Summary of the Situation
Dear Community,
We’re writing to provide a comprehensive update on our plans to recover CMST and restore stability to the Harbor protocol following the exploit on August 9th. We appreciate your patience during this period as we’ve worked diligently to track the exploiter and collaborate with relevant jurisdictions. Our primary goal remains getting Harbor back to normal operations as swiftly as possible.
An exploiter manipulated oracle prices on August 9th to borrow an excessive amount of CMST with minimal collateral. We’ve spent the past months tracking the exploiter and working with authorities to pursue justice. As Comdex is integral to CMST, our major focus is on restoring normalcy. To achieve this, Harbor will be conducting a debt auction.
Harbor Token Supply and Burn Plan
Before detailing the debt auction, we want to address the current HARBOR token supply and our plans for a significant token burn:
- CMST uses HARBOR as its governance and utility token, with a total supply of 1 billion.
- Originally, 50% was intended for emissions over 6 years.
- After extensive discussions, we’ve decided to burn a major portion of the supply before the debt auction begins.
- Post-burn, HARBOR will become a fully community-owned project with no overhead supply.
- The team tokens have not vested, and we have made a conscious decision to burn all allocated team tokens. This action underscores our commitment to the Harbor’s long-term success and our alignment with the community’s interests.
The remaining circulating supply will only consist only of:
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Tokens distributed through emissions to users during the earlier epochs
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Airdrop recipients
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veHARBOR lockers
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The 100M strategic partnership allocation (fully governance and community-controlled)
All the inflationary supply will be burned, making Harbor fully deflationary. The system surplus will be used to buy back and burn Harbor. Essentially, once the auction is completed, Harbor debt auction participants who mint new Harbor into the supply to recapitalize will become the major stakeholders in the protocol and governance.
We’ll provide a detailed breakdown of the supply burn in a separate announcement.
Understanding Debt Auctions
A debt auction is a failsafe mechanism used to recapitalize an undercollateralized system or recover bad debt resulting from system malfunctions or exploits. This mechanism is not unprecedented in the DeFi; in fact, it’s similar to the approach taken by MakerDAO when DAI became undercollateralized. In that situation, MKR tokens were minted to cover the deficit, much like we’re planning to do with HARBOR.
When triggered, which occurs when the system lacks sufficient surplus funds and must resort to minting HARBOR tokens to recoup the debt, the debt auction follows a reverse auction mechanism. Users bid a lower amount for a fixed asset, with the lowest bidder winning. New HARBOR tokens are minted and auctioned in exchange for a fixed amount of CMST. This process allows the protocol to recover from unexpected events while distributing newly minted tokens to participants willing to stabilize the system, much like how MakerDAO used MKR to restore DAI’s stability.
This is a well-known DeFi protocol’s crisis management strategy underscores the validity of our approach and demonstrates that such mechanisms can effectively restore stability to recoup bad debt.
How Does it Work?
Harbor’s debt auction follows a reverse auction mechanism:
- Users bid a lower amount of HARBOR for a fixed amount of CMST.
- New HARBOR tokens are minted and auctioned in exchange for CMST.
- The lowest bidder wins the auction.
The auction begins with a predetermined number of HARBOR to be minted against a fixed amount of CMST. When the auction concludes, the protocol mints HARBOR to the winning bidder’s address and collects CMST to fill the debt.
For example, if the current bid is 1000 HARBOR (or a price of 1000 CMST/HARBOR), the next bid must be less than 1000 HARBOR. The auction mechanics require users to bid at least 2% less than the previous bid, so the next possible bid would be a maximum of 980 HARBOR. In this way users will bid for a lower amount of Harbor for a fixed amount of CMST.
Auction Mechanics and Parameters
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Total CMST debt to be recovered: ~282,000 CMST
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Minimum lot size for participation: 1,000 CMST
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Total number of lots: 282
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The auction will consist of a number of fixed ‘Lots’ of CMST, with multiple lots enabled at a time for user bidding.
Note: Exact parameters will be communicated closer to the auction date and are subject to change.
Adjustments During the Auction
During the debt auction period, we will implement several important adjustments to ensure the stability and integrity of the system. First and foremost, CMST minting will be temporarily halted from the vaults affected by the exploit. This measure is crucial to prevent any further instability and to maintain control over the CMST supply during this critical recovery phase.
Additionally, the stablemint functionality will be modified to operate as a one-way deposit system throughout the auction process. This means that users will still have the ability to deposit USDC or DAI to mint CMST, allowing for continued liquidity and usability of the system. However, it’s important to note that USDC and DAI withdrawals will be paused for the duration of the auction.
This one-way system serves two primary purposes: it helps maintain the stability of the CMST supply by preventing large-scale withdrawals, and it ensures that there’s sufficient liquidity within the system to facilitate the debt auction process. We understand that this temporary restriction may cause some inconvenience, but it’s a necessary measure to protect the interests of all users and to ensure the successful completion of the debt auction.
We want to emphasize that these adjustments are temporary and will be lifted once the auction is concluded and the system has been fully recapitalized. Our team will be closely monitoring the situation and will provide regular updates throughout the auction process.
Why Participate in the HARBOR Debt Auction?
Participating in the HARBOR debt auction presents a unique opportunity for investors and community members. Once the system is fully collateralized and operational, CMST will pivot to a burn model, potentially creating value for token holders. The protocol will utilize surplus funds which the protocol would earn with expansion of CSMT via fees to buy back and burn CMST, which could lead to an increase in value for HARBOR holders. Moreover, auction participants will become key stakeholders in the protocol’s governance, giving them a significant voice in shaping Harbor’s future direction. This level of involvement offers not just potential financial benefits, but also the chance to actively contribute to the protocol’s development and decision-making processes.
Actionables and Timelines
To ensure a smooth and successful recovery process, we have outlined the following key actionables and timelines:
- Test Auction on Comdex Testnet: We will run the entire test auction on the Comdex testnet and allow the community to familiarize themselves with it before going live. This step is crucial to ensure that all participants understand the process and mechanics of the auction.
- Running the Auctions: The actual auctions will run until the entire debt is cleared. The debt-clearing process is real-time, and as Harbor is auctioned and as soon as the auction closes, the CMST acquired is sent to the collector. The collector then repays and closes the existing open collateral auctions.
The Future of Harbor
Looking ahead, we have plans for Harbor’s growth and development post-recovery. A key component of this effort will be running debt auctions for the undercollateralized CMST. This move is not just about addressing the current state of CMST but also about strengthening its position within the ecosystem. We have ambitious plans for CMST, including its close integration with the ShipFi and our upcoming RWA aggregation app (more on this in a later announcement). Importantly, we are committed to making CMST adoption more fluid and easy, with the goal of establishing it as the ideal stabletoken for the Cosmos ecosystem. This strategic positioning will enhance CMST’s utility and broaden its adoption across the Interchain landscape.
We appreciate your continued support and trust in the Harbor protocol. We’re committed to transparency throughout this process and will provide regular updates as we move forward with the debt auction and recovery plan.
Please stay tuned for further announcements regarding the exact timing of the token burn and debt auction. We welcome any questions or feedback from the community.
Together, we’ll rebuild and strengthen Harbor for the future.