Abracadabra Proposes Shutdown of MIM Stablecoin with Minimal Recovery for Holders

The Abracadabra team has put forth a proposal to terminate the lending protocol alongside its popular stablecoin, Magic Internet Money (MIM). Current estimates indicate that MIM holders could expect to recover approximately 4 cents per token as part of the liquidation process.

This proposal was presented via a Snapshot vote on September 29, set to close at 1:24 p.m. ET on Wednesday. Early voting showed overwhelming support, with the proposal's submitter casting about 100 million votes in favor, while another wallet voted against with approximately 523,000 votes. This initial voting reflects a significant backing of roughly 99.5% in favor.

The rationale behind this drastic measure stems from a string of hacks that left MIM “severely under-backed with no viable path back to parity.” Currently, the collateral supporting MIM's debt amounts to around $1.2 million. However, approximately $300,000 of this is locked in an unchangeable Arbitrum WETH cauldron, indicating that only about $900,000 remains actionable. With an estimated additional $22 million of MIM held outside of protocol addresses, the team estimates a staggering $21 million gap, leading to the conclusion that MIM's effective backing is below $0.04, making more than 95% of it unbacked.

Trading data from CoinGecko indicates that MIM is currently valued at around $0.029, reflecting the fragile position of the asset.

Payout Mechanics Explained

Should the proposal be ratified, the plan involves reclaiming collateral from various lending markets, known as cauldrons. This collateral will be converted into ether and redistributed following a Merkle contract structure. Borrowers will receive their collateral value after deducting any outstanding MIM debt, which will be counted at a fixed rate of $1 per MIM. MIM holders will receive the remaining proceeds prorated.

A snapshot documenting MIM balances and cauldron positions will occur once the collateral has been converted, but not before October 15. Should any funds remain unclaimed after six months, they will be distributed to those MIM holders who did file claims, up to a maximum of $1 per token, with any excess allocated to borrowers.

The team mentioned considering raising interest rates to trigger liquidations and stabilize MIM's price, but they concluded that any temporary increase would only benefit fast-moving sellers. They also noted a critical deadline: on December 15, LayerZero Labs will discontinue its V1 relayer, which puts approximately $1 million in Abracadabra’s Stargate USDC and USDT cauldrons at risk unless withdrawn promptly.

The proposal also highlights that, according to legal advice, MIM represents a liability that precedes the accounting value of the SPELL governance token. Thus, until this liability is fully addressed, the SPELL token cannot hold any recognized value.

A Tumultuous Year for MIM

This proposal arrives just months after a June vote that transferred operational management and treasury control to a group linked to Anubis, a decision that similarly saw only two wallets cast votes. The protocol has endured considerable setbacks, including a notable exploit in January 2024 that resulted in a $6.5 million loss, knocking MIM off its intended peg. The turmoil continued with a March exploit that drained around $13 million and another incident in October where approximately 1.79 million MIM was minted fraudulently from deprecated cauldrons.

If approved, the protocol’s operations will cease following the completion of the liquidation, but withdrawals from immutable cauldrons will still be possible on-chain. The team clarified that they will not accept any legal or technical responsibility for maintaining the protocol post-closure, although the interface will remain available for any prolonged access needs.

Implications and Future Outlook

The potential termination of the MIM lending protocol stands as a critical moment, not just for Abracadabra but for the broader DeFi sector. The staggering losses facing MIM holders highlight vulnerabilities that often linger in decentralized financial systems. If you're working in this space, these developments should make you reconsider risks and security measures.

For investors and users of similar systems, this situation serves as a harsh reminder of the importance of due diligence and risk assessment. Many may overlook the fact that stablecoins, while designed to be pegged to traditional currencies, can fluctuate dramatically based on market conditions and underlying collateral health. And this is the part most people overlook: understanding the liquidity and backing of any asset can save substantial losses.

The fallout from this could resonate across other protocols as well. If the community ultimately votes to approve the proposal, what's to stop similar collapses in other, less secured systems? Analysts will likely keep a close eye on how the liquidation is handled and if MIM can return from its current position. Will they innovate a better model for collateral management, or will MIM's downfall serve as a cautionary tale?

Ultimately, MIM's fate could lead to stricter regulatory scrutiny in the crypto sector, as more developers and users push for enhanced security and transparency amid growing concerns. As always, change is likely, but whether that change will address the longstanding issues remains to be seen.