Chart of The Day: Algorithmic Stablecoins Wobble Alongside Crypto Markets

Crypto markets tumbled over the weekend and continue to drop this Monday. Some algorithmic stablecoins have also struggled to maintain stability (USN not pictured above due to lack of data).
The dip saw peg defenders emerge, most prominently the Luna Foundation Guard (LFG), which passed a vote to 1) Loan $750M worth of BTC to OTC trading firms to help protect the UST peg and 2) Loan 750M UST to accumulate BTC as market conditions normalize.
UST total supply has contracted for the first time in a month on Sunday and has since shrunk by ~85.6m according to Terra analytics website Smart Stake.
The exception to the price action is Tron’s USDD, which was launched just 4 days ago. It has a smaller market capitalization of ~$169m. USDD’s pegging mechanism is similar to Terra’s UST, with an arbitrage-driven mint-burn mechanism backed by the Tron Blockchain’s native token TRX.
UST has been receiving most of the attention relating to de-pegging, but a similar fate has befallen its counterparts such as FEI and USDN which are slightly off peg. It remains to be seen whether each project will be robust enough to maintain its peg during these volatile times.
For more, Delphi members can revisit our Terra ecosystem overview here.

Aurora: Another EVM Chain, or the Beginning of Near?

[Excerpt from a Delphi Pro Report]

Not all bridges are built equal, and the Rainbow Bridge best exemplifies that. Built by the same team who built Near and Aurora, the Rainbow Bridge is a fully trustless bridge that allows users to bridge assets from Ethereum to Near and Aurora. What does trustless mean, and how does it differ from other bridges? It means that the operators of the bridge are not an added third party. The only two groups that a user needs to trust are:
- 1. Miners on Ethereum
- 2. Validators on Near

That’s it. This differs from other bridges that are actively live today, where not only do you need to trust each chain’s validators, but you also need to trust a PoA/multisig controlling the bridge. An unfortunate recent example of this is the Axie Ronin bridge, where a hacker was able to compromise 5/9 addresses in the multi-sig and drain the bridge of all its funds. It didn’t matter how secure the blockchains on either side of the bridge were, the multisig was the weak link. This is not possible on the Rainbow Bridge. Let’s break down the main components.
- A Near light client is implemented as a smart contract on Ethereum
- An Ethereum light client is implemented as a smart contract on Near
- Relayers that read and send the block headers to the other chain
- Connectors that prove the cryptographic hash of the transfer by utilizing the light clients
- Watchers that monitor and submit fraud proofs when needed (eg. May 1 attack attempt)

The flow is this:
- User deposits asset (e.g. ETH) on Ethereum side
- Rainbow bridge tells connector on Ethereum to lock ETH in vault
- Rainbow bridge calculates a cryptographic proof that this happened
- Relayer sends Ethereum block headers to Light Client on Near (20 blocks)
- Rainbow bridge asks connector on Near to create this ETH
- Cryptographic proof of tx is provided
- Connector looks up block headers through Light Client to verify proof independently
- Once proofs match and are confirmed, ETH is minted on Near

After this process is complete you have the native ETH locked in the vault on the Ethereum side and an equivalent amount of ETH minted on the Near side. Nowhere in this process was trust in a separate group of validators or third party. To send back to Ethereum, the ETH is burned on the Near side and released from the vault on the Ethereum side. Another benefit of this bridge is that it’s not just for transferring assets, it’s also a messaging protocol. Since the bridge is generic, any information that is cryptographically provable on Near can be used on Ethereum, and vice versa. Things like transaction details, inclusion of a transaction in a block, state of a contract, etc. can all be sent between the chains. You could bridge NFT’s and even vote on one chain with your assets on the other.
Now there are still risks with this setup as the Rainbow Bridge is an “Optimistic Bridge” when going to Ethereum. This is because verifying the validator signatures from Near is prohibitively expensive and so the Near client on Ethereum verifies everything in the header except the signature. This design relies on watchdogs to submit fraud proofs if a header has been submitted with an invalid signature. This happened on May 1st! What happened here?
- Attacker submitted contract to become relayer (permissionless) and sent fraudulent Near blocks to Ethereum
- Watchdogs noticed the block submitted did not happen on Near and sent fraud proof
- MEV bots saw the watchdog transaction and front-ran it, taking the bounty for themselves
- Fraudulent block was rolled back, attack thwarted

Fraud proofs have been discussed at length in crypto research, mostly in regards to Optimistic Rollups. There have been many critiques around them, most notably that watchdogs would not do their job or that miners would collude and censor the fraud proof. What actually happened here is that not only did miners not censor the fraud proof, they front-ran it! It’s very encouraging to see these optimistic assumptions hold up in practice and protect a bridge holding $1.6B of funds. If you’re wondering why the bridge is still considered trustless when watchdogs are needed, it’s because anyone can be a watchdog, you don’t have to rely on them if you submit the fraud proofs yourself. Of course, more watchdogs are better and the Aurora team used this attack to tighten up security and make attempts even more expensive.
From a technical standpoint, the Near/Aurora/Rainbow team should be recognized for their expertise. While “EVM on another chain” may not be the most promising value prop, the Rainbow Bridge is well built and highlights that these are serious builders who know what they’re doing.

While the bridge has been live for a year now, usage did not pick up until the Aurora IDO and token launch.
Since mid-November 2021 there have been ~$2B of assets transferred through the bridge. This counts transactions in both directions, but ~75% of transactions are transfers from Ethereum to Near/Aurora.
Also, while a transfer from Ethereum is approximately 10 minutes (20 blocks), transfers to Ethereum are much longer (up to 16 hours). For this reason other bridges which are quicker and charge a fee (like Synapse) are used for outflows more frequently.
Notable events on the chart are the IDO, Trisolaris incentives boost (including Allbridge integration and LUNA pools), money market launches, Bastion lockdrop event, and Bastion token launch.
For more, Delphi members can see the full Delphi Pro Report here.

Lens Protocol: The User-Owned, Open Social Graph Enabling Composable Social Applications

[Excerpt from The Delphi Podcast]

Stani Kulechov is the Founder of Aave and Lens Protocol, a composable and decentralized social graph that makes building Web3 social platforms easy. We discuss tokenizing online social relationships, giving online social ownership to the users, algorithm tweaking, and much more.
Resources:
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- 📺 Watch Video Interviews
- 💬 Follow Delphi Podcast on Twitter
- ✅ Follow Delphi Digital on Twitter
- 🧠 Access Delphi’s Research
For more, you can see our latest Delphi Podcast releases here.

Notable Tweets

Compound Treasury Receives S&P Credit Rating

Today, Compound Treasury received a B- credit rating from S&P Global Ratings. This makes Compound Treasury the first institutional DeFi offering to be rated by a credit rating agency.

https://medium.com/compound-finance/compound-treasury-sp-credit-rating-897aff3a6f8c

—Compound Labs (@compoundfinance) May 9, 2022

LFG Votes to Deploy 1.5B in Capital to Support UST

1/ Over the past several days, market volatility across crypto assets has been significant.
The market turmoil is also reflected by the past week’s uncertain macro conditions across legacy asset classes.

—LFG | Luna Foundation Guard(@LFG_org) May 9, 2022

Stepn Token GST Surges on BSC

Stepn Token GST on BSC has exceeded $40, 9x compared to the GST price on Solana. NFT floor prices on BSC have been pushed up to $13,000. The main reason is that Stepn did not build a cross-chain bridge between Solana and BSC. However, GMT is down 21% in the last 7 days.

— Wu Blockchain (@WuBlockchain) May 9, 2022