Synthetix's sUSD stablecoin slips below dollar peg to $0.96 amid sell-off

Synthetix’s decentralized stablecoin — known by its ticker sUSD — dropped below its $1 peg as selling volume increased on decentralized exchanges.

The stablecoin is issued via Synthetix, a DeFi protocol that enables the creation of synthetic assets or Synths. It aims to maintain a 1:1 peg to the U.S. dollar, minted as a loan and overcollateralized with crypto assets.

The stablecoin has a market cap of over $50 million. On Thursday, sUSD dipped as low as $0.92 before recovering to $0.96 at the time of writing, data shows.

Chaos Labs — a risk manager for the Aave lending protocol — identified that the depeg was triggered by a major liquidity provider withdrawing from the sBTC/wBTC liquidity pool on the Curve decentralized exchange. This LP received sUSD obtained via Synthetix’s spot synth redemption and sold it on the corresponding Curve liquidity pool.

Synthetix implemented what’s called 'SIP-2059' at the end of April. This led to the deprecation of non-sUSD spot synths on the Ethereum mainnet — effectively ending atomic exchanges for synths such as sETH and sBTC, according to Chaos Labs. Consequently, users were compelled to exchange these synths for sUSD, it further noted.

“A relatively dormant address 7 deposited 87 BTC in the sBTC/WBTC Curve pool over the course of several months in 2023. This pool’s liquidity was heavily concentrated, with three accounts providing the majority of liquidity, including this initial user,” Chaos Labs stated.

Following the liquidity withdrawal, the sBTC token temporarily depegged to between 0.93 and 0.94 against WBTC but was subsequently arbitraged back to 0.96. The user then exchanged his sBTC for sUSD, amassing a total of 4.48 million sUSD. Afterward, the user continued to sell sUSD in the sUSD Curve pool, having swapped other assets to maintain BTC exposure, which led to a further decline of sUSD to $0.93.

In response to the ongoing depeg and the size of the market, Chaos Labs recommended the Aave community temporarily freeze the sUSD reserves on Aave V3 on Optimism to mitigate further market impact and is assessing other metrics as precautionary measures.