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Polygon’s USDR Depeg has Shades of Terra: How Does a Stablecoin Lose $1?

Published October 12, 2023 1:32 PM
James Morales
Published October 12, 2023 1:32 PM
Key Takeaways
  • The USDR stablecoin collapsed in price to just over $0.5.
  • Echoing the collapse of Terra’s UST, the depeg was triggered by a spike in redemptions.
  • However, issuer Tangible insists it can salvage USDR’s liquidity.

Stablecoins fluctuating up to a few cents above and below the dollar is a common occurrence; even the world’s most popular stablecoin USDT is prone to occasional wobbles. However, when the price of a stablecoin travels too far from $1 for too long, it is considered to have become “depegged.”

On Wednesday, October 11, exactly that happened to Tangible’s Polygon-based Real USD (USDR). After collapsing by nearly 50% on Wednesday evening, USDR has failed to retain its peg more than 12 hours later. But how did the stablecoin destabilize in the first place?

What Causes Stablecoin Depegs?

According to Tangible, Wednesday’s depeg was triggered by a surge in DAI redemptions from its treasury, which resulted in it being unable to meet redemption requests.

USDR price
USDR was stable, until it wasn’t.

The rush to withdraw collateral has echoes of UST’s collapse. Back then, a drop in the price of Bitcoin drove users to withdraw liquidity from the Anchor protocol, a Terra-based lending and borrowing system where investors earned interest generated by Terra’s reserves.

Following mass withdrawals from Anchor protocol, in May 2022, the price of Terra’s native token Luna collapsed and UST lost its dollar peg  .

Within the space of a week, the stablecoin’s value plummeted to just $0.1, wiping out $45 billion of market capitalization. Despite the community’s best efforts, the Terra-Luna ecosystem has never fully recovered.

However, despite the historical precedent, Tangible has insisted that it “isn’t going anywhere” and that it has a plan to ensure USDR will retain its peg.

Can USDR Recover From Liquidity Issues?

To prevent the depeg from spiraling out of control and ensure that it can redeem USDR for one dollar, Tangible has initiated an emergency action plan. 

In the immediate term, Tangible will make stablecoins from its protocol-owned liquidity available to help fund redemptions. It has also begun liquidating its insurance fund, a pool of digital assets the firm established to help it weather exactly the kind of scenario it currently finds itself in.

But stablecoins only make up part of USDR’s collateral. The rest is underpinned by tokenized real estate investments, hence the “real” in Real USD.

Going forward, Tangible said its tokenized real estate “baskets” are “nearly ready for launch.”

Baskets are essentially yield-generating tokens that represent fractionalized ownership of Tangible’s real estate investments. These are mostly based in the UK, although the company has some US properties in its portfolio too.

If there isn’t enough demand for baskets to fill the hole in USDR’s treasury, Tangible said it is preparing to sell its real estate as a backup plan.

The Next Few Days Will be Crucial for Tangible

If Tangible is able to restore market confidence in USDR, the stablecoin’s divergence from the dollar will go down as one of the technology’s averted catastrophes: a near-disaster that was brought under control before it spiraled into a full-blown crisis. 

But recall that it only took a week for UST to collapse from a top-ten token to crypto’s most expensive flop.

If it can accelerate the launch of baskets and use its tokenized real estate to fulfill USDR redemptions, Tangible may just be able to salvage the stablecoin.

If not, investors only have two options: sell their coins at a 50% discount or wait for the issuer to liquidate its property holding and hope it raises enough capital to repay USDR holders in full.

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