BUSD Risk Recap

Gauntlet has moved to address the risks related to regulatory actions against BUSD and Paxos. As of recent reports, Paxos plans to sunset BUSD but will maintain full backing and redeemability through at least February 2024. Binance intends to continue supporting BUSD pending an alternative primary stablecoin. However, Paxos has also announced that they have permanently ceased minting new BUSD as of February 21, 2023. Over time, this will lead to a decline in circulating BUSD supply as existing tokens are redeemed. When the supply of BUSD shrinks, risks will increase due to:

1. Insufficient arbitrage participation to quickly return the price to $1 if needed
2. Less market depth for liquidators to quickly sell at-risk collateral
3. Greater ease of market manipulation due to the smaller float

Since there is no potential for future growth in BUSD and risks will gradually rise, Gauntlet has provided plans for deprecating BUSD markets to our lending customers. While we do not assess regulatory or centralization risk and defer to protocol communities on strategic decisions, these plans have been developed to minimize market risk if protocols choose to delist BUSD. Below is a recap of the moves we proposed.

Freezing Supply & Borrows

A freeze prevents users from opening new positions in the BUSD liquidity pool while permitting withdrawals or repayments. Since users can migrate to other stablecoins at their own pace after closing existing positions, this would be the least disruptive measure to the user experience. Some protocols, like Aave, moved to freeze markets immediately upon the BUSD news being made public. We support this early action and recommend all lending protocols with BUSD markets move to freeze them soon.

Increasing Reserve Factors

By raising the reserve factor to near 100%, the protocol can stop suppliers from receiving interest. With no further return for holding their positions, suppliers will be driven by the opportunity cost to withdraw their BUSD. Borrow rates will rise as BUSD suppliers withdraw, encouraging borrowers to move their loans to other stablecoins. Increasing reserve factors directly affects existing user positions, so it comes at a trade-off to the user experience. However, since migrating to other stablecoins is generally straightforward, we see the slight inconvenience to users as a worthwhile trade-off for protocols. Our recommendations for Moonwell and Venus include reserve factors in the winddown plan.

Reducing Collateral Factors

For protocols that use BUSD as collateral, we recommend gradually disabling the use case by reducing the collateral factor to zero. The pace of reduction should be tailored for the protocol’s specific exposure to avoid liquidating users unnecessarily. With every step-down of the collateral factor, users should be given time to adjust their BUSD use before a further reduction is planned. Due to the data-dependent nature of this process, we will make the recommendations as needed for protocols with active BUSD collateral.