[Company Watch] The Fall of Pegs Cash and What’s Next

  • Mint PUSD (with USDC and PEGS) when it’s above $1
  • Redeem PUSD (for USDC and PEGS) when its below $1
  • There should be no or little transaction costs. If the gas price is too high, traders might not want to balance immediately, or the profit of restoring a peg is less than the cost of gas.
  • There should always be sufficient liquidity of USDC and PEGS to support the traders’ actions to balance the peg.
  • Traders should act independently and do not get involved in price speculation of PEGS.
  1. As investors saw PUSD went slightly below $1 and nobody traded, as the gas price was prohibitively high due to a falling BTC on that day (300 to 500 gwei).
  2. PUSD continued to drop and at the price level of $0.95 PUSD/USDC and even below, there would be margins for traders to arbitrage by redeeming PUSD for USDC and PEGS. At that moment, the collateral ration was about 93%.
  3. As traders arbitrage, a lot of PEGS were minted, increasing the supply from 300k to a few million. This put tremendous selling pressure on PEGS — considering that at a daily issuence of 34k was already a 2000% APY, and a few millions of PEGS were minted.
  4. Investors started to panic sell PEGS and its price declined rapidly (the decline actually started about 24 hours to 36 hours before the unpegging of PUSD, as liquidity providers cashed out mining rewards).
  5. The panic sell of PEGS cast some doubts over the entire community and traders (who arbitrage by buying PUSD and selling USDC and PEGS) hesitated, as a falling price of PEGS might have wiped out the arbitraging profits, if traders are doing this manually and not via small contracts.
  6. As traders slowed down, PUSD price was bumpy with the range of $0.90 to $0.96. In the telegram group, investors started to question a falling PEGS and a shaky PUSD.
  7. On the other hand, the Recollateralisation feature (allowing investors to top up the reserve of USDC when there’s a shortfall, for a small incentive of 0.75%) is not working. Firstly, the smart contract used a time-weighted average price of calculating how much PEGS can be exchanged for USDC, and in a falling market, exchanging USDC for PEGS was simply a bad idea. Secondly, gas was too expensive to justify the 0.75% incentive. So no one topped-up the USDC reserve.
  8. After a few hours, as more traders redeem PUSD, the reserve of USDC was drained. In the span of a few minutes, investors rushed to Uniswap to cash out PUSD for USDC. And the price of PUSD collapsed. A crypto version of run-on-the-bank happened.

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