On May 16, the “synthetic” stablecoin from Synthetix, sUSD, lost its peg to the US dollar, dropping to $0.915.
At the time of writing, the asset’s price on the decentralized exchange (DEX) Uniswap had recovered to $0.965.
The stablecoin is launched on the DeFi protocol Synthetix, which allows the creation of “synthetic” assets in the Ethereum ecosystem, with sUSD serving as collateral.
According to CoinGecko, the market capitalization of the “stablecoin” exceeds $50 million.
The risk manager of the lending protocol Aave, Chaos Labs, identified the cause of the depeg. Analysts reported that the deviation from the dollar occurred after a major liquidity provider (LP) exited the sBTC/wBTC pool on DEX Curve.
The LP converted assets into sUSD through spot redemption on Synthetix and then exchanged them in the Curve pool. This triggered a chain reaction that destabilized the stablecoin’s peg.
Chaos Labs explained that on April 29, the Synthetix community adopted SIP-2059, which effectively ended support for spot synthetic assets on the Ethereum network, except for sUSD. Therefore, protocol participants have to redeem sBTC and sETH for the “stablecoin.”
“A relatively inactive address for several months in 2023 contributed 87 BTC to the sBTC/wBTC pool on Curve. The liquidity of this pool was highly concentrated: most of it was provided by three accounts, including this initial user,” stated Chaos Labs.
After the liquidity withdrawal, the ratio of “synthetic” BTC to wBTC temporarily dropped to 0.93–0.94, but later returned to 0.96. The LP then exchanged their sBTC for 4.48 million sUSD.
Subsequently, they began selling stablecoins in the Curve pool to maintain their collateral. Over several hours, the sUSD rate gradually deviated as the coins were sold.
The LP still holds 1.76 million sUSD, which could be sold after the rate recovers, experts believe.
“Given the current discount, there is an incentive to redeem sUSD debts on Synthetix, as the asset is hard-coded to $1 in the protocol. However, [recovery] has not yet occurred,” added the company.
The Chaos Labs team recommended the community temporarily freeze sUSD reserves in Aave v3 on Optimism to mitigate further market impact and conduct a more thorough assessment of the situation.
Specialists emphasized that the incident has not yet caused significant damage. Total liquidations for sUSD at the time of assessment amounted to about $2398.
Back in January, the stablecoin TrueUSD lost parity with the US dollar, falling by 1.3% to $0.984.
In April, the USDP rate from Paxos surged above $1.18. The loss of the peg led to a liquidation of 529,000 USDC for one trader.