Exclusive Interview with Gauntlet: The Untold Story Behind USDC’s Depegging and Its Impact on DeFi

After Silicon Valley Bank or svb Shutdown the value of USD coin or usdc The world's fifth largest cryptocurrency Hit an all-time low on Saturday at 88 Cents to one dollar the U.S firm Circle Which is responsible for the coin Disclosed that 3.3 billion dollars of The 40 billion dollars in usdc reserves Which supported were held at the defunct Financial institution and these events Have disrupted the balance of Define Protocols and their interconnected Systems and as a result of the usdc Stablecoin's deepegging the crypto Projects and investors have been thrown Into chaos triggering a massive Chain Reaction so today in this episode we are Joined by Paul lay the protocol Management lead at gauntlein who will Share his insights and analysis on the Recent usdc price fall and its Ripple Effects on D5 let's dive in so Paul can You give us an introduction to yourself And also Gauntlet yeah absolutely and Really looking forward to this Discussion Trevor Um so for background I'm Paul lay I'm The protocol management lead at Gauntlet Gauntlet provides Financial Risk Management Solutions to decentralize Finance protocols our clients include Protocols like compound Ave moonwalk Venus and others as the protocol Management lead I oversee the delivery

Of our platform to our clients and help Ensure our clients are making informed Decisions around risk management and Before Gauntlet I was an investment Banker at Goldman uh specifically in the Financial institutions group advising Banks and other financial institutions So personally it was really fascinating To see how this situation started from Traditional finance and then spilled Over to decentralized finance so yeah That's a bit of background on me and Gauntlet awesome so let's start with the Questions so the first one is Paul could You just you know take us through what Happened with The usdc debegging Saga And also then maybe touch upon how has This cascaded into D5 protocols Yeah absolutely Um so for context usdc Lots its Equivalence uh to the dollar uh trading To as low as 88 cents um over this past Weekend Um it was a downstream effect of svb Silicon Valley Banks insolvency so at a High level uh usdc is a collateralized Stable coin so it maintains its value by Having reserves backing uh the stable Coins issued and a circle which is the Company that issues usdc Um had around 3.3 billion dollars of Reserves sitting in SCB so an svb became Insolvent Um the market

Understood that hey if depositors cannot Be made whole there are not full Reserves backing uh usdc stablecoins Anymore Um in terms of how it impacted D5 usdc Is heavily integrated into decentralized Finance ecosystems it is largely Considered a safe safe haven for its Equivalence to the US dollar for example People trade usdc on decentralized Exchanges people can deposit usdc on Lending protocols and borrow usdc on Lending protocols on an infrastructure Level even Liquidators view usdc as Enumerator for liquidations so when usdc Lost its equivalence to the dollar There was risk exposure as a result of All the leverage that was built on top Of usdc in the D5 ecosystem more broadly Yeah yeah definitely definitely an Interesting thing that you knows that We've seen recently Um so which type of protocols were Impacted by the uscc deepegging and also What were their main drivers behind Their risks for sure Um so protocols with leverage uh were uh Mostly impacted Um so at a high level there are Protocols that allow uh users uh to Deposit assets as collateral and borrow Other assets or meant other assets these Protocols include protocols like money Markets protocols as well as

Collateralized stablecoin protocols Um and the way these kind of protocols Work at a high level is you know when The price of the collateral of users Fall below the price uh the value of Borrow that users have Um this can introduce a shortfall which If liquidations fail this ends up in bad Debt for these protocols which results In the loss of user fund Um so you can easily kind of Imagine a Scenario where users have deposited usdc Um as collateral and borrowed other Assets and at the price of usdc Falls to A certain extent and liquidations fail Or adverse liquidations happen this can Result in a loss of user funds Um the interesting thing is that Um kind of on a protocol mechanism Design level the situation of usdc Depegging wasn't really considered a Realistic scenario by many protocols as A result when protocols designed their Mechanisms or parameterized new Mechanisms that didn't incorporate the Kind of likelihood of a usdc drawdown Form from from par in terms of kind of What were the main drivers of risks it Came down to to several factors that Impacted protocols risk exposure here to This usdc situation the first is what Are the mechanisms of the protocol for Example what price feed are they using Some protocols use a dynamic price feed

For usdc other Protocols are actually Hard code the price of usdc at one Dollars and back when they made a Decision it wasn't a totally irrational Decision it was to protect against other Types of risk such as pressure Manipulation but the mechanisms impacted The risk exposure the second is user Positions Um on different protocols um you know Users have obviously different positions And users and protocols also list Different assets so for example some Protocols like compound has a shorter List of of assets that may uh lead to The protocol being less risky than other Protocols and the third is the risk Controls of the protocol What mechanisms Are in place to protect the protocol in The case of extreme Market scenarios for Example other some protocols like office B3 have Supply caps other protocols Um have you know different isolated Pools that can help restrict exposure For usdc so all these different factors Either magnified or mitigated the risk Of usdc exposure so the next question is How did they manage the risk given the Large amount of tvl that was involved Yeah the inch interesting thing is that In extreme Market situations like these The traditional assumptions about risk May not May no longer hold true so for Example assumptions around a price

Discovery liquidity and very importantly Liquidator Behavior May no longer hold True in these scenarios so it was very Important uh to be able to adapt Predictive models to simulate how Different risk scenarios would impact Protocols in what scenarios would Protocols face the most exposure and how To quantify that exposure and through That understanding of risk protocols can Then make informed decisions on Strategies to mitigate their exposure The actions that protocols took largely Were divided into two main categories The first is managing risk exposure for New hypothetical uh positions so new Decisions entering in the protocol and The second was managing risk exposure For existing positions and the skew of You know which risk is weighed more Heavily for protocols it really depended On a variety of factors that we touched Upon earlier Um but what we saw was protocols really Took different actions uh depending on Their risk exposure and the mechanisms They had in place so some uh protocols For example only paused the addition of New positions other protocols were only Considering pausing borrows not supplies And even other protocols we're Considering pausing the liquidation Mechanism itself so all sort of depended On what those different factors were and

What was going to be the most impactful With the greatest marginal benefit to Each protocol yeah yeah that's that's Really interesting so the next question Is how will the industry react Differently next time time should Similar de-pegging events happen again For sure this was a very uh unique Situation Um I think there are we observed that There are a few things uh that protocols Can consider moving forward uh the first Is having faster risk controls Um because these Protocols are Decentralized with decentralized Governance oftentimes it takes seven Days or even longer to make any changes To the protocol and there are certain Emergency measures Um but if there is a faster path with More controls Um of course there are trade-offs but One of the benefits is protocols being Able to more dynamically Um change protocol settings in order to Protect user funds so the first is the Speed of risk controls and the second is Continuous research on risk management As we have observed you know risk risk Scenarios constantly evolve over time New types of risks are introduced and as Protocols continue to innovate and build On top of each other it will be Increasingly important to research how

Risk evolves and in line with that how The risk management practices change or Our final question is has the full event Unfolded with the usdc debugging Situation and are there any further Dominoes to fall in crypto that could be Triggered by the banking crisis we're Not fully out of the woods yet in terms Of stability prices for usdc have Largely stabilized over the last few Days but if You observe the liquidity Conditions it hasn't fully recovered so If You observe uh for example pairwise Liquidity for usdc usdt the two percent Depth on the upside is around three Times higher than the two percent depth On the downside so liquidity conditions Haven't Fully return it to normalcy despite the Fact that prices have largely stabilized So it's important to continuously Monitor how these conditions have Evolved for not just usdc but for other Assets as well before kind of declaring That everything is um kind of back back To normal before usdc crisis situations So Paul for you know the viewers out There that want to find out the latest Information from everything that's Happening with gauntlet Um you know where where can they go for Sure we are very responsive on Twitter Uh so find us at Gauntlet Network that's G-a-u-n-t-l-e-t Network and you know

Happy to discuss anything there cool Awesome well thank you so much for your Time Paul this was definitely an awesome Interview thanks again absolutely thanks Trevor