Algorithmic stablecoins are supposed to be automatically pegged to the price of another currency. These are unlike centralized alternatives like tether (USDT) or USD coin (USDC), which are backed by actual dollars or equivalent assets stored in a bank.
The collateral ratio of DEI is constantly monitored and adjusted via arbitrage bots, which continually trade $1 worth of the underlying tokens for 1 DEI, or vice versa, to ensure a peg.
DEI – which traded 3 cents below its peg on Sunday – lost 20 cents on Sunday night as traders likely exchanged DEI tokens for USDC amid a small amount of liquidity on decentralized exchanges, which caused price fluctuations. Lower prices led to more traders selling DEI for other tokens, presumably to protect against risks, which further contributed to a price drop.
Separately, Deus developers had earlier paused a redemption mechanism for DEI – which allows investors to redeem DEI for other tokens – that may have contributed to the decline.
As such, developers on Deus’ Telegram channel explained the lower liquidity was partly due to traders exiting stablecoin pools after UST’s collapse last week and a lower-than-usual backing for DEI tokens after a $13.4 million exploit on the Deus protocol in late April.
Meanwhile, DEI has regained the 72 cents level at writing time, with Deus developers stating a repegging plan using debt tokens was in place that would prevent a collapse of the peg in the future.
The slump follows Terra ecosystem project UST costing its investors billions of dollars as it lost its peg and fell to as low as 22 cents. Associated token luna (LUNA) dropped to pennies from trading over $100 earlier this month, losing as much as 99.7% of its value in under a week.
Panic around UST last week led to a similar sell-off in other stablecoins, such as Waves’ stablecoin USDN which lost 15%.
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.