Algorithmic stablecoin USDN, which is designed to mimic the value of the U.S. dollar, has fallen off its peg by 9 cents to 91 cents.
- USDN is backed by the waves token (WAVES) and leverages the staking model of the Waves protocol’s underlying consensus algorithm.
- Waves' token is trading 3.86% lower over the past 24-hours, according to CoinGecko.
- Concerns over the algorithm have previously been raised by the company's founder Sasha Ivanov.
- "We have to work on the algorithm,” Ivanov said on CoinDesk TV’s “First Mover” program in June. “And what happens now is kind of inevitable, which is just a test of the whole system.”
- Algorithmic stablecoins have been in the spotlight this year following the collapse of terraUSD (UST) and the LUNA ecosystem, which saw $83 billion in market cap evaporate in May.
- Analysts told CoinDesk that USDN's backing was realized through WAVES and was currently about 14% backed, which created "almost the same scenario as with UST."
- "Just a week ago, their team made it possible to improve the mechanics of USDN reserve recapitalization through the SURF token purchase, depending on the backing ratio: the lower the ratio, the lower the token’s price," Iakov Levin, CEO of crypto yield platform Midas, explained in a message to CoinDesk.
- Levin said that even though all purchases made with this token add to USDN backing, the move created a model similar to UST by relying on a secondary token to support the stablecoins' peg by providing liquidity. The upcoming Ethereum Merge was further cited as a reason for falling liquidity.
- "Everyone is busy preparing for the Ethereum Merge upgrade," he said, so "the liquidity drops naturally. No one is keen on supporting the peg of another algorithmic stablecoin. This model potentially leads to dire consequences and extreme fragility of the peg," Levin added.
UPDATE (Aug. 26, 2022, 11:08 UTC): Adds analysts' comments in seventh and eighth bullets.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.