The recent debacle concerning blockchain protocol Terra’s stablecoin, TerraUSD (UST), is yet to end. Other stablecoins appear to have joined in the fray, having lost their dollar peg over the past few days. If you somehow missed the uproar that followed UST’s record collapse and the corresponding decline of Terra’s native LUNA token, here’s a brief recap.
Earlier this month, algorithmic stablecoin UST saw its value crash from its 1 USD peg, falling below 15 cents. Sister token LUNA showed similar behavior; its price dropped by more than 92% in just a few days. This resulted in massive losses for users of either asset.
Among other ostensible reasons, certain suspicious transactions over the first weekend in May kickstarted the decline. Vast volumes of TerraUSD initially left DeFi protocol Curve Finance; later, about $285 million worth of TerraUSD tokens entered circulation. TerraForm labs admitted responsibility for the first transaction, but coupled with the second; it triggered a minimal depegging that led to a massive sell-off and an influx of arbitrage traders. As other events unfolded, the Terra ecosystem practically collapsed.
The stablecoins mentioned above are now treading similar paths: the Kava network’s USDX, the well-known stablecoin Tether
(USDT), and the DEUS network’s DEI token. Over the past few days, these coins have fallen from their dollar peg; a trend UST probably began. Let’s look at recent price activity and other details relating to this issue.
An Overview of the Depegging Trend
USDX is the native stablecoin of the Kava blockchain ecosystem. The DeFi project allowed users to access USDX tokens as loans by depositing other cryptocurrencies as collateral, and the network secures these funds using a smart contract. Kava welcomes a wide range of crypto assets such as XRP, BNB, BTC, etc.
Not long after TerrsUSD’s collapse, data charts showed that USDX had decoupled from the dollar. The stablecoin nosedived to 47 cents past midday on Wednesday. It recovered the next day, rising $0.89, but it plummeted once more to about $0.56. Over the week, USDX has seen its price undergo fluctuations but has generally recorded higher values. It has not restored its peg at writing but still hovers at the $0.80 range.
USDX’s Relationship with UST; What Caused the Depegging?
Some might argue that Terra kicked off a depegging phenomenon, and in the case of the Kava dip, they are somewhat correct. Scott Stuart, CEO and co-founder of Kava labs shared that the UST liquidations were likely part of what caused USDX’s decoupling.
Let’s shed some light on this; as stated earlier, Kava accepts collateral for USDX loans in crypto, and UST was one of its listed coins. The crash led to the liquidation of a portion of Kava’s backing, thus dragging USDX alongside TerraUSD and LUNA.
Fortunately, as Stuart reports, USDX will regain its dollar peg as it is not an algorithmic stablecoin. Kava has supposedly isolated the UST risk and is in the process of dissociating. The team put it to a vote, and with approval from the majority, UST is no longer used in minting USDX. Once the tokens have left the network’s system, all should return to normal.
It appears the CEO’s assurance was not misplaced; USDX has indeed been on a steady uptrend. Perhaps as Stuart says, it won’t be long before it recovers.
(USDT) is the world’s largest stablecoin and is a perfect example of a fiat-backed stablecoin, a token pegged to a government-issued currency. Each of the 82.8 billion Tether
tokens in circulation is backed by a dollar making for an 82.8 billion USD reserve.
Stablecoins generally exist to guard against market volatility, and a network like Tether
somewhat embodies this sentiment. Hence, its depegging on Thursday, May 12th, understandably induced a slight wave of panic among investors and crypto users in general. Within this period, USDT briefly touched its lowest value in over five months; 94.55 cents.
In truth, the widespread worries were needless as it didn’t take very long for the stablecoin to recover. Currently, USDT is trading at $0.999, as shown by coinmarketcap.
Tether(USDT) Depegging Driven by Fear
Terra’s decline gave rise to speculation of a ripple effect, which presumably caused USDT to plunge in value. Traders sold off their holdings amidst an industry-wide mistrust of stablecoins. Interestingly, the Terra crash also affected the world’s largest cryptocurrency BTC.
Additionally, USDT’s initial dip left an opening that arbitrageurs were quick to note and leverage. Tether
did not halt redemptions during the happenings above; Chief Technology Officer Paolo Ardoino affirmed this on Twitter.
Source: Twitter @paoloardoino
Several traders purchased the network’s native tokens for under a dollar each and redeemed them for the usual 1 USD, thus making a profit. Not long afterward, the network’s liquidity pools were greatly diminished. Tether
has remained stable since confirming the firm’s assurances that all would return to normal.
The DEI devaluation was the third to occur in the days since TerraUSD’s and the most intriguing as the token is also an algorithmic stablecoin. The DEUS network beneath which DEI operates utilizes a mint and burn mechanism similar to UST’s. However, the pertinent assets have one clear difference; the DEI token is collateralized.
DEUS allows users to mint 1 DEI by depositing a 1 dollar collateral. The deposit could be $1 worth of digital coins such as USDC, FTM, DAI, the protocol’s native DEUS token, etc. As stated earlier, DEUS uses a mint and burn system to regulate the DEI peg.
As new DEI tokens enter circulation, DEUS tokens are burnt unless substituted with collateralized assets. Also, as users swap DEI for other tokens (redeem it), newly minted DEUS tokens enter the market. The network manages this because, during redemption, users receive a 20% portion of the swapped tokens in DEI.
Data from CoinGecko shows that DEI’s value had fallen from its dollar peg as of late Sunday. The slump saw the token drop to a record low of $0.52; however, it soon recovered. The stablecoin’s market capitalization halved with the DEUS token also going along with the general dip.
The Ensuing Collateral Ratio Imbalance
Depegging allows users to profit regardless of which direction it goes. If the price falls under 1 USD, traders can purchase the tokens cheaply on the market and redeem them for a 1 dollar equivalent collateral asset. Also, if it exceeds $1, traders can mint DEI using collateral worth $1.
Arbitrageurs also harnessed the opportunity to profit this time; however, unlike USDT, redemptions were impossible to sustain, leading the project’s developers to shut them down. The halt was only supposed to last till DEI regained its peg, but that is yet to occur. According to CoinGecko, DEI is hovering at $0.58 writing; it is worthy of note that it briefly rose to 72 cents.
It is undeniable that the TerraUSD collapse had a hand in the DEI token’s descent. Lowered liquidity across DEXes and unstable prices prompted traders to drop DEI for other tokens. The decrease in liquidity resulted from investors exiting stablecoin pools due to fear of contagion from Terra. Additionally, DEI backing had fallen following an attack last month that cost the network $13.4 million.
In The End
The recent events have resulted in significant losses for some and left several stablecoin users shaken up. The depegging trend has highlighted possible flaws in stablecoins and illustrated how impactful a shift in industry sentiment could be. Fortunately, it appears the stablecoin market will be just fine this time. Developers for the pertinent projects have managed the events remarkably well thus far.
A worthy point of concern is the growing anxiety surrounding stablecoins within the US Federal Reserve. The institution recently issued a report stating that stablecoins could harm the economy. These digital assets could supposedly cause interest rates to rise and are liable to liquidity risks. The report also suggested that the backing assets could devaluate, an understandable point considering the affair with UST and USDX.
This comes shortly after a tide of speculations regarding a regulatory crackdown. It remains to be seen how coming events will unfold.
Author: Gate.io Observer: M. Olatunji
* This article represents only the views of the observers and does not constitute any investment suggestions.
*Gate.io reserves all rights to this article. Reposting of the article will be permitted, provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.