Synthetix's sUSD stablecoin has slipped below its $1 peg, trading at $0.96 amid increased selling volume on decentralized exchanges.

Synthetix is a decentralized finance (DeFi) protocol that issues synthetic assets, or Synths, including the stablecoin sUSD, which is designed to maintain a 1:1 peg to the U.S. dollar. This stablecoin is minted as an overcollateralized loan using crypto assets and currently has a market cap exceeding $50 million. On Thursday, sUSD fell as low as $0.92 before partially recovering to $0.96.

The depeg was triggered by a major liquidity provider (LP) withdrawing from the sBTC/wBTC liquidity pool on the Curve decentralized exchange. According to Chaos Labs, a risk manager for the Aave lending protocol, the LP received sUSD through Synthetix's spot synth redemption and then sold it on Curve's liquidity pool.

This depegging incident follows Synthetix’s implementation of 'SIP-2059' at the end of April, which deprecated non-sUSD spot synths on the Ethereum mainnet, effectively ending atomic exchanges for synths such as sETH and sBTC. Users were thus required to convert these synths into sUSD.

Chaos Labs highlighted that a previously inactive address had deposited 87 BTC into the sBTC/WBTC Curve pool over several months in 2023. This pool’s liquidity was highly concentrated, with three accounts, including the inactive address, providing most of the liquidity.

After the liquidity was withdrawn, the sBTC token temporarily depegged to between 0.93 and 0.94 against WBTC but was quickly arbitraged back to 0.96. The user then converted sBTC into 4.48 million sUSD and sold these sUSD tokens in the Curve pool, further driving the stablecoin’s value down to $0.93.

In response, Chaos Labs recommended that the Aave community temporarily freeze sUSD reserves on Aave V3 on Optimism to mitigate further market impact. They are also assessing other metrics to prevent additional instability.