Scream May 2022 Post-Mortem
Reflecting on v1 and looking forward to v2
- Scream is launching a v2 protocol, starting with WFTM, ETH, BTC, USDC, and DAI markets. v2 will more heavily incentivize borrowing to drive revenue generation to go towards v1 bad debt. More v2 markets will be added over time pending risk evaluation. We have worked with industry-leading experts throughout the process, including several engineers at Yearn during v2 market deployment and launch.
- v1 market will continue to operate with borrows paused. Interest will stop accruing on any fUSD bad debt via a planned comptroller upgrade to be deployed this week. Scream is in constant communication with Deus regarding outstanding borrows to ensure prompt repayment.
- Revenues from the v2 protocol will go toward paying of remaining fUSD bad debt.
- Scream is in active discussion with partners and outside entities regarding the remaining 4.5M fUSD the protocol holds, as well as outstanding fUSD bad debt.
This article provides a breakdown into the events that led up to insolvency of the platform; and provides a working roadmap to regain the confidence of the market and users.
Before we get into this, we wanted to acknowledge the patience and support of our community during this difficult time. Although the situation has felt almost impossible at times, we are committed to remedy the situation to the best of our ability. With great thanks to dudesahn, flashfish, and FP at Yearn Finance, assistance in navigating complex negotiations has given our team a sense of renewed optimism that an amicable solution can be found — we are eternally thankful for their help.
While the road ahead may be challenging with no ‘perfect’ or ‘short-term’ fix in sight; we believe that with the help of the Fantom Foundation and the Deus Finance team, a working solution can be found for our users.
From an operational perspective, we will be consulting with leading security experts to design new security and risk-management strategies for the protocol. As a further safeguard, we will be looking to onboard a full-time technical risk manager to actively monitor markets, review protocol changes and regularly report back to the community and our partners.
Steps will also be taken to decentralise decision-making of core protocol changes, to include new markets, collateral factors or total supply caps on assets. Details on how these processes will be implemented will be available ahead of time for the community to consider.
In consultation with our partners, we have begun deploying, configuring and testing a new implementation of our lending market (v2). Far from giving up on v1 market, we believe that v2 market will help to regain trust and confidence again while finding a way to actively manage the ongoing bad debt situation over time. Quality price feeds from our partners at Chainlink will be used (at a minimum), and pending agreement with Band Protocol on a robust back-up oracle solution we plan to mitigate the risk of relying on a single oracle solution. Further implementations are also being discussed at this time between DeFi experts, including a new interest rate curve for borrowing, collateral caps and a revised tokenomics structure. More details on this will be shared later.
Please join our discord for regular updates on the current bad debt situation here.
fUSD bad debt
On 10 May, the supply cap of 10M for supplying fUSD to the protocol was inadvertently lifted. This occurred as a result of an attempt to lower the fUSD supply cap to zero to prevent further supplies of fUSD. However, a supply cap of zero did the reverse, and uncapped the supply of fUSD. The situation either required the pausing of minting or setting the supply cap to 1 Wei.
Certain users detected the unintended change and supplied significant amounts of fUSD to the platform. Although the price of fUSD at the time ranged between approx. $0.50 to $0.80 with extremely low liquidity on-chain, users were able to abuse the error: using Scream’s $1 oracle pricing of fUSD to borrow liquid assets from the platform (including wETH and wFTM).
These top 10 addresses accounted for the majority of the bad debt that was accumulated by the protocol.
New bad debt
0x8d7e07b1a346ac29e922ac01fa34cb2029f536b9Old bad debt
Nearly 10M in fUSD was supplied to the protocol following the supply cap being raised—almost all of it coming from the three
New bad debt addresses above. These addresses held borrows of more than $9.2M (mainly WFTM and ETH) against ~9.8M fUSD. Following their minting of scFUSD, these wallets withdrew other collateral (WFTM), or bridged out (ETH). This accounted for approximately 30% of all fUSD bad debt.
Additionally, the vast majority of
Old bad debt comes from
0xd72141fe0d631b5421387412e39bbdf898e1e1fc , who previously already had ~2m in WFTM debt against ~1.3M fUSD, and following the errant supply cap raise borrowed an additional 2.6M WFTM, much of which was swapped for stablecoins.
Addressing the issue
The team became aware of this on 15 May, and immediately paused all markets that had been hardcoded to $1, including DOLA, FRAX, fUSD and DEI. We also alerted the Fantom Foundation (the Foundation) of the issue on this date.
In consultation with the Foundation, and following an announcement that we would be liquidating undercollateralized borrowers at a price of $0.80 per fUSD, we proceeded to seize the fUSD collateral from the top 10 addresses (above), accounting for ~18.29M of fUSD collateral. ~13.75M of this collateral was then sold to the Foundation for ~1845 wETH, 10,386,333 wFTM, and 1,788,998 TUSD. This took into account the $0.80 spot price of fUSD, as well as the standard 8% liquidation bonus.
These assets were then used to repay the debts of users that had their collateral seized.
Debts were repaid depending on which markets needed liquidity urgently.
Bad Debt Repayment Status
To date, the Scream protocol has repaid
- 10,386,333.63 WFTM
- 1,845.75 ETH
- 1,316,451.52 TUSD
- 472,091.59 FRAX
- 319,575.45 USDC
of bad debts accrued from fUSD. Additionally, the protocol has committed to use the existing >$1M in protocol reserves to pay down bad debt.
The team is in close talks with the Foundation about a potential deal to sell the remaining fUSD in our treasury (~4.5M fUSD). Other strategies are also being actively considered following the Foundation’s latest announcement.
More details on this to follow once we can share an update with you.
DEI as collateral
In early May, the Deus Finance team (Deus) had been in negotiations with our team about taking over development of the protocol. As a condition of the deal, Deus required its algorithmic stablecoin, DEI, to be added as a market and used as collateral—with a 30M supply cap, 85% collateral factor and a hardcoded $1 price for DEI while a suitable alternative oracle was being developed.
Once DEI was added to Scream markets, the Deus team provided ~28,519,000 DEI in liquidity (essentially the entire DEI supply on Scream), borrowed the following amounts using DEI as collateral across three wallets:
1. 740,717 + 3,000,000 + 1,446,156 = 5,186,873 DAI
2. 550,000 + 2,000,000 = 2,550,000 USDC
3. 500,000 TUSD
4. 500 ETH
5. 1 BTC
Scream’s insolvency and remediation steps
The increased fUSD bad debt from opportunistic borrowers, paired with a DEI depeg precipitated in the aftermath of the UST death spiral, resulted in significant withdrawals of liquidity from users and partners, leading many markets to reach 100% utilisation. Some users had experienced difficulties in withdrawing their assets during this time.
v1 Action Plan
To mitigate the situation, Scream worked simultaneously to 1) decrease outstanding bad debt from fUSD-collateralized borrows and 2) ensure that Deus’ borrows remained overcollateralized to protect lenders in other markets. Additionally, the deal with Deus to take over development of the protocol was reversed.
As stated above, in collaboration with the Foundation, Scream secured ~1845 wETH, 10,386,333 wFTM, and 1,788,998 TUSD from the Foundation to pay down bad debts in exchange for ~13M fUSD. Scream still holds an additional 4.5M in fUSD and is engaged in active discussions with the Foundation, as well as other interested parties regarding next steps here. For the remaining fUSD supplied to the platform, liquidations are running and bad debt is rapidly being repaid.
Almost immediately, Deus repaid their outstanding 500 ETH and 1 BTC borrows. In consultation with Yearn, we also reached an agreement with Deus to provide excess collateral in the form of over 13M DEI and 600k SCREAM tokens to a multisig controlled by representatives from Yearn, Scream and Deus as a joint-commitment to ensure that Deus’ borrows stay sufficiently overcollateralized.
Furthermore, on 25 May, Deus repaid an additional ~1.5M DAI of their original ~10.5M borrow, and have committed to steadily repay the remainder of their outstanding borrow in a timely manner. We shall closely monitor the developing situation and update our community of further repayments.
At the time of writing, there is 11.61 million DEI supplied against ~9.1m in USDC, TUSD, and DAI borrows, with an additional 13 million DEI in the shared multisig.
Further repaying bad debt, and more, with v2
While ensuring that DEI borrows are overcollateralized and paying off as much fUSD bad debt as possible are crucial steps, after consulting with partners we concluded that we could not accomplish this in a sufficiently short timeframe to restore v1 markets back to full health.
Launching a v2 market, with fewer assets, will allow Scream to once again host a liquid market and use the revenues to help pay off bad debt in v1. We are also taking this time to evaluate many options for the Scream protocol—including expansion to other chains, as well as revamping the SCREAM tokenomics.
We equate our success with user trust; and building a world class team with security at our core will be our focus. We will share our growth plans in the coming weeks, including more information concerning the SCREAM token.