TL;DR – Vault users suffered a loss of funds last week when UST depegged; some community members shared different considerations on potential distributions to Vault users. These considerations are summarised below for broader community input that will be incorporated to draft a vote proposal. Please share your views as a DAO member or Vault user during the next 4 days!
Background
This part has been covered in the recent community call you can find here.
- Gro Protocol was impacted by the recent depegging of the UST stablecoin, the third largest stablecoin by market cap. One of four strategies was exposed to UST through Curve on Ethereum, resulting in a partial loss of funds for Vault users.
- PWRD users were shielded from the UST depeg as Vault protected PWRD. As the leveraged product, Vault took a larger share of total protocol losses since it also took on the loss of PWRD.
- Vault withdrawal was not available at times when the PWRD protection utilisation ratio capped out or when the safety checks on stablecoin prices did not pass when Curve and Chainlink feed diverged. This was the same for Argent zkSync users as there is a process to bridge funds from L1 to L2 which was impacted by the same factors above.
- Gro protocol is built to be a permissionless protocol that lets users make their own decisions on entering a portfolio of stable strategies. In our community and in the core team, there were both users who believed that UST would recover and those that believed it would fail. As a core team we did not want to make a centralised decision / bet on their behalf. That was why our initial focus was on enabling users to make their own decisions and working around the various safety measures that were preventing withdrawals.
- As the situation worsened, it became clear that the community was no longer divided and rather that UST was a broken strategy. At that time, we pivoted our efforts towards manually exiting the collective exposure of Vault to UST. We regret that we didn’t have the foresight to establish an automated stop-loss mechanism instead of a manual assessment. We are also reflecting on whether it is feasible to pursue higher risk strategies in a completely trustless or decentralised setup.
Impact to users
- We’re working with the Argent team to collect and process user data on mainnet and zkSync, making sure we include all users affected by the UST depegging regardless of which networks you use or whether your Vault tokens were staked.
- Preliminary analysis shows that ~3,600 Vault users were impacted; the vast majority of users had less than 10 GVT tokens (~$1,750) before UST depegging last week.
- Vault users as a whole took a ~45% loss in funds, although this varied depending on the price of Vault at the time of exit; PWRD users did not suffer any loss.
- A more detailed breakdown will be available once the data collection and processing effort is completed.
Rationale for distributions to Vault users
- Vault is a leveraged product and is designed to protect PWRD in return for higher yield. In offering the protection, Vault takes on a larger share of losses when one of the underlying yield strategies fails.
- Strategies and exposure levels have been displayed on the Gro dApp together with leverage levels (utilisation ratio), so that all users could track how yields are generated and the risks involved at any time.
- Stop-loss was not built into the protocol, but in hindsight this would have been a good feature to build in. We see this as a reason to consider covering some losses of impacted Vault users extraordinarily, as this feature would have reduced losses.
- There is also an argument that the protocol functioned as expected and documented, and this was a ‘black swan’ event that impacted $40bn of DeFi. Even so, the core team thinks stricter risk management could have prevented some losses for users and want to consider options outlined in this post.
Considerations raised by community
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Below is a recap of feedback we’ve heard in the community over the last 10 days, shared now in the forum for your input and discussion before putting forward a proposal, so that the proposal can get a broad community buy-in and has a higher likelihood to pass.
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One key consideration is to balance the interest of the impacted users and the governance token holders. Misaligned interests could lead to the distribution proposal being rejected by GRO holders (some may not have held Vault as UST depegged).
- Distribution out of the DAO treasury would lower funds available to support continuous work in improving the protocol and other DAO initiatives; equally a loss of trust among users would hinder future development and adoption.
- Distributing governance tokens may lead to high dilution in circulating supply regardless of whether they come from the team allocation or treasury; one way to alleviate the impact is to distribute GRO tokens through the existing mechanism of the 12-month vesting contract.
- Distributing stablecoins in the treasury would reduce runway for operating expenses; one suggestion by @sonicblend is to consider using a debt token similar to Pickle Finance’s Cornichon (more details here), where repayment will be funded by the future cash flow from protocol performance fees currently set at 5% of yields earned. This mechanism does not have a fixed duration and so the speed of repayment will depend on Gro protocol’s TVL, yield on funds, and performance fee level.
- There are other ways to structure a debt based on the experience of other DAOs or protocol teams – please see this post by Indexed Finance comparing the various options.
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Another consideration is whether smaller wallets should receive more as a % of their loss than larger wallets.
- The argument for this arrangement is that owners of smaller wallets might have put a higher share of their personal funds into Vault, meaning the UST depegging has disproportionately impacted their day-to-day life – as some of you have shared in our Discord last week. This also mirrors how traditional bank deposits are offered a deposit insurance of a fixed sum to all accounts.
- One of the proposals in Terra ecosystem also suggested a tiered repayment model for similar reasons, while the official Revival Plan proposal was structured to shorten vesting requirements for smaller wallets.
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There are also mentions or suggestions of further segmenting the impacted users with different distributions.
- Some of you asked if there would be different distributions depending on whether you have withdrawn or stayed in the protocol. Gro protocol has removed all funds from the UST wormhole v2 pool on Curve. This means in the unlikely event where Gro receives restitution from the Terra ecosystem, that would not come through our smart contracts and so users who already withdrew funds would still be eligible.
- The impacted users could also be mostly segmented into those coming through Argent or through the front-end developed by Grwth Lbs at http://app.gro.xyz; or whether the deposit was made before or after the addition of UST as one of the yield strategies.
- At this point we are working on collecting and processing data, so there is no proposal on whether these factors should impact any calculations – it would be helpful to learn what you think. It is worth noting that introducing these splits could make it more complex and lengthen the time required in execution, but we welcome any suggestions so we can scope out any additional data requirements.
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Mechanics aside, a fundamental consideration is in defining which parts of the protocol design could be improved.
- Some of you pointed out that Vault was designed to protect PWRD and it’s known that there could be losses incurred in black swan events. Others shared that exposure to UST was displayed on the landing page of Gro dApp where Argent referred to in the wallet app.
- While there are various things we wish would have turned out differently, the core team regrets not having implemented an automated stop-loss feature for a rule-based and more rapid exit after a strategy failure such as this one (more in the recent community call).
- There was a general consensus after the event among most community members that having an automated stop-loss mechanism would have reduced the loss even if not eliminating it entirely. In its absence, a DAO vote could have helped form a general consensus on whether funds should be withdrawn faster from the UST wormhole pool.
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Finally, some have expressed frustration that Argent zkSync users can only access GRO tokens on mainnet and feel excluded from this process. One idea to overcome this is to airdrop vesting GRO tokens to the impacted zkSync users, who can then claim their airdrop on mainnet using the Argent wallet. Once claimed, users can then vote regardless of whether the tokens are in vesting or withdrawn to the wallet.
Next steps
- We look forward to getting your input on the above over the next 4 days while we continue to collect and process data.
- A vote proposal will be drafted based on community input to this post. It will be posted on the forum for an additional 3 days before going into a vote.
- The process is taking some time so that we can get all required data and incorporate more community feedback into the vote proposal to increase likelihood that it passes. Please let us any feedback you have by replying to this post!
PWRD successfully weathered the storm, though I am left wondering if the overall net outcome from the ordeal for Gro Protocol is negative. It raises an existential question: does the leveraged component of PWRD cause more harm than good?