Crypto investors no longer know where to turn.
Crypto pricing is now related to the stock market, which means that, as the saying goes, when the stock market coughs, the price of the digital currency suffers from pneumonia.
It has continued this year amid fears of a recession. That concern has been replaced by inflation, the highest in 40 years, and worsened by the recent resurgence of the Covid-19 in China, due to continued supply chain disruptions.
Investors are running out of assets, and almost no asset class is spared. But in addition to this pessimistic overall picture, the crypto market is suffering from the underlying problem of certain projects, such as Stablecoin.
What is a Stablecoin?
A stable coin is a digital currency whose value is associated with a stable reserve asset such as the US dollar, euro or gold. The goal is to offer investors a way to buy cryptocurrencies that are considered to be very volatile, as opposed to unpaid cryptocurrencies like Bitcoin or Ether.
Stablecoins are therefore considered to be supported by dollar or euro assets whose fair value must be equal to the number of conventional currencies.
“The value of cryptocurrencies like Bitcoin and Ether fluctuates a lot – sometimes within minutes,” Coinbase explained in a blog post. “An asset pegged to a more stable currency can assure buyers and sellers that the value of their tokens will not increase unexpectedly or crash in the near future.”
Stablecoins are designed to bring peace to the minds of investors who are still reluctant to invest in crypto. This policy was upheld, but in recent days it has been broken by the fall of Stablecoin UST or Terra USD and its token sister Lunar. Both are cryptocurrencies in the terra ecosystem.
The US lost its dollar peg when millions of investors wanted to redeem their tokens at the same time. The market then discovered that the USS reserve mechanism was wrong. Indeed, UST is an algorithmic stablecoin; In other words, it was supported not by the dollar reserves but by its sister assets Luna, which had to be burned or permanently destroyed by a computer code.
Algorithmic stablecoins differ from centralized options such as tether (USDT) or USD coins (USDC), which are supported by actual dollars or equivalent assets stored in a bank.
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‘One of the biggest fiascos in crypto’
UST and Lunar standards collapse simultaneously, causing massive losses to millions of retail and large investors. Here you can read a story about investors from Rob Lenihan of TheStreet who say they are on the verge of financial ruin due to UST and Lunar.
“Terra’s death is one of the biggest failures in the history of the crypto-market, measured by the affected market capitalization compared to the total crypto market cap,” said Ark Invest analyst Frank Downing in a note. “The collapse of Terra destroyed about 3% of Crypto’s total market capitalization, compared to the 2014 Mt. Gox hack that stole 7% of outstanding Bitcoin.”
The market cap of the crypto market is currently 1.38 trillion, far from $ 3 trillion last November.
DEI loses its peg to the dollar
Now, another algorithmic stablecoin is in the spotlight. This is the stablecoin of DEI, Deus Finance. DEI operates within Deuce, a decentralized financial project based on the Phantom Ecosystem.
DEI lost its 1-to-1 peg to the dollar. According to CoinGecko, DEI is currently trading at $ 0.574049, down 11%.
On May 16, the price dropped to 0.525299. The coin reached a high of $ 1.18 on January 31 and had a market value of $ 114.8 million on April 30. But since then the market value has melted 55% to $ 51.3 million.
The project uses DEUS and DEI coins: 1 To create or mint DEI, you must have a 1 deposit.
When they want to redeem their tokens, investors will receive 80% of their value at USDC and 20% at DEUS if USDC is used as parallel to create DEI. The parallel ratio fell to 43%, according to Finbold.com, citing data from Deuce Finance.
But low collateral makes DEI coin redemption difficult, as not enough capital is supporting stablecoins.
“Traders are taking advantage of the discrepancy in this arbitration, buying DEI coins and exchanging them for 1 collateral, making matters worse,” Finbold.com said.
Deus Finance has now tried to stabilize the currency by suspending all redemption.
