DEI, a hybrid algorithmic stablecoin from the DeFi protocol DEUS Finance, lost its dollar peg on Sunday, according to data from CoinMarketCap.
The DEI stablecoin currently trades at $0.66 after recovering from an all-time low of $0.55 recorded on May 16.
Though DEI resembles Terra’s UST in many ways, DEUS Finance’s stablecoin is collateralized (unlike UST).
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, WBTC (the wrapped version of Bitcoin), or a combination of DEUS and USDC. The collateral ratio between the USDC and native token DEUS is 80%.
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The dollar-peg of DEI 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 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 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 peg?
Over the past two months, the DEUS Finance ecosystem suffered two flash loan attacks leading to a loss of more than $30 million.
Alongside the stablecoin, 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, according to data from CoinMarketCap.
These two factors depreciated the collateral value of the stablecoin and thus brought down the collateral ratio to 43%, according to data from DEUS Finance.
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With the collateral ratio so low, redemptions for DEI become incredibly difficult as there isn’t enough capital backing the stablecoin.
Now that the DEI stablecoin trades well below $1, many users have taken advantage of the arbitrage opportunity to buy the stablecoin 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.