Note: This article is not financial advice. Hubble Protocl does not endorse any tokens or platforms mentioned in this article.
- USDH remains pegged and backed by collateral.
- No toxic assets, no bad debt, no significant losses
- Hubble’s smart contracts passed a second major stress test.
Nearly half a year to the day Terra collapsed, Hubble Protocol and the decentralized finance (DeFi) community were forced to navigate through another black swan. The protocol is proud to say that Hubble and USDH remain fundamentally unaffected by the volatility and uncertainty of the last week, and both the platform and its stablecoin remain solvent.
Throughout the event, the Hubble community maintained solid contact with users with updates on every social media channel available, and around 50 support tickets have been closed since the 7th. This retrospective hopes to enhance the transparency around Hubble’s second major stress test.
Pausing USDH Borrowing and Raising Withdrawal Caps Helped Users Derisk Early
As the FTX situation escalated, markets responded with extreme volatility. On November 9, Hubble began suspending deposits and borrowing on FTX/Alameda-related assets such as soBTC, FTT, and SRM. Due to oracle issues, further deposits and borrowing were disabled for all assets shortly thereafter.
Users were able to repay their loans and withdraw assets. Many users had difficulty partially repaying their loans to remove some collateral as oracles were failing; however, all users who repaid their USDH loans 100% were able to withdraw collateral 100%, since full repayment bypassed checks on oracle prices.
Adjustments made after Hubble’s first stress test in May ensured that users were able to repay their loans and withdraw their collateral during high volatility. Withdrawal caps were raised to help facilitate the unusual amount of activity, and the protocol repeatedly informed users to derisk their positions.
Hubble Quickly Limited Exposure to Two Toxic Assets
The bankruptcy announcement from FTX, FTX US, and Alameda meant that Hubble was exposed to two toxic assets: soBTC and SRM. Each of these assets accounted for a substantial portion of Hubble’s collateral, and the protocol managed to eliminate exposure to both tokens without incurring significant bad debt.
The BTC accepted as collateral on Hubble was soBTC, which was wrapped by FTX. As soon as FTX announced bankruptcy, soBTC depegged from the market price of native BTC. The token became illiquid on-chain, and the closure of all FTX markets meant soBTC couldn’t be unwrapped for BTC in reserves.
SRM was considered a toxic asset for several reasons, including low liquidity, and high expected volatility due to being part of Alameda/FTX’s balance sheet, as both were liquidating their positions across the board.
In addition, SRM had been issued by Project Serum, which turned out to be a program deployed on Solana with a single signer (no multisig) and uncertainty about its future. At the same time, the Solana community deprecated Serum entirely and started using OpenBook, making SRM a redundant token.
Derisking soBTC and SRM
Multiple announcements were made that the oracle for BTC on Hubble would be changed for one that reported prices on-chain, which would liquidate many accounts with BTC as collateral.
Around three dozen BTC were redeemed at chain value, with proportionate USDH debt burned, to reduce liquidations while removing all exposure to soBTC.
As liquidations and redistributions went through, some users received soBTC-related debt, but this outcome was reversed.
During this time, the wallet that borrowed against 20 million SRM tokens withdrew USDH from the Stability Vault and repaid most of its loan, leaving around $300k in debt and the total deposit of SRM.
When the SRM oracle was updated to query prices for on-chain liquidity, the SRM whale account was redeemed. No users received SRM debt from this position.
In the end, all soBTC and SRM were redeemed or liquidated with no net loss to the protocol or its users stemming directly from these assets being held.
Hubble Consistently Evaluates and Implements Risk Management Improvements
Operating a borrowing protocol inherently involves some aspects of continuous risk management. Although nearly any situation can theoretically be accounted for by a smart contract (stress on theoretically), sometimes a protocol’s multisig voters need to intervene to adjust risk parameters in real-time, especially during the volatility of a black swan.
For example, as Avi Eisenberg, the Mango exploiter, recently became vocal about the potential for exploiting AAVE, the protocol took action to reduce its vulnerability. AAVE governance discussed and passed several risk proposals, that completely changed the parameters of the protocol.
Moving forward, Hubble will continue to monitor and adapt its risk management procedures against a constantly evolving space.
At this point, having navigated through what can arguably be described as one of the worst years for crypto, Hubble considers its smart contracts battle-tested in extreme conditions.
The Redistribution Mechanism Socialized Underwater Debt by Smart Contract Design
Several of the features Hubble implemented from Liquity include the Stability Vault (formerly Stability Pool) and a mechanism for the redistribution of debt. When the Stability Vault is emptied, or loans are liquidated underwater, redistributions are triggered to bypass the Stability Vault and socialize debt across all open loans.
Due to an early reduction in exposure to soBTC and SRM, Hubble’s smart contracts were able to redistribute debts and collateral without burdening users with these toxic assets. Users received USDH debt and other collateral in proportion to the size of their open loan.
As soon as Solana’s DeFi community realized that soBTC was no longer redeemable, swapping Hubble’s oracle for one that reflected soBTC’s on-chain price was equivalent to an instant 45% price drop for the asset.
Unfortunately, when oracles were updated to reflect realistic prices for BTC and SRM, some loans containing these assets were liquidated with outstanding debts higher than the value of their remaining collateral. This means that the smart contracts distributed more USDH debt than collateral.
This was one of the first times DeFi had faced the problem of a wrapped asset plummeting in value on-chain during a black swan event, and the effects have been wide in scope and across multiple chains. For example, MakerDAO is also faced with the same situation liquidating renBTC, an asset associated with Alameda since it acquired the Ren project.
USDH Maintained a Steady Peg Through Stress Test #2
USDH has hovered slightly under peg since Hubble deployed the Peg Stability Module (PSM). During the most recent period of high volatility, the price of USDH was pushed above $1.00, and the PSM helped users arbitrage the price back down.
As can be seen in the image above, USDH was trading below its peg until its price suddenly climbed above $1.00. In the image below, the influx of USDC into the PSM correlates with lowering USDH's price and stabilizing it at one dollar.
Liquidations and the Stability Vault
The Stability Vault facilitates liquidations for tokens in the DeFi Treasury and the six original tokens that users could borrow against at Hubble’s launch. Most of October and early November witnessed few liquidations, and deposits in the Stability Vault remained relatively stable.
The massive drop in deposited USDH that occurred on the 9th is attributed to the SRM Whale’s withdrawal from the Stability Vault. The withdrawn USDH was used to repay most of the loan taken on SRM tokens.
Liquidations began ramping up on the 8th, with 53 recorded. On the 9th, liquidations peaked with 128 counted. Despite issues with network performance, the protocol managed to successfully liquidate loans that had passed their liquidation threshold.
Hubble Protocol Survives to Lend USDH Another Day
Hubble persevered through one of the worst black swans the crypto space has ever experienced. It was like a perfect storm. Nearly everything that could go bad happened all at once.
The protocol was designed with anti-fragility measures in place that ensure USDH remains fully backed and pegged through extreme volatility. With these smart contracts in place and a well-coordinated community, Hubble managed to avoid holding any toxic assets or bad debt.
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