Scream is the latest DeFi protocol to suffer at the hands of faulty algorithmic stablecoins.
Opportunistic traders have taken advantage of the Fantom-based lending protocol having fixed the value of the network’s native stablecoins fUSD and DEI at $1 despite the tokens trading below their pegs.
The ill-fated move allowed users to scoop up the stablecoins at market value — both of which traded as low as $0.55 this past week — before depositing the tokens in Scream and using them as collateral at face value ($1) to take out loans in other assets. As a result, opportunistic users have drained Scream’s USDT, FRAX, DAI, and USDC pools, which now hold less than a dollar worth of liquidity each.
According to CoinGecko, fUSD has traded for between $0.51 and $0.93 during 2022 and last changed hands for $0.77. DEI fell below $0.99 on May 13 and crashed down to $0.55 on May 16. It is currently trading for $0.62.
Twitter user The Fantom Ecologist tweeted on May 16 that Scream may have become insolvent and that depositors couldn’t withdraw their assets. “[Scream] accept[s] $fUSD as $1 collateral (but it’s off peg); seem to have accidentally set the deposit limit to [infinity]; millions quickly borrowed against the bad debt,” they posted.
To address the bad debt incurred by fUSD deposits, Scream announced plans with the Fantom Foundation to deploy a bot “that will liquidate any underwater positions that use fUSD as collateral.” The Fantom Foundation tweeted that the bot is currently under audit. If successful, the bot will be deployed within three to four weeks.
Scream said that it would hardcode fUSD to $0.80, and urged borrowers using fUSD as collateral to pay back their loans or face liquidation. On May 18, the protocol tweeted it had executed the first phase of its liquidation repayment plan, and that roughly 1,359 Ether, 1.3M TUSD, and 7.6M WFTM had been repaid to its pools.
Screenshots shared on social media suggest that Deus Finance, the issuer of the DEI algorithmic stablecoin, was the sole culprit using DEI as collateral, and that the team has agreed to pay back their bad debt. Deus suffered a $13.4M hack in late-April, with the incident following a $3M flash-loan attack the previous month. The Deus team has since initiated a plan to sell treasury bonds in a bid to fully collateralize the DEI stablecoin.
Scream said it will rely on Chainlink oracles to price its assets moving forward.
The incident has driven a 59% loss in Scream’s total value locked (TVL) since May 16. Scream’s TVL is now just $38.4M, down from $1.1B in January, according to DeFi Llama. The protocol’s SCREAM token is also down 50% in the past two days, last changing hands for $3.70 according to CoinGecko. SCREAM is down 98.3% from its all-time high in January.
The news follows a rough few months for Fantom. Fantom’s TVL and the value of tokens within its ecosystem were badly hit in March after developer Andre Cronje and Fantom Foundation member Anton Nell quit decentralized finance.
Fantom’s problems compounded earlier this month. A whale who had borrowed $37M in stablecoins against what was once $90M worth of FTM faced liquidation after the token’s price crashed. The position’s liquidation placed a strain on the network’s on-chain liquidity, driving further losses for FTM.
Scream’s woes follow the collapse of Terra’s algorithmic stablecoin, TerraUSD (UST), earlier this month. UST lost parity with the US dollar on May 9 and has since plummeted to $0.09. Terra’s volatile network token, LUNA, which was designed to prop up the price of UST, fell into a death spiral and now trades for a fraction of a cent.
Other algorithmic stablecoins, such as VAI, FEI and Neutrino USD, also decoupled from the US dollar. Even Tether, the centralized USDT token, briefly lost its peg in the wake of the UST crash.
FTM last traded for $0.32, a 90% decline since mid-January.