- DEI (DEI-USD) is the newest stablecoin to fall from its $1 peg
- The stablecoin underlies the Deus (DEUS-USD) network and uses an algorithmic model
- The news comes just one week after algorithmic stablecoin TerraUSD’s (UST-USD) collapse
Stablecoins, as their name implies, are supposed to remain safe and steady. When they stumble, they can drag the rest of the crypto market down with them. This past week has proven detrimental for stablecoins with the collapse of UST, but now it seems all eyes are on the DEI crypto, which mirrors UST in many aspects.
To understand the downfalls of DEI this week, it’s important to know the backstory of the UST collapse. UST is an algorithmic stablecoin native to Terra (LUNA-USD). It is the currency fueling much of the network’s DeFi capabilities, supporting many of the liquidity pools across the network’s dapps.
As an algorithmic stablecoin, UST forgoes collateralization by fiat reserves in favor of mathematics. Most stablecoins keep their pegged values by having underlying currency reserves. The safest projects are those which overcollateralize. Algorithmic stablecoins don’t have any underlying reserves. Rather, they use mathematic calculations to support pricing. UST is supposed to maintain its $1 peg by having its supply constantly adjusted to meet the demands of users.
This method is quite innovative on paper, but it is not foolproof. That much is being made clear as UST values fall far from their $1 peg. When too many users flood out of an algorithmic stablecoin, the algorithm cannot keep up. This allowed UST values to plummet last week, taking the token down to just 10 cents, where it remains.
DEI Crypto Suffers Similar Fate to UST
The DEI crypto is in similar shape to UST this week, suffering from its own price de-pegging. The stablecoin, which underlies the Deus Finance network of DeFi tools, is the latest stablecoin to drop significantly in May.
DEI operates slightly differently from UST. Rather than adjusting supply and demand, DEI arbitrage bots monitor collateral ratios which include DEI. These bots then buy the underlying assets in these token pairs to keep DEI prices at $1.
Late last night, the protocol lost its control of the DEI prices. Theories suggest that users were cycling out of DEI into other stablecoins that are more liquid and widely available. The spikes in volume and rapid exits from the protocol were enough to de-peg DEI. Now, the stablecoin is trading at just 72 cents.
As is the case with UST, Deus developers are creating a hasty recovery plan to try and restore DEI back to $1. The plan includes implementation of a treasury bond system, allowing users to lock collateralized assets in the protocol for a fixed interest rate. Hopefully, these developers can keep the stablecoin from plummeting further, unlike UST.
On the date of publication, Brenden Rearick did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.