Another algorithmic stablecoin lost its dollar peg when DEUS Finance’s Terra inspired DEI token fell.
According to data from CoinMarketCap, DEI, a hybrid algorithmic safecoin derived from the Protocol DEUS Finance, lost its dollar perg on Sunday.
After recovering from a May 16th all-time low at $0.55, the DEI stablecoin is currently trading at $0.66.
Although DEI is similar to Terra’s UST, DEUS Finance’s stablecoin can be collateralized (unlike UST).
Deus Finance uses two tokens, DEUS and DEI. The first is the native governance token of the project, while the second is the stablecoin that is dollar-pegged.
By depositing $1 of collateral, users can make 1 DEI. You can use Circle’s USDC or Fantom FTM as collateral. WBTC is the wrapped version of Blockchain. The collateral ratio between USDC and native token DEUS equals 80%.
The DEI dollar-peg is stabilized much like Terra’s UST. This leverages a similar mint/burn mechanism between DEUS, DEI.
The DEI collateral is burnt during minting. This is a process that removes the tokens from circulation. DEUS tokens can also be minted when redeeming DEI to pay underlying collateral.
For example, if you had to mint DEI with USDC as collateral, you would get 80% in USDC and 20% for redeeming your underlying.
Redemption refers to the act of exchanging the stablecoin for collateral.
Users can create 1 DEI with $1 worth of collateral if the DEI price is higher than $1. They can then sell the extra DEI in the market and pocket the profit.
Users can purchase one DEI at a price below $1 on the open-market and then redeem them for $1 in USDC or DEUS collateral.
What caused the DEI to lose its peg
The DEUS Finance ecosystem was hit by two flash loans in the last two months. This led to a total loss of $30 million.
The DEUS token fell by 45% today, reaching $162 per token. According to data from CoinMarketCap, it now trades at $264, down from $813.282,694, an all-time high.
These two factors led to a decrease in the collateral value and a reduction of 43% in the collateral ratio, according to DEUS Finance.
Because the collateral ratio is so low, redemptions of DEI are extremely difficult because there isn’t enough capital backing this stablecoin.
Many users are now taking advantage of the arbitrage opportunity to purchase the DEI stablecoin on exchanges, and then redeem them for one-dollar of collateral.
The DEUS finance team stopped the redemption process to stabilize the coin and reduce the risk of it collapsing. They also declared that the coin would be fully collateralized.