Depegged? What kind of word is that?
Pegs are a mechanism that binds the value of one cryptocurrency with that of another in a 1:1 ratio. Pegs are primarily used to facilitate trading of non-similar assets, which is currently hindered by reliance on different blockchain protocols. Pegging also allows users to buy and sell certain assets that are tied 1:1 to their original asset (for example, the BEP2 Binance Chain version of Bitcoin is tied to the original version of Bitcoin from the Bitcoin Network) without having to wait for long confirmation times or pay high transaction fees to transfer assets between blockchains.[1]
Depegged’ means that the value of the DUSD, which was initially intended to be traded as a stablecoin on 1 US dollar, no longer has this value. Initially, it was too high because of high demand due to high APR[2], then it has dropped in value to below $1 because….yes why actually?
Because they all dumped their DUSD???
No, because the crypto market is in a bear market, that is, in the larger time horizon, prices went down daily, weekly, monthly. Thus, also the main currency of the DeFiChain, on which the DUSD is built. DFI[3]
So why did DUSD fall so much? Is it? It isn’t. Or is it?
To do this, you need to understand how the price of the DUSD is determined. This is a self-contained token loop in the DeFiChain ecosystem that does not allow arbitrage to the outside world. This means that price fluctuations must be balanced within the DefiChain ecosystem. Since no external trading of DUSD is possible, the price of DUSD results from the ratio of the two pairs DFI-DUSD on the Decentralized Exchange in so-called liquidity pools, which function similarly to Uniswap with an Automated Market Maker (AMM)[4].
If there are 1000 DFI in the pool on one side and 1000 DUSD on the other side, the price in this pool is 1 DFI = 1 DUSD. Or 1 DFI = 1 US dollar, if DUSD is valued at 1$.
Great, then it fits, this pool can then be used as a pivot for the DFI price. DFI is worth $1. But it doesn’t. Why? Because DFI does have a connection to the outside world and can be arbitraged. Say an unlucky investor, let’s call him Paul, sells his profitable DFI on a CEX against a real currency, pushing the price down. Depending on the size of the order, the price may drop from $1 to $0.80.
The experienced arbitrageur recognizes his opportunity, $0.80 for a DFI on the CEX. He buy it immediately, put it on the DEX of the DeFiChain and in the DFI-DUSD pool he get directly 1$ for each DFI bought for 80 cents – pool shift (slippage) excluded.
He take the 20 cents profit per DFI directly again and go with it to the CEX and repeat the little game, there he become rich.
It’s going to be a party.
Wait a minute, there was something. Self-contained ecosystem, no arbitrage possible on DUSD?!? Correct, the DUSD cannot be moved to the CEX, the arbitrageur can execute this trade exactly 1x and has his profit sitting in the ecosystem in DUSD.
After he has done this 1x, he leaves it the next time, because the profit is so not increaseable. The arbitrageur prefers to take another AMM pool in the DeFiChain ecosystem and sell his DFI against USDC or USDT instead of DUSD. He can move these out of the system and close or continue his loop.
The DUSD pool has lost out; only investors who want to buy decentralized share tokens from Apple, Tesla or Amazon in the DeFiChain dToken system and need DUSD to do so still use this pool, as these share tokens can only be traded against DUSD.
Conclusion: the DFI-DUSD pool is rarely moved (in our theory), remains “stable”. 1 DFi = 1 DUSD.
But why then does the price drop so rapidly? This is a purely mathematical calculation.
In the DFI-DUSD pool, 1 DFI = 1 DUSD is worth due to the current ratio. However, if the DFI external world moves, in which case the DFI price falls on various exchanges, but the DFI-DUSD pool does not move with it due to limited arbitrage opportunities, the DFI in the DUSD pool is worth more than in the free market and the DUSD price consequently less.
Example:
DFI-DUSD Pool Ratio: 1000 DFI to 1000 DUSD: 1 DFI = 1 DUSD.
CEX price DFI: $0.80
If we now take the CEX price of DFI and calculate it against the DUSD-DFI pool – because that’s the only way the DUSD price is actually determined – not what is traded in it, but how much the DFI is worth in there compared to the rest of the market, we have the ratio:
1000 DFI worth $800 = 1000 DUSD worth $800. Keyword AMM.
So although the DFI-DUSD pool has not actually shifted, it is only because of the price fluctuation of DFI in other pools and CEXes that the DUSD price has arithmetically dropped. 1 DUSD is suddenly worth only $0.80 if you build the imaginary bridge into the free market and calculate the price that way.
So now the demand for DUSD would have to increase so that the DUSD pool is also pushed in that direction (sell DFI, buy DUSD) and poof, the DUSD would also be back at 1$.
Or else the alternative? The clever reader will already have guessed it. Assuming our unfortunate investor Paul from the beginning of the article reads through the whitepaper, the pink paper and the roadmap of DeFiChain again and comes to the conclusion, hmm, brilliant, this project is insane, I’m going to get in big again after all, this has future, this has potential. And since he is not a small fish, his purchase pushes the price of DFi on the central Exchanges from $0.80 back up to $1. We don’t have to do the math on what that means for the DUSD-DFI pool.
The unshifted pool still has its 1000 DFI, now worth $1000 again, and 1000 DUSD, also worth $1000 again (AMM!).
Tada, the “depeg” becomes a “repeg”, 1 DUSD is worth 1 dollar again.
So what does it take? Investors. When are the investors coming? When the bear market is over, when the market turns around and more risk is accepted again when investing. Then the “DUSD problem” will solve itself.
Until then, dear reader, let the specialists and experts who deal with the DUSD and its algorithm on a daily basis the necessary time to find and implement solutions even in weak market phases that will prevent another “depegging”.
Focus on important things, use the DMC to create usecases for the DefiChain.
Get busy with useful features that add value, then we and the DeFiChain will all be ready for the time that is definitely coming. The time when projects like DeFiChain will stand out from the market, have a lot to offer, and attract new investors who will see the potential in DeFiChain just as you hopefully do now, if you didn’t before.
Until then, DCA[5] never hurt anyone!
[1] https://0-100.io/glossar/peg
[2] https://0-100.io/glossar/jahrlicher-prozentsatz-apr
[3] https://www.coingecko.com/en/coins/defichain
[4] https://0-100.io/glossar/automated-market-maker-amm
[5] https://0-100.io/glossar/dollar-cost-averaging-dca
