cryptocurrency. 

Ivanov, in response, countered by accusing Alameda Research, the boutique investment firm founded by FTX CEO Sam Bankman-Fried, of manipulating the price itself in order to profit from a short position, and that 0xHamZ’s post was promoted by bot accounts. Bankman-Fried called this allegation an “obv[ious] bullshit conspiracy theory.” On April 3rd, Ivanov announced his support for a governance proposal that would effectively force Waves short-sellers to buy the token back.

The vote was defeated by a vote of 54,300 against to 35,100 in favor, but the reputational damage was seemingly done. Starting on April 3rd, the price of Waves crashed from its opening of $48.77 to close at $22.11 yesterday. This precipitous decline in turn destabilized the USDN stablecoin, causing the intense downward spike shown above. While USDN has recovered much of its value after the crash, currently hovering between $0.96 and $0.98, the price and market cap of Waves continues to fall from its record highs. 

Implications for the future of stablecoins 

Though the Neutrino stablecoin once again appears to be stable, a continuous drop in the value of Waves could spell doom for both coins, given their fates are intertwined. While the circumstances leading to this crash are specific to the Waves ecosystem, this incident may illustrate systemic risk for other algorithmic stablecoins — the fourth- and fifth-largest stablecoins by market cap, TerraUSD and Dai, both function in similar ways as Waves and Neutrino.

Tether, the largest stablecoin by market cap, isn’t algorithmic; it claims to be backed up by real assets, but those assertions have been repeatedly called into question. With stablecoins seen as an essential part of DeFi’s future, these incidents may present major obstacles for earning the trust of investors.

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