Another stablecoin stumbles: USDX

Another stablecoin stumbles: USDX

Another stablecoin stumbles: USDX

UST wasn’t the only stablecoin to come unglued recently. Kava Network’s USDX also lost its dollar peg and has yet to fully recover. The two events are not unrelated.


USDX crashes but is recovering

The price of Kava’s USDX stablecoin first became erratic on May 10, at one point falling to $0.79. Then, on May 11, it tumbled, losing more than half its value by the end of the day.

Since then, the token has managed to claw its way back to around $0.82 by May 15. While this partial recovery may provide some relief to investors, USDX remains useless as a stablecoin. Whether it will manage to regain its peg is uncertain, though the protocol’s founders insist it will be fixed soon. This is not the first time that USDX has lost its peg, having spent 6 months depegged immediately after launch.

USDX differs from algorithmic stablecoins like UST and USN in that it’s minted as a loan backed by cryptocurrency collateral. This is described in more detail below.


Why did it happen?

The reasons for USDX depegging have not been made completely clear. According to tweets from Scott Stuart, co-founder and CEO of Kava Labs, the cause was Kava’s exposure to UST (one of its supported collateral assets).

UST began losing value on May 10 and has been stuck at around $0.17 for several days.

This caused downstream collateral liquidations that dragged USDX along, contributing to its dislocation from the dollar peg. “The UST risk in Kava is isolated and can be tolerated with current system parameters,” Stuart assured investors.

He also announced that LUNA and UST had been deactivated as collateral for Kava Mint.


About Kava and USDX

Kava Network is a Layer 1 blockchain with a unique co-chain architecture that’s part of the Cosmos ecosystem. Designed to be a DeFi platform, it’s managed by KavaDAO using the KAVA governance and token, which can also be staked by validators or delegated to validator nodes.

The network hosts the Kava Mint dApp, which functions similarly to Maker, except with tiny fees and cross-chain capability.

Borrowers deposit crypto assets to create a Collateralized Debt Position (CDP) and receive newly-minted USDX stablecoins. These are burned when the debt is repaid, or if the collateral is liquidated when its value drops below a predefined threshold.

Kava and USDX ecosystem - IMG SRC

When Kava Mint was launched in 2019, CDP’s were initially collateralized only by Bitcoin deposits. However, the website currently lists 13 accepted currencies, several of which might be considered risky by conservative investors, including:

  • LUNA and UST (though the value of both has been set to zero);
  • HARD, the governance token of Kava Lend, a decentralized money market that enables over-collateralized lending and borrowing of cross-chain assets;
  • SWP, the governance token of Kava Swap, a cross-chain AMM protocol;
  • XRPB, ERC20 and BEP2 tokens for leveraged exposure to crypto (the token value changes 3 times greater than the underlying ETH or BNB);
  • KAVA and USDX.

In other words, an investor could potentially open a CDP using BTC, take the USDX that’s minted to open another CDP, and on and on, not unlike fractional reserve lending in the traditional banking sector, or the more “degenerate” yield farming platforms. The effects of any liquidation of underlying collateral in this case would be magnified.

Being backed by crypto assets makes USDX less risky than algorithmic stablecoins like UST and USN, but not as secure as fiat-back stablecoins such as USDC or USDT.
So far, USDX seems to be the only stablecoin visibly affected by the Terra LUNA debacle, and the Kava team is confident that it’s under control.

Near’s USN stablecoin has remained stable except for several spikes near $2.00 on May 13, and all fiat-backed stablecoins, including USDC, TUSD and USDT, have been rock-solid.

This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.

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