FreeLiquid USDFL Stablecoin Peg Lost

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freeLiquid

FreeLiquid is a decentralized stablecoin protocol set up by a group of enthusiasts. The original code was a fork of the MakerDAO protocol. The stablecoins are backed by collateral in the form of liquidity pool tokens. Owners of liquidity pools can borrow USDFL accounting for up to 90% the value of their original collateral. While the newly acquired tokens could be used in other liquidity pools, interest in purchasing them was based on the market pressure, and the liquidation portions of the smart contract were disabled, meaning that the USDFL could not be exchanged for the underlying collateral externally.

The stablecoin appears to have lost and regained the peg in January 2021, before losing it for the final time in February 2021.

This is a global/international case not involving a specific country.

About FreeLiquid

A "[d]ecentralized lending platform that offers funding in USDFL stablecoins to liquidity providers." "Freeliquid is a new decentralized lending platform, which offers USD stablecoin loans for providing liquidity pools (e.g., from Uniswap) as collaterals." "Users can lock their liquidity tokens on Freeliquid Borrow to immediately get funding up to 90% of the collateral while keeping the passive income from liquidity provider fees. The received funds can be for any purposes, for example, to create more liquidity pools or for trading."

"Freeliquid has been developed with a major aim to make liquidity pools work as a source of additional funds for its owners. As of December 2020, there are around 1.5 billion of total USD value locked in liquidity pools on Uniswap alone. Despite their holders enjoy earning fees, the funds in liquidity pools are frozen and can not be used for other purposes. Even if pools remain at the approximately same value in USD (as with stablecoin pairs), no platform so far has been accepting them as security for providing loans — until now."

"With the launch of Freeliquid, liquidity providers receive an instrument that enables them to turn liquidity pools into a source of funds, allowing to re-invest the original assets multiple times."

"The Freeliquid Protocol is a fork of the MakerDAO platform. The main operating principles of Freeliquid are completely identical to MakerDAO smart contracts (see Maker documentation). The decision to use the proven MakerDAO framework has been made to ensure security, transparency, and efficiency of the Freeliquid Protocol. The chosen framework also contains a welldesigned governance system, which relies on community-driven voting using a governance token."

"The Freeliquid Protocol operates on the Ethereum blockchain. The Protocol’s entire codebase is available as open source on Github. The web platform is currently hosted at https://freeliquid.io/ and can be accessed by connecting a crypto wallet, such as Metamask or Ledger Nano."

"The Freeliquid Protocol has been developed by a group of enthusiasts, who continue to support and further develop the project. The decision-making, however, is mainly done by the decentralized community of Freeliquid users. The changes to the Protocol are proposed and voted on by the community using the FL governance token (see Chapter 3.1), while the developer team remains responsible with implementing decisions."

"The Freeliquid Protocol enables users to receive USD stablecoins by locking liquidity pools as collaterals. The main advantage of this solution is that investors can now get extra funding, while keeping the passive income from the liquidity provider fees. The newly-obtained stablecoins can be used to increase the size of the existing liquidity pool or create another one. The process can be repeated several times, effectively leveraging the initial investment with no risks. Alternatively, the funds can be used for any other purpose, such as trading or yield farming. In any case, Freeliquid users can therefore turn their liquidity pools into a source of extra funding, potentially multiplying their profits."

"USD Freeliquid (USDFL) is an ERC-20 stablecoin, which is soft-pegged to the US dollar. Its value is backed by user-provided collateral." "As any other ERC-20 token, USDFL is easy to hold and transfer by using cryptocurrency wallets. USDFL can also be traded on decentralized exchanges, where users will be providing the respective liquidity pairs." "At the first stage, following liquidity pairs will be supported as collateral: USDT/USDC, USDT/DAI, USDT/USDN, USDC/DAI. There are two native tokens of the Freeliquid platform: the governance token $FL and the US dollar stablecoin $USDFL. Please make sure you always use the correct contract addresses for FL and USDFL!"

"Governed by the FL token." "To prevent the centralization of voting power, all generated FL tokens will be distributed as rewards for using the platform and providing liquidity for native Freeliquid tokens. No tokens will be distributed to the team or early investors. There will be no ICO. Freeliquid is governed by the decentralized community of its users, which can create proposals and vote on them using FL tokens."

"To better illustrate how Freeliquid Borrow works, consider the following example:"

"Assume there is a liquidity provider (further called “the LP”) who has a USDT/USDC pool on Uniswap, which earns them a passive income in the form of liquidity provider fees. The LP’s position has the total value of both tokens locked. Let us take this value to be equal to 100,000 USD as an example. By using Freeliquid Borrow, the LP can lock his liquidity tokens as a collateral and receive up to 90% of the pool’s total value in the USDFL stablecoin. In our example, that would be approx. 90,000 USDFL, which could be immediately issued for the borrower."

"The LP now can use the obtained funds for their own purposes, such as exchanging USDFL for USDT/USDC and creating another liquidity pool on Uniswap with a total value of $90,000. In the end, the LP will hold a liquidity pool of $190,000 in total, which almost doubles the income from liquidity provider fees, while taking almost no risks. Alternatively, the borrowed funds can be used for trading or investing in crypto assets. This might bring much larger returns on the initial Vault value, but also entails higher risks."

"Freeliquid Vaults are smart contracts that generate USDFL after users lock collaterals in Freeliquid Borrow and specify their preferred loan size. Initially, only pools consisting of stablecoin pairs will be accepted as possible collateral. Additional collateral types can be added later through community voting."

"Users can borrow USDFL in an amount of up to 90% of the collateralized asset value. The borrowed USDFL tokens constitute the outstanding Vault debt which is charged with an interest rate (‘Stability Fee’), displayed in annual terms. Initially, to support the early growth of the Freeliquid Borrow, the Stability Fees for each collateral type are set to zero. The maximum borrow amount percentage and Stability Fees may be changed later by the community to ensure the financial stability of Freeliquid. Note that these parameters are applied to each liquidity pair independently. Collected Stability Fees are stored in the Freeliquid Reserve (see Chapter 2.4)."

"The loans do not require an approval from a third party and are not restricted by any repayment date. Borrowing is processed instantly and can be repaid at any time by covering the outstanding amount of USDFL back to Freeliquid Borrow. It is always possible to only repay a portion of the outstanding debt or to generate additional USDFL, if the collateral provided is large enough."

"Since the volatility of stablecoins and the risk of extreme price surges are very low, the liquidation module is switched off completely, meaning that liquidation is not possible. In the future, pairs with more volatile assets will be added to Freeliquid as possible collateral types. To account for potential risks, the liquidation function, which is already available for smart contracts, can be introduced through governance voting."

"Let’s assume that you hold $10K-worth of stablecoin liquidity pool shares. Simply collateralize your LPs via Freeliquid’s audited smart contracts, and you’ll instantly obtain $9,000 in USDFL. These tokens can then be introduced in yet another liquidity pool, minting additional LP tokens. Collateralization can take place a few times over, leading to incredible APYs."

"Of course, USDFL can also be used for non-LP purposes. Since USDFL trading pairs with sufficient liquidity are available on several trading platforms like Uniswap, Curve, or Waves, the lending stablecoin can be converted to other emerging tokens, accessing profits obtained via organic coin value growth."

"We are proud to announce that the launch of Freeliquid will take place on Monday, 21.12.2020." "The developer team has a lot of things planned for further growth of Freeliquid, including more collateral types and support of pools from other platforms like Curve Finance. As always, we will only propose those changes to the community governance and carefully implement them only if the vote succeeds."

"We have our roadmap on the website — please check it out for further plans of Freeliquid."

"For now, our Borrowing platform is fully functional, so users can take loans just as planned."

"We also have our FL token distribution going full-steam (Freeliquid Reward module)."

"And finally, integrating with Waves blockchain and the support of Curve finance LP tokens are underway! This should be finished during the 1st quarter of 2021 and attract new users and general interest towards our platform."

"It has been a while since we have given out any official updates. USDFL price has been one of the main challenges for our team. To overcome this challenge we would like to introduce a new voting contract that can be found on our Freeliquid vote."

"This proposal aims to increase the stability fee from 2% to 5%. The official voting starts on Monday, exact time is TBA (eager participants - you can vote now). Auction will be also included in this voting."

"We have been constantly working all that time on our project and after the release of the auction, we will have more announcements coming afterwards."

"Dear community, we would like to inform you about our emergency plans! Please read detailed information in our announcement channel!"

"We have faced 2 problems: (1) Protocol users do not pay fees for using USDFL borrowed. (2) Very high commissions on Ethereum network for any kind of transaction."

"These two problems makes the existence of the protocol barely possible and we really wanna fix this. And the most reasonable solution to save our project at the moment is to transfer it to the Binance blockchain. This solution will attract smaller liquidity providers, and will stimulate funds circulation including fees collected for using the protocol. This will allow the price of USDFL stable coin to hold on more confidently."

"Protocol was successfully transferred to the Binance network in the summer, but at that moment we faced an outflow of liquidity and a drawdown in the USDFL price. That is why we could not provide initial liquidity to BSC."

"We are sad to announce that recent events such as the attack on the Luna algorithmic stablecoin and the market fall, do not allow us to fully implement the mechanism of the USDFL algorithmic stablecoin." "Due to the current situation, we cannot find sufficient liquidity to ensure its stable existence both on the Binance blockchain and on the Ethereum blockchain. We regret to inform you that we have to stop the project from further development."

"If our community has ideas and liquidity on how to resume the work of our stable coin, you can write us your proposal on telegram or Twitter. We would like to thank all of you for your contributions to the Freeliquide community and sticking with us during these hard times."

"USDFreeLiquidity (USDFL) [as of November 8th, 2022 is] $0.25" "Total Liquidity $6,418" "USDFreeLiquidity (USDFL) has been inactive and is deactivated." "We don't have exchanges available for USDFreeLiquidity."

This is a global/international case not involving a specific country.

The background of the exchange platform, service, or individuals involved, as it would have been seen or understood at the time of the events.

Include:

• Known history of when and how the service was started.
• What problems does the company or service claim to solve?
• What marketing materials were used by the firm or business?
• Audits performed, and excerpts that may have been included.
• Business registration documents shown (fake or legitimate).
• How were people recruited to participate?
• Public warnings and announcements prior to the event.

Don't Include:

• Any wording which directly states or implies that the business is/was illegitimate, or that a vulnerability existed.
• Anything that wasn't reasonably knowable at the time of the event.

There could be more than one section here. If the same platform is involved with multiple incidents, then it can be linked to a main article page.

The Reality

This sections is included if a case involved deception or information that was unknown at the time. Examples include:

• When the service was actually started (if different than the "official story").
• Who actually ran a service and their own personal history.
• How the service was structured behind the scenes. (For example, there was no "trading bot".)
• Details of what audits reported and how vulnerabilities were missed during auditing.

What Happened

The specific events of the loss and how it came about. What actually happened to cause the loss and some of the events leading up to it.

Key Event Timeline - freeLiquid USDFL Stablecoin Peg Lost

Date	Event	Description
January 12th, 2021	Main Event	Expand this into a brief description of what happened and the impact. If multiple lines are necessary, add them here.

Technical Details

This section includes specific detailed technical analysis of any security breaches which happened. What specific software vulnerabilities contributed to the problem and how were they exploited?

Total Amount Lost

The total amount at risk has been estimated at $1,788,000 USD. The total amount lost is unknown.

How much was lost and how was it calculated? If there are conflicting reports, which are accurate and where does the discrepancy lie?

Immediate Reactions

How did the various parties involved (firm, platform, management, and/or affected individual(s)) deal with the events? Were services shut down? Were announcements made? Were groups formed?

Ultimate Outcome

What was the end result? Was any investigation done? Were any individuals prosecuted? Was there a lawsuit? Was any tracing done?

Total Amount Recovered

The total amount recovered is unknown.

What funds were recovered? What funds were reimbursed for those affected users?

Ongoing Developments

What parts of this case are still remaining to be concluded?

General Prevention Policies

While the coins were backed by collateral, there was no contract which could be used to enforce this through liquidations. As a result, the system depended instead on market liquidity for the stablecoin price, which dried up.

Individual Prevention Policies

No specific policies for individual prevention have yet been identified in this case.

For the full list of how to protect your funds as an individual, check our Prevention Policies for Individuals guide.

Platform Prevention Policies

Policies for platforms to take to prevent this situation have not yet been selected in this case.

For the full list of how to protect your funds as a financial service, check our Prevention Policies for Platforms guide.

Regulatory Prevention Policies

No specific regulatory policies have yet been identified in this case.

For the full list of regulatory policies that can prevent loss, check our Prevention Policies for Regulators guide.