Solana Stablecoin Narrowly Escapes UST-Style Collapse

A recent incident has brought back fresh memories of the UST stablecoin collapse, but the team successfully averted the fall. USX, a synthetic stablecoin issued by Solana-based DeFi protocol Solstice depegged and was on its way to a collapse.

The project confirmed on X that USX depegged due to sell pressure on Orca and Raydium exceeding available liquidity, causing the value of the stablecoin to drop on the secondary market by 20%.

According to the team, the stablecoin has fully recovered and is now fully backed and assets under custody on the Solstice side remain entirely unaffected with more than 100% collateralization. The team added that other aspects of the protocol, eUSX and YieldVault are entirely unaffected as the issue was purely a USX secondary market liquidity event.

The Risks of Synthetic Stablecoins

Synthetic stablecoins are stablecoins whose values are determined by algorithmic and smart contract mechanisms rather than actual assets backing them. As a result, any shift in the dynamics can cause the value to depeg, causing a cascading effect. This was first seen in UST, an algorithmic stablecoin launched by Do Kwon who was recently sentenced to prison. 

A similar incident happened with USX, but was slightly different in that the price drop was initiated on the secondary market. Here, the value of the token is determined by supply and demand and can be affected during low liquidity or high sell pressure, unlike on the primary market where actual minting takes place. 

Solstice also managed to inject liquidity in time, which helped to stabilize the value of the stablecoin to prevent further decline. According to the team, USX is not an algorithmic stablecoin like UST which failed due to a collapse of the backing assets. Despite the timely intervention, the brief depeg created significant panic and users have fired back.

Solana’s Reputation Saved

Over the years, Solana has become a popular and major destination for building DeFi protocols. Because of this popularity driven by speed, scalability and cheap transactions, the network has grown to Surpass Ethereum in annual revenue.

The aversion of USX’s collapse is a major protection for Solana’s reputation, as such an event could have caused a dent to its image as a popular network for DeFi projects. 

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