Morpho Delists Elixir’s sdeUSD/USDC Pair After deUSD Collapse, 3.6% Bad Debt
Ethereum-based lending protocol Morpho has delisted the sdeUSD/USDC market from its vault following the devaluation of stablecoin deUSD, resulting in a 3.6% bad debt. This action followed Elixir's announcement retiring deUSD as worthless. Elixir introduced a USDC compensation program for affected victims, while MEV Capital offered collaboration for repayment strategies. Loss estimates range up to $1.8 million depending on vault size, and Elixir's compensation plan is expected to make payouts of $10-20 million. The deUSD crash highlights risks in algorithmic and synthetic stablecoins, resembling the TerraUSD collapse in 2022. Morpho's quick delisting demonstrates improving risk management in DeFi systems. While short-term losses and regulatory scrutiny are expected, these actions aim to restore trust in DeFi's stablecoin ecosystem.
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Decentralized Lending
Morpho Delists sdeUSD/USDC After Stablecoin Crash
Ethereum-based lending protocol Morpho has removed the Elixir sdeUSD/USDC exchange from its USDC vault following the collapse in value of its stablecoin, deUSD. The delisting triggered a 3.6% bad debt loss, which marked a notable setback for Morpho's system of vaults. This decision came shortly after Elixir declared its stablecoin deUSD as permanently retired and worthless.
How the Delisting Process Occurred
Morpho, operating leading lending and borrowing markets on Ethereum, followed standard procedures to execute the delisting process:
- The protocol set a supply limit of zero for the affected market.
- Funds in the impacted pool were gradually shifted elsewhere.
- Once the allocations were cleared, the market was removed from the withdrawal queue of the vault.
Despite these efforts, 3.6% of the Total Value Locked (TVL) remained unretrievable due to the value depreciation of sdeUSD.
The Stablecoin Collapse and Elixir's Response
The crash rendered deUSD and its derivatives, such as sdeUSD, virtually worthless. In response, Elixir introduced a USDC compensation program to aid victims, which includes:
- Borrowers
- Liquidity providers on Automated Market Makers (AMMs)
- Pendle LPs
This measure aims to mitigate the financial impact on affected users, although details of the program's scope remain under development.
MEV Capital's Involvement and Crisis Management
MEV Capital, a significant player in credit and liquidity management, affirmed its commitment to collaborating with Morpho, Elixir, and other impacted platforms such as Euler and Compound. Their primary goal is to strategize repayments for affected lenders and borrowers.
Past precedents in the DeFi space show that creditor collectives can consolidate assets and engage in coordinated recovery processes. This partnership may prove instrumental in managing the aftermath of this incident.
Financial Impact of deUSD's Failure
The 3.6% bad debt ratio translates into quantifiable losses. For instance:
- For a TVL of $10 million, Morpho faces a shortfall of roughly $360,000.
- For larger vaults with a TVL of $50 million, losses could escalate to $1.8 million.
In contrast, Elixir's compensation program might require payouts ranging from $10 to $20 million USD, depending on the prior circulation of deUSD. This collapse of deUSD highlights the inherent risks of algorithmic and synthetic stablecoins, drawing parallels to the TerraUSD (UST) crash of 2022.
Impact on Morpho, Elixir, and DeFi's Future
Morpho's swift delisting of the sdeUSD/USDC market underscores DeFi's evolution in risk management practices. Modern lending protocols now employ automated solvency surveillance systems, such as Health Factors, to ensure timely action against undercollateralized accounts.
For Elixir, recovery involves both repaying USDC and restoring user confidence. While such steps may improve trust in the industry, the incident is likely to attract regulatory scrutiny, further shaping the future of DeFi and stablecoin markets.