On May 9th, a stablecoin (UST) pegged to the dollar “de-pegged,” and was fluctuating below $1.00. UST was the stablecoin used to lend on Anchor Protocol, to which Donut had allocated a portion of Grow plan funds. This resulted in a 13.39% Grow Adjustment to balances for Grow plan members.

Frequently Asked Questions

What is the Grow Adjustment?

The Grow Adjustment is the loss incurred to principal as a result of the UST depeg.

How was the Grow Adjustment calculated?

Donut’s Grow plan had 40% of funds in UST and allocated to Anchor Protocol. Once UST began deviating from its peg, we began liquidating our entire UST position. Due to the size of our position and chain congestion, this took time. Our risk management ensured that losses were limited to 13.39% of user funds, instead of 40%.

Why didn’t we lose the full allocation if UST crashed completely?

Our risk management liquidated all UST well before its eventual collapse, reducing the expected loss from 40% to 13.39% for users.

How does a Stablecoin depeg result in loss of funds?

When a stablecoin depegs, it is no longer equal to its peg denomination of $1.00. This may mean that your underlying asset can lose value.

Does Donut still use UST?

No. We only use USDC, a fully collateralized fiat-backed stablecoin that is accepted as one of the safest stablecoins across the industry. USDC maintains its peg with a fully backed reserve of cash deposits and US treasuries. USDC’s issuer Circle also regularly conducts audits, releases monthly attestations by Grant Thorton, publishes weekly reserve breakdowns, and is fully regulated by the NY department of financial services.

Did overcollateralization protect funds?

Yes, and it continues to. When funds are loaned across digital lending markets, borrowers are required to overcollateralize their loan by 150% or more. This protects your principal and interest earned in case of borrower default. If the value of the collateral falls, borrowers are margin called and required to top up or repay part of their loan. If not, they are automatically liquidated, which protects your principal.

During this market event, the collateral did not crash or lose value, the underlying loaned asset UST no longer retained it's 1:1 parity with the dollar.

Did Donut pause app functions during this event?

On Thursday evening, May 12th, we notified Grow users that to best protect their funds, we paused deposits, pending withdrawals, and plan switches. 72 hours later, we unpaused all accounts and resumed app service.

Every withdrawal and plan switch made prior to this was honored at the 1:1 peg, meaning these users incurred no loss, even though they initiated withdrawals when the price of UST had fallen from its peg. We covered these directly from our balance sheet.

How has Donut helped users recover losses?

For our affected users, Donut created an exclusive Recovery Boost giving users an additional +15% APY for 90 days, paid entirely from our balance sheet. We did this because we love our users and wanted to find a way to help.

How has Donut increased its strength since this event?

Donut uses the USDC stablecoin, a fully collateralized fiat-backed stablecoin that is accepted as one of the safest stablecoins across the industry, for all lending practices. For our Save plan, we partner directly and indirectly with a US regulated custodian Wyre, and prime lenders Genesis and Abra. For Build, we allocate funds to the same partners as Save, while also lending across decentralized markets with Yearn. All funds continued to be protected overcollateralization as well.

In addition, your funds are securely lent to prime brokers and lenders via our wallet partner, Fireblocks, which stores over $400 billion in digital assets.

Donut also uses bank-grade encryption, PIN numbers, and two-factor authentication to protect accounts, and continues to be a FinCEN registered organization.

What are the tax implications of the Grow Adjustment?

You will be able to declare the Grow Adjustment as a loss in your tax declaration for 2022. All relevant information will be available to affected users via the app in early January 2023, in time for the tax season.

What’s next for Donut?

We remain committed to introducing new ways to reward our community members in the coming months This includes more boosts, educational content, and further strengthening our risk management features to ensure Donut continues to be the simplest and safest way to earn with DeFi.

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