In an effort to prevent another stablecoin collapse and crypto contagion, the NEAR Foundation is taking measures to support holders of USN.
On Oct. 24, the NEAR Foundation announced that it had set aside $40 million for a ‘USN Protection Programme’ grant.
The fund is designed to protect USN holders and users by ensuring they can redeem the stablecoin on a 1:1 basis with USDT.e.
The move follows a separate announcement on Oct. 24 by Decentral Bank (DCB) that it was winding down the independent stablecoin, USN, based on the NEAR blockchain.
Under-collateralized stablecoin scrapped
USN is an algorithmic stablecoin soft-pegged to the dollar backed by a reserve fund that contains NEAR and USDT. Remarkably, USN has maintained its peg, only dropping slightly over the past couple of days.
DCB, which launched the stablecoin in April as the first one for the NEAR ecosystem, said that the under-collateralization risk materialized in the first half of 2022. It resulted in a collateral gap of around $10 million which has grown to a shortfall of $21 million presently.
It stated that the stablecoin had faced many issues over the past few months due to changes in market perception from recent high-profile incidents, adding:
“As a result of these issues, we have taken the difficult decision to wind down the USN project in a controlled and responsible manner in a way that ensures USN holders are protected.”
The NEAR Foundation responded quickly to prevent panic and the collapse of its own native token as users feared another LUNA moment. It found that the algorithmic mechanisms failed “during extreme market conditions,” which resulted in the collateralization shortfall.
It added that the $40 million gap is fixed and not linked to the NEAR token price in any way. This is because it has never had a hardcoded burn or mint relationship to USN.
Security firm PeckShield observed that the total value locked in NEAR has tanked since DCB withdrew its liquidity. DeFiLlama is currently reporting a 45% slump in TVL over the past 24 hours to $136 million.
NEAR token unaffected
Despite the outflow of collateral from the ecosystem, the native token has weathered the storm so far. NEAR was trading up 2% on the day at $2.98 at the time of press.
However, the bears sunk their teeth into NEAR in this downturn. It is currently down 85% from its January all-time high of $20.44.
NEAR is a proof-of-stake layer-1 blockchain touting high throughput from its sharding system.