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Solstice, a Solana-based decentralized project, recently saw its flagship stablecoin, USX, lose its peg to the United States dollar.
As of 01:45 UTC on December 26th, USX depegged to $0.799. About three hours later, the Solstice team infused liquidity into the stablecoin, helping its value rebalance closer to $1. At the time of writing, the Solana-based stablecoin traded at $0.99.
Shortly after the depeg happened, Solstice pinned a “secondary market liquidity issue” as the cause of the depeg. This implied that the sell pressure on USX in secondary markets, such as Orca and Raydium, exceeded available liquidity. In such cases, the stablecoin’s secondary market price drops.
Notably, USX liquidity providers on these decentralized exchanges/secondary markets may experience impermanent losses in the value of their holdings. However, their positions remain intact. This implies that when prices rebalance, the value of their holdings returns to their original positions.
On the other hand, those who used Solstice’s primary marketplace continued benefiting from the 1:1 redemption. This involves direct minting and token redemption from the platform. It is worth noting that this in-house market is open solely to institutional partners who have permissioned access to the service. Additionally, they must undergo Solstice’s Know Your Customer (KYC) verification process.
Solstice stated that those who sold USX via secondary markets during the depeg will not be reimbursed for losses they incurred. On the other hand, those who bought it during the depeg have netted profits from an arbitrage opportunity.
Stablecoins are natively designed to maintain a 1:1 peg to specific assets. For instance, stablecoins pegged to the U.S. dollar must be redeemable at par with the fiat currency.
Since Solstice lost its peg, it has raised eyebrows in the Solana DeFi ecosystem and the broader crypto community. The reason is not far-fetched. In mid 2022, UST, the algorithmic stablecoin issued by Terraform Labs, lost its 1:1 peg to the U.S. dollar. The depeg incident was accompanied by the fallout of its sister crypto, LUNA.
This triggered a rapid crash, contributing to the wipeout of approximately $40 billion from the crypto market at the time. Its crash also triggered a chain of events that led to the downfall of other crypto projects.
Solstice clarified that its USX stablecoin is in no way similar to Terraform Labs’ UST. It explained that USX is neither an algorithmic stablecoin nor a rebasing token like UST. The team also reiterated that USX remains over 100% backed by its reserve.
USX’s current stability near $1 indicates that the project’s efforts to inject liquidity into the secondary market have been successful. Aiming to prevent the issue from happening in the future, the team stated:
“We are actively working with internal and external parties to deepen secondary market liquidity to reduce the impact of large withdrawals in the future.”
Accountable, a third-party entity, published an attestation report confirming that Solstice’s USX was fully solvent, as the project’s team claimed.
Meanwhile, Solstice’s USX depeg issue had no notable impact on its DeFi business. According to on-chain data from DefiLlama, the protocol’s total value locked (TVL) is over $325 million, slightly higher than yesterday’s.
The post Here’s Why Solstice’s Stablecoin USX Depegged Below $1 appeared first on CoinTab News.
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