Algorithmic stablecoin DEI from DEUS Finance loses dollar peg, plunging 30%, as of now. This token was inspired by Terra UST.
DEI, a hybrid algorithmic stablecoin from the DeFi protocol DEUS Finance, has been having a hard time for a while now. The problems appeared amid the Terra and Luna epic crash. But on May 15 DEI lost its dollar peg and started plummeting.
The DEI stablecoin currently trades at $0.66 after recovering from an all-time low of $0.55 recorded on May 16.
Of course, you can’t compare DEI to UST. And even if DEI diminishes just as UST did, the investor’s loss will not be even close to those of Terra’s users.
But still it is rather frightening to see another algorithmic stablecoin to be crashing just few days after Terra and Luna did the same.
Is DEI algorithmic stablecoin similar to Terra’ UST?
According to Decrypt, though DEI resembles Terra’s UST in many ways, DEUS Finance’s stablecoin is collateralized. Unlike UST, which was protected by literally a few lines of code and nothing more.
Deus Finance uses two tokens called DEUS and DEI. The former is the project’s native governance token, and the latter is its dollar-pegged stablecoin.
Users can always mint 1 DEI by depositing $1 worth of collateral.
The collateral can be Circle’s USDC, Fantom FTM, MakerDAO’s stablecoin DAI, or a combination of DEUS and USDC.
The collateral ratio between the USDC and native token DEUS is 80%.
The dollar-peg of DEI stablecoin is stabilized much like Terra’s UST, leveraging a similar mint-and-burn mechanism between DEUS and DEI.
During DEI minting, the DEUS collateral is burned (a process of removing the tokens from the circulation) unless a different form of collateral is used (such as USDC, FTM, or WBTC, for example).
When redeeming DEI stablecoin for the underlying collateral, DEUS tokens are also minted alongside the underlying collateral.
If you were to mint DEI using only USDC as collateral, for instance, when you redeem your underlying, you would receive 80% in USDC and 20% in DEUS.
Redemption is the process of swapping the stablecoin for its collateral.
If the price of DEI is above $1, users can mint 1 DEI using $1 worth of collateral and sell them in the market to pocket the difference as profit.
If DEI falls below a dollar, users can buy one DEI stablecoin for less than a dollar on the open market and redeem them for $1 worth of collateral in USDC and DEUS.
How did DEI lose its dollar peg? Another attack?
Pretty much, so.
Over the past two months, the DEUS Finance ecosystem suffered two flash loan attacks leading to a loss of more than $30 million.
The DEUS token dropped by 45% this morning, hitting $162 a token. It now trades at $264 from an all-time high of $813,282,694.
These two factors depreciated the collateral value of the DEI stablecoin and thus brought down the collateral ratio to 43%.
It was crucial. Collateral low is essential to keep the stablecoin, well, stable.
With the collateral ratio so low, redemptions for DEI stablecoin become incredibly difficult as there isn’t enough capital backing the stablecoin. And it gives an opportunity for further attacks.
How’s so? Well, now that the DEI stablecoin trades well below $1, users can take buy the stablecoin for less than a dollar on exchanges and redeem them for the one-dollar worth of collateral.
To reduce the risks of collapsing, the DEUS finance team has halted the redemption process to help stabilize the coin. They also announced to make the coin fully collateralized.
When and how can this be achieved yet remains to be seen.