Depegging of TrueUSD: A Tale of Trader Opportunities, Liquidity Risks, and Crypto Market Stability

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The recent depegging event of TrueUSD (TUSD) had traders scrambling for opportunities, with many seizing the chance to gain a potential 20% profit share. In their quest to be part of this profitable venture, traders were willing to incur large fees by utilizing Aave and Compound, two popular lending protocols. These traders borrowed huge amounts of TUSD and swiftly swapped these holdings for USD Coin (USDC), another dollar-pegged token. The intention was to place a bet against TUSD from its inflated price effectively.

However, the demand for TUSD led to supply constraints, as neither Aave nor Compound had an ample amount of TUSD. As a result, borrowing rates skyrocketed to over 100% annualized on both protocols. Crypto analytics firm Kaiko revealed that the token conversions appeared to be organic and not driven by automated bots. The depegging of TUSD was likely due to the lack of liquidity that should ideally back its $1 peg.

Interestingly, Binance has been actively promoting TUSD recently. They introduced BTC-TUSD as the only zero-fee pair on the exchange, which quickly led to Binance BTC-TUSD becoming one of the highest-volume pairs in the cryptocurrency world. However, TUSD is still relatively unknown among stablecoins, and the lack of liquidity could make depegging more probable.

On the other hand, Binance has been avoiding Binance USD (BUSD) due to its recent regulatory issues. The exchange had offered BUSD in collaboration with crypto firm Paxos, but the New York Department of Financial Services (NYDFS) directed Paxos to cease minting new BUSD tokens. As a result, traders have quickly adopted TUSD, with its bitcoin trading volumes reaching over $1 billion in the past 24 hours, coming second only to tether-denominated trading at $1.5 billion.

While the depegging of TUSD presents opportunities for traders to potentially profit from the situation, it also exposes the risk associated with the lack of liquidity in some stablecoins. While larger players like USDC and tether might have the required liquidity, events like this serve as a reminder that inconsistencies can lead to significant market disruptions. An informed and cautious approach is necessary when navigating such situations, as various factors, including promotional efforts by large exchanges and regulatory challenges, can create imbalances in the nascent crypto markets.

Source: Coindesk

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