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Synthetix’s sUSD Stablecoin Loses Its Dollar Peg amid Heavy Sell-Off

The depeg situation of Synthetix’s sUSD has once again highlighted the vulnerabilities within DeFi systems and the impacts of liquidity shifts.

Synthetix’s decentralized stablecoin sUSD has seen an unexpected turn of events after it slipped below its intended $1 peg. The stablecoin, issued through the Synthetix DeFi protocol, fell to as low as $0.92 on Thursday before making a partial recovery to $0.96.

sUSD Depeg Caused by Liquidity Issues

The incident was initially identified by Chaos Labs, a risk manager for the Aave lending protocol. According to their analysis, the depeg was triggered when a major liquidity provider withdrew from the sBTC/wBTC liquidity pool on the Curve decentralized exchange. This provider redeemed sUSD via Synthetix’s spot synth redemption and subsequently sold it on Curve, causing a sudden drop in sUSD’s value.

Synthetix, a platform enabling the creation of synthetic assets or Synths, mints sUSD as a loan overcollateralized with various crypto assets to maintain a 1:1 peg with the US dollar. However, the recent activity has exposed weaknesses in this mechanism.

The implementation of SIP-2059 at the end of April was responsible for deprecating non-sUSD spot synths on the Ethereum mainnet. As that ended atomic exchanges for other synths like sETH and sBTC, users were forced to convert the synths into sUSD, increasing the selling pressure on the stablecoin.

Meanwhile, this is not the first time a stablecoin will be experiencing a depeg that stems from liquidity issues. Last October, real estate-backed stablecoin USDR fell to $0.53 per coin, albeit in a similar manner. At the time, the team explained that a redemption rush drained liquid assets such as DAI from its treasury. Company statement about the USDR depeg reads in part:

“Combined with the lack of DAI for redemptions, panic selling ensued, causing a depeg.”

Stablecoins Not ‘Stable’

For stablecoins to retain the meaning of their names, they are intended to always be worth $1 on the open market. However, under certain market conditions, they sometimes lose their peg.

Circle’s USD Coin (USDC), one of the world’s largest cryptocurrencies by market cap, briefly fell to $0.885 per coin on March 11, 2023. That was around the period that several banks in the US went bankrupt. Although USDC regained its peg three days later, Terra’s UST was not so lucky. UST lost its peg in May 2022 and never recovered. It is valued at $0.02219 per coin as of publication.

The depeg situation of Synthetix’s sUSD has once again highlighted the vulnerabilities within DeFi systems and the impacts of liquidity shifts. However, in the meantime, Chaos Labs has recommended that the Aave community should temporarily freeze sUSD reserves on Aave V3 on the Optimism network. This freeze, they claim, would help to mitigate further market impact.


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