A warning shot that must have given some cold sweats to investors. The MIM stablecoin lost parity against the dollar for a few hours last night following the flash crash of the FTX platform. Why are the two linked?
The MIM stablecoin lost parity with the dollar overnight
A second Terra (UST): this is what feared observers who saw the price of Magic Internet Money (MIM) fall below a dollar during the night. The stablecoin has indeed touched 0.95 dollar for a while, before coming back up:
The eventful night of the stablecoin MIM
This morning, the stablecoin seems to have managed to find its “peg”. But fears are not entirely dispelled. The reason is that the MIM is partially backed by FTT, the FTX token. And the latter suffered a catastrophic drop yesterday, down to around $5 this morning.
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The link between MIM and FTX
According to data published by Abracadabra, the FTT still represented today 37.5 million dollars in the basket of currencies that backs the MIM. This corresponds to a substantial share: 15% of the collateral. As a reminder, users can deposit collateral in order to create (mint) MIM tokens.
The fear is therefore that the MIM will not be sufficiently guaranteed if the price of FTT falls. In reality, this is still far from being the case. The Abracadabra protocol ensures that its stablecoins are more than guaranteed (overcollateralized). Alameda Research, the investment arm of FTX had borrowed MIM against FTT, to the tune of $28 million. And this loan was backed by $126 million in FTT tokens. We are therefore still in balance, and the loan is far from being liquidated by Abracadabra.
But the situation could change. According to the research director of analyst The Block, the fall of the FTT could make the situation worse:
“Due to the illiquid and volatile nature of FTT, there may not be enough liquidity in the market to facilitate the effective liquidation of FTT-backed positions in Abracadabra, as the latter are about to become under-collateralised.»
We will therefore closely monitor future developments. As a reminder, the Terra affair, and the cascade of consequences that followed, had been triggered by a “depeg” of the stablecoin UST. Abracadabra must therefore be particularly aware of what is at stake.
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Source: The Block
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