May 2022 - DEI Stablecoin Depegging - $74.539m (Global)

"DEI is an advanced algorithmic cross-chain fractional-reserve stablecoin, with one native bridge that will connect to all chains within the DEUS ecosystem." "DEI is backed by cryptocurrencies. Twenty percent of its reserves are in Deus Finance’s native cryptocurrency while the remaining 80% is a combination of other stablecoins."

"DEI’s composition is free-flowing, comprising roughly 10% DEUS tokens and 90% of another trusted stable, depending on the chain in question. The collateral ratio of DEI is constantly monitored and adjusted via arbitrage bots."

"DEI’s mission is to bridge liquidity across all blockchains in a scalable and decentralized way. DEI will enable users to send a stablecoin to any chain and claim it on the other side with no slippage."

"DEI’s vision is to be the stablecoin of choice for users across all chains. Currently, there is an industry-wide dilemma in that users require a different stablecoin for each chain they wish to operate on. With DEI, users will have access to a stablecoin that is usable and redeemable across all chains."

"Another issue that DEI addresses is cross-chain liquidity. Bridging tokens to other chains can often be a very slow and sometimes risky process. Adding to that, bridges are only as useful as the liquidity on the other side."

"DEI’s mission is to bridge liquidity across all blockchains in a scalable and decentralized way. DEI will enable users to send a stablecoin to any chain and claim it on the other side with no slippage."

"During DEI minting, the DEUS collateral is burned (a process of removing the tokens from the circulation) unless a different form of collateral is used (such as USDC, FTM, or WBTC, for example). When redeeming DEI for the underlying collateral, DEUS tokens are also minted alongside the underlying collateral." "If you were to mint DEI using only USDC as collateral, for instance, when you redeem your underlying, you would receive 80% in USDC and 20% in DEUS."

"DEI is majority-backed by the collateral of a trusted stablecoin and fractionally backed by DEUS tokens. As mentioned previously, this ratio is dynamic and is kept in check by arbitrage bots. It is important to note that DEI’s behaviour and characteristics are isolated per chain. For instance, if for some reason USDC on Mainnet were to collapse, the circulating DEI on other chains would be unaffected. In such a rare event, the only users negatively affected would be those attempting to bridge to and from the compromised chain during the window of instability. The DEI bridges will have a decentralized failsafe mechanism to shut down during such an occurrence."

"Redemption is the process of swapping the stablecoin for its collateral." "If the price of DEI is above $1, users can mint 1 DEI using $1 worth of collateral and sell them in the market to pocket the difference as profit." "If DEI falls below a dollar, users can buy one DEI for less than a dollar on the open market and redeem them for $1 worth of collateral in USDC and DEUS."

"[D]ue to DEI’s free-flowing composition, users can always redeem DEI for $1 by tapping into the currently existing stablecoin liquidity of external protocols. Additionally, users are incentivized to add to this liquidity by providing their own through yield farms that will reside on all chains within the DEUS Finance ecosystem."

"The stablefarm is a low-risk, high reward farming pool designed to incentivize users to provide liquidity and suffer zero impermanent loss. The LP tokens are created by providing 50% DEI and 50% of a trusted stable, depending on the chain. This pool yields 50% APY with no downside."

"Looking for somewhere to #yieldfarm with your stables? There are a host of opportunities to stake your $DEI / $USDC on #Fantom" "The good people over at @LiquidDriver have added the "Another $DEI, another dollar" stablepool, powered by @beethoven_x."

"Users interacting with this software do so entirely at their own risk."

On May 14th, "$DEI Market Cap [was] $88,737,181".

"With UST collapsing, the stablecoin market was shaken." "$DEI The next stable to crash?"

"DEI – which traded 3 cents below its peg on Sunday – lost 20 cents on Sunday night as traders likely exchanged DEI tokens for USDC amid a small amount of liquidity on decentralized exchanges, which caused price fluctuations. Lower prices led to more traders selling DEI for other tokens, presumably to protect against risks, which further contributed to a price drop."

"Traders [we]re taking advantage of th[e redemption] arbitrage mismatch, buying up DEI coins and exchanging them for $1 worth of collateral, making matters worse. Deus Finance reacted by halting the redemption process in order to try and stabilize the coin."

"First of all, we have been aware of DEI being below 1$ for several days now." "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." "Further updates to follow."

"Read up on the long-term future for $DEI stability: DEUS Treasury bonds! A solution to automate an unbreakable backing of 1 DEI:1 USDC while also dampening $DEUS selling pressure into the future." "To regain DEI’s peg to the U.S. dollar, the Deus Finance team is selling their own quasi-treasury bonds that they hope will incentivize people to add to the stablecoin’s liquidity. In a blog post, a member of the Deus Finance DAO said the stablecoin didn’t have enough USDC to back it because of a hacking in March in which $3 million of crypto was stolen."

"If DEI is below 1$ for a longer time, the interest rates of overcollateralized Loans increase every second. That mechanism pushes borrowers to buy back DEI below 1$ to pay back their loans more often."

"The collateral ratio of DEI is constantly monitored and adjusted via arbitrage bots, which continually trade $1 worth of the underlying tokens for 1 DEI, or vice versa, to ensure a peg." "Arbitrage bots, which simultaneously buy and sell the same asset to profit from small differences, were ensuring the peg by trading $1 worth of an underlying token for 1 DEI and vice versa."

"AMO v2 will imitate natural user behavior, using lending, borrowing, repaying buyback, and collateralizing."

"AMOv3 the peg-savior. Additionally, we will implement that at a random time. Without any notice, we will use the AMO to bring the price back to 1$, but this will “punish” all borrowers by increasing interest rate by more significant percentages, so they will need to buy DEI above peg."

"With this dynamic, we will decrease the global risk by writing the balance to the isolated risk side when DEI trades below 1$; additionally, the increasing interest rate will naturally lead to increased demand for DEI below 1$."

"We deactivated the AMO today in anticipation of what happened at UST, to cooldown the market and not deploy further treasury assets. AMO will get activated again over the night, with a new monetary policy model that will be rolled out in parts today and in the future."

"We believe a confident peg at $1 and fully collateralized backing is the only answer to resolve short-term peg stability."

"The $DEI redemption and bond contracts have been closed. Almost 40m DEI has been removed from circulation and we want to say a huge thank you to the community for their support and cooperation thus far." "The DEI contract is being updated and additional layers of security are being implemented. DEUS v3 development is ongoing and after some final internal tests we will be deploying a public testnet very soon, so stay tuned."

"So why is DEI dumped so hard?" "Why is $Dei down about 50% in 24 hours while $Deus is up 30%. Im really confused."

"[W]e are working on a newly deployed DEI that will have a 95%+ backing again & laid out a clear plan how future revenues can compensate for past debts." "[W]e are also in contact with Scream to make sure future protocol profits will directly benefit Scream debt."

"As per announcements in our community, $DEI redemptions have begun to stabilise the peg."

"It’s clear that only with a fully intact and backed DEI, DEUS can generate revenue needed to clear up past debt. Free circulating DEI is jeopardising current and future profits until health is installed."

"What is $bDEI? $bDEI is bonded $DEI. Minting $bDEI removes $DEI out of circulation." "$DEI bonds are live. These are low risk/reward and $DEI in the process."

"On top of the WednesDEI redeployment, lafachief is preparing an article on the vDEUS revamp. The changes will create a maximum supply cap of 600k $DEUS. vDEUS will become an ERC20. Liquidity Pools will be available & incentivized."

"Until now Market Forces should have made everyone realize that we cannot offer an early non-dilutive repayment." "Such early repayments are dilutive and extract value from the protocol and ultimately from the people that should be repaid, as repayments become slower and slower."

"Even the current “optimistic” outlook is a repayment over 3–7 years at a yearly rate of 40% of your DEI redeem value, given the price of DEUS stays stable at $40, as currently debt is repaid in DEUS tokens its more likely the price goes down more, crippling repayments further until they stall completly."

"vDEUS becomes an ERC20 token, migrations will be possible approx next week." "vDEUS staker are receiving real yield as compensation for the waiting time in form of 25% APR in vDEUS that can be traded to DEUS on DEXs for instant liquidity or held until conversion for maximum value."

"revamping the vDEUS model enables the protocol to have a maximum inflation of 260k DEUS. ((50m *1.25) times 1/250 DEUS) which adds to the (100k+APR) veDEUS. With current circulating supply and farming rewards, leading to a maximum supply just short of over 600k DEUS, a modest increase from the pre-blackswan max-supply of 300k DEUS."

"vDEUS APR is guaranteed for one year or until DEUS price hits $250. bDEI is non-dilutive for DEUS, it guarantees legacy DEI holders fully-backed DEI when the protocol has enough cash."

"Contract theory studies the incentives needed to reach a pareto improving equilibrium: Redeemers make DEUS savings possible by being repaid later. They get a compensation in the form of being paid back more later (a 25% APR accrued)."

"DEI token contract has been redeployed with a 99/1 mint/redeem gap." "As an official @SolidlyETH Partner @DeusDao We will follow them on their move to Ethereum." "With the upgraded Solidly moving to Ethereum, we are planning to join suit by moving our $DEI minter and collateral."

"$DEI has been redeployed, currently with 1% seigniorage. The minting ratio is 100% with a redemption ratio of 99/1. The 1% in seigniorage will primarily be used to buy back and burn $DEUS." "The redeem ratio will begin at 99% and gradually trend towards 90% over the coming weeks leading up to the first bDEI maturity date at the end of September." "This will result in up to a 10% $DEUS burn per minted $DEI."

"A new-look app accompanies this redeployment, with a revamped dashboard containing all stats at a glance. An extensive analytics (with historical charts) page is being built and will be released very soon." "This redeployment also sees the implementation of the Lossless protocol. Lossless offers an additional layer of security and mitigates the impact of exploits by utilizing threat identification tools and unique monitoring systems." "Ontop of the amazing wedsnDEI redeployment, there is a new article that outlines new changes to vDEUS including creating a 600k soft cap to the $DEUS supply."

On October 5th, "Only a few days left before the migration period ends." So it would seem that the migration period is over. "We wont be allowing any adjustments to these newly implemented changes, these ideas were discussed & formalized internally with great input from people experienced in debt restructuring." "We hope all parties can be happy with the revamped plan, since it is aligned with all financial principles and maximizes value for all parties."

"And I with 14.000 ust Lost in the Old DEI. I [hope] that New DEI are not the New Old DEI." "Better have some money to back this coin this time." "Fool me once shame on you..."

Further Analysis

DEI aimed to create a stablecoin which could be swapped across multiple chains without any cost. Unfortunately the protocol depended on the availability of liquidity in farming pools. In other words, the whole thing depended on there being persistent demand for the stablecoin token.

DEI tried a wide variety of different approaches to revive the coin and re-establish the peg, but were ultimately unsuccessful. Eventually, a new coin was launched which would allow users of the old coin to get back a fraction of the coins which they originally had. Most public sites such as CoinMarketCap and CoinBase have not yet listed the new token. It's only listed on CoinGecko so far.

How Could This Have Been Prevented?

The DEI stablecoin did not have reserves to back the coin, following an earlier March hack. The primary problem was due to the security or insurance of those funds lost in March.

More Cryptocurrency Exchange Hacks/Scams/Frauds

Frenly Pandas Discord Channel Hacked > > < < QuickSwap GoDaddy DNS Compromise

Sources/Further Reading

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