Understanding USDN staking rewards: how did the APR increase from 9% to 23.5% in just 2 weeks?

USDN is the only stablecoin that supports staking by default, on the level of its algorithm. This makes it different both from other stablecoins (which don’t support staking) and PoS staking coins, which do offer staking but are subject to high volatility.

However, the very fact that USDN is so different can make its reward mechanism hard to understand for some investors. For example, between June 1 and August 20, 2020, the APR (annual percentage rate) has grown from 9% to 23.5%, mostly thanks to the surging price of WAVES.

Here is a short guide to how the APR of USDN staking is calculated.

1) The role of WAVES: collateral and staking

USDN is algorithmically pegged to the US dollar so that the price of USDN always equals $1. However, since USDN is a decentralized stablecoin, it is 100% backed by another digital asset, WAVES. WAVES uses a consensus algorithm called Leased Proof-of-Stake (LPoS). It allows users to stake their WAVES and earn a reward (currently 6.5% a year - see here for more info).

2) Distributing of staking rewards

All the WAVES locked up in the USDN smart contract participate in staking and currently yield 6.5% a year, but the rewards are distributed ONLY to those USDN holders who stake their coins. This is part of the reason why the APR is high. The lower the share of the USDN in staking, the higher the yield.

Staking rewards are transferred from the mining node to the USDN smart contract daily and are immediately converted into USDN at the current exchange WAVES/USDN rate.

3) Contract deficit and the stabilization mechanism

When the price of WAVES grows, the USD value of the collateral increases even if the number of USDN in circulation remains the same. For instance, for 1 million USDN you might have $1.2m in WAVES on the contract. And vice versa: if the price of WAVES falls, the value of the collateral decreases, resulting in a temporary deficit.

Deficit triggers the price stabilization mechanism. The contract issues special tokens that users can buy at a price below $1 and later redeem for USDN at a 1:1 ratio. Essentially the contract borrows from users.

4) How did the APR go from 9% to 20% so quickly?

The protocol is designed in such a way that even when the deficit is high, the APR of USDN staking doesn't go below 8%. Between March and June 2020, the contract was in deficit following the price slump in the crypto market in mid-March. The staking reward rate hovered around 9%.

However, since the price of WAVES increased by almost 50% between July 10 and August 7, the total value of the collateral grew, and the deficit disappeared.

WAVES price movement in July-August 2020

Another factor is that the number of USDN in circulation grew by almost 2 million in the past couple of months, but most of the new coins were not staked. As a result, the percentage of USDN in staking went down. As we’ve said before, the yield grows when the share of staked USDN falls - thus an additional increase in the APR.

The combined effect of the price rally and the falling staking share produced the 20% APR. Remember that the reward rate you see on the website is the estimate for the past 3 days recalculated as an annual rate.

According to Waves.Exchange analysts, the profitability of USDN staking will remain at 15-20% until the end of 2020 at least. This means that now is the best moment to stake USDN. Here you can easily buy USDN with a credit card and deposit them in staking in just a few minutes.

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