Recently, the investors of the cryptocurrency community faced a massive shock after the sudden downfall of the Terraform Labs tokens. The stablecoin token UST and digital coin LUNA native to the Terra Chain both crashed 99.9% in value within a matter of a few hours after the UST peg was broken.
The incident spread on the social media websites like wildfire and soon started a FUD among other stablecoin holders.
Not withholding the risks of stablecoin project performances in the past, the next currency in line that seems to struggle is Deus Finance’s native token DEI.
According to on-chain metrics, the price of the DEI stablecoin is already breaking its peg to the USD and crashing to a $0.64 low. However, the Deus Finance management has assured investors that everything is under control, and they are working on restoring the peg.
DEI’s Decreasing Collateral Percentage
The data projections from Deus Finance indicate that the main reason for the instability of the DEI peg is an ever-declining percentage of collateral. It is worth noting that Deus Finance users can mint 1 Dues token after submitting collateral of $1.
In this manner, the investors can get 80% of their investment in the form of the USDC token via redeeming, and the remaining 20% is preserved in DEUS in the form of collateral for USDC to DEI conversions.
The latest data projections from Deus Finance indicate that the collateral ratio on the network has retracted to 43%. Therefore, the users are unable to redeem their DEI token since there are not enough funds available to back the stablecoins.
Meanwhile, some traders are using this opportunity to purchase DEI tokens from Deus Finance and exchanging them for $1 on other cryptocurrency exchanges.
Deus Finance has decided to disable the stablecoin redemption function for a while, which could potentially increase its price stability.
It is worth noting that DEI is an algorithmic stablecoin that uses data and programming to generate a peg to an alternative currency like USD automatically. The current situation is great for investors who have deployed Arbitrage bots.
The arbitrage bots are working to rapidly purchase and sell DEI tokens to take advantage of the $1 peg volatility. A 2022 report by the Bank of England suggests that the decreasing trust of the people in fiat currencies is going to become diminished due to the arrival and availability of stablecoins.
The report further suggested that when a stablecoin is unable to serve its underlying purpose of settling payments, the masses can lose their trust. Some experts suggest that investors should pay close attention to USDT as it dropped to $0.9 recently.