The collapse of Terra’s flagship stablecoin project UST has sent shockwaves that have affected the entire cryptocurrency ecosystem and its peers are perhaps experiencing the worst part of it.
During the weekend, another well-known stablecoin known as DEI drifted off its $1 peg as a wave of redemptions compromised the project’s collateral backing the token.
Same as UST, DEI is an algorithmic stablecoin that is collateralized by USDC reserves pledged by investors to mint the token. These DEI tokens can be used for yield farming purposes.
Can DEI survive the latest downturn to once again become a strong player in the algorithmic stablecoin landscape? In this article, we dig deeper into what happened to the project lately while sharing some predictions about its future based on the developing team’s effort to turn the situation around.
DEI is a stablecoin partially backed by the collateral pledged by those who mint it. Whenever an investor wants to mint DEI, they have to pledge USDC or other selected crypto assets to do so.
Whenever DEI is minted, DEUS is burned and that should result in an increase in the token’s price as its circulating supply is reduced. Meanwhile, when DEI is redeemed, DEUS is minted and that should lead to a reduction in its price as the circulating supply increases.
A deterioration in the public’s trust regarding algorithmic stablecoins appears to have prompted a wave of redemptions that led to the massive minting of DEUS. Since DEI’s collateral is partially made up of DEUS, the value of the collateral has declined significantly.
According to data from DEUS Finance, the collateral ratio of DEI at the moment is standing at 43%, meaning that less than half of the circulating supply is currently backed by users’ pledged USDC and other digital assets.
“Our team is working around the clock to restore the DEI peg. Mitigation measures were implemented immediately and solutions are being developed for long-term stability”, the DEUS Finance team stated following this weekend’s crash.
Can This Stablecoin Survive? DEI Price Prediction 2022
The developing team behind DEI has proposed various measures to push the stablecoin back to where it should be. The first of them is the issuance of a treasury bond that aims to increase the collateral ratio closer to 80% or so.
These bonds will remove a portion of DEI’s circulating supply and they should facilitate redemptions to the point that the public’s trust in the project is restored.
Allocating these bonds may not be easy in the current environment as those who buy these instruments have to believe in the project’s ability to pay back the loan as expected.
DEUS Finance also implemented a recently proposed pegging mechanism on 15 April in anticipation of what could happen due to the instability caused by the collapse of UST. This new algorithmic market operation – also known as AMO – aims to incentivize the purchase of DEI by increasing the interest charged on overcollateralized loans.
Thus far, the measures proposed by the team have not managed to push DEI back to its intended peg. It remains to be seen if the developing team manages to issue the treasury bond proposed as that could result in a positive outcome.
In the meantime, algorithm-based predictions from multiple services are pointing in different directions as the future of stablecoins remains relatively uncertain.
Wallet Investor has a bearish short-term outlook on the token as its baseline DEI price prediction stands at $0.548 for 31 May. Meanwhile, Gov.Capital is anticipating that the token will climb back to its $1 peg next month or sooner.
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