Deus Finance’s stablecoin Dei (DEI) is the latest stablecoin to lose its 1-to-1 peg to the U.S. dollar. It is presently selling at $0.64 after numerous algorithmic stablecoins lost their peg last week, the most prominent of which is the algorithmic stablecoin TerraUSD (UST).
Deus Finance employs DEUS and DEI tokens for its Defi system, where $1 of collateral is needed to mint 1 DEI. When redeeming one DEI, users would obtain 20% of the value in DEUS and 80% in USDC if USDC was used as collateral to create DEI.
According to Deus Finance, this is necessary since the collateral ratio decreased to 43%. Low collateral indicated problematic redemption of DEI tokens because there is not enough cash behind the stablecoin.
Our team is working around the clock to restore the DEI peg. Mitigation measures were implemented immediately and solutions are being developed for long-term stability.
DEI peg mechanism: https://t.co/KKt3Tsam6F
Bond program: https://t.co/UBhE3XAY7KFurther updates to follow.
— DEUS Finance DAO (@DeusDao) May 16, 2022
Traders exploit this arbitrage mismatch to purchase DEI coins and swap them for $1 worth of collateral, exacerbating the situation. Deus Finance responded by suspending the redemption process to stabilise the cryptocurrency.
How the DEI loss came to be
While more centralised cryptocurrencies like Tether (USDT) or USD (USDC) are backed by dollar assets, algorithmic stablecoins were automatically pegged to the price of another currency.
Arbitrage bots, which concurrently purchase and sell the same asset to benefit from slight discrepancies, assured the peg by exchanging $1 worth of an underlying token for 1 DEI and vice versa.
Crypto markets are facing uncertainty, as even the Bank of England acknowledged in its March 2022 report: “Public confidence in money and payments could be undermined if a systemic stablecoin used for payments fails to meet its obligations.”
For the time being, Bitcoin is holding about $30,000 despite all the recent turmoil. If the stablecoin rout persists, there might be much more selling pressure in the crypto markets, and the bottom would be hard to forecast.
Investors should pay close attention to USDT as the biggest stablecoin and how its values fluctuate compared to other major currencies to gauge the direction of the markets.