DEI Loses Peg Days After Terra’s Implosion, but Hong Kong Offers Way Out

The difficult patch for cryptocurrencies continues as Fantom’s DEI becomes the latest stablecoin to lose its peg to the U.S. dollar.

At the start of the week, Deus Finance’s stablecoin, DEI, according to CoinMarketCap data, dropped as low as 54 cents as it lost its peg to the dollar. 

This marks the continuation of the streak of algorithmic stablecoins losing their pegs, sending ripples of chaos through the entire ecosystem.

Before the de-pegging, DEI had a market capitalization of around $64 million and showed great promise in its growth trajectory. DEI served as a collateral mechanism for third-party instruments on Deus Finance, a Fantom-based protocol for decentralized finance (DeFi). 

Algorithmic stablecoins in disarray

DEI bears similarities with the embattled UST as they are both algorithmic stablecoins. For DEI, the collateral ratio was constantly monitored and regulated through arbitrage bots that ensured the stability of the peg. 

The disillusionment around algorithmic stablecoins most likely led to DEI’s recent slump. 

On Sunday, the asset was trading at $0.97 but apprehensive traders began exchanging DEI tokens for USDC on decentralized exchanges with low levels of liquidity.

As traders frantically exchanged their DEI for other assets, the stablecoin entered a downward spiral that was made worse by developers putting a lid on the redemption mechanism for DEI.

“Our team is working around the clock to restore the DEI peg,” wrote the Deus Finance team. “Mitigation measures were implemented immediately and solutions are being developed for long-term stability.” 

Despite the attempt to allay the worries of investors, some community members have referred to DEI as just “another algostablecoin headed for a death spiral.”

Stablecoins can learn from Hong Kong

Stablecoin issuers might want to look to governments for tips on how to guarantee stability. For nearly 40 years, Hong Kong’s dollar has been pegged to the U.S. dollar despite being a paper currency.

Although it uses arbitrage to maintain the peg, the Hong Kong Monetary Authority uses a pure system by backing the currency with dollar assets and not tampering with interest rates. 

This differs from Terra’s UST as it was largely under-collateralized and interest rates were meddled with. 

Amid the chaos, Tether (USDT) gave investors a scare when it briefly lost its peg but quickly regained it to the relief of traders. 

The largest stablecoin was being traded at roughly $0.95 for a few hours, according to CoinMarketCap. Furthermore, experts have warned players in the space to brace for even stricter regulations for stablecoins after the events of the last week.