Ethereium-based lending protocol Morpho has gotten the Elixir sdeUSD/USDC exchange off its USDC vault following the drop in value of its stablecoin, deUSD. The delisting led to a loss of 3.6% bad debt which is a significant loss in the Morpho system of vaults. This move was soon after Elixir announced that its stablecoin deUSD was permanently retired and declared worthless.
How the Delisting Unfolded
Morpho that has the best lending and borrowing markets in Ethereum, operates a variety of vaults that has funds allocated to particular lending pools. The delisting was according to Morpho standard procedure:
- The protocol established a limit of zero in supply of the market.
- The assets in the affected pool shifted out.
- When the allocations cleared, the market came out of the withdrawal queue of the vault.
All these efforts did not permit retrieving 3.6% of the Total Value Locked (TVL) because of the value crash of sdeUSD.
Interior, Stablecoin Failure, Elixir
This crash made deUSD and its derivatives such as sdeUSD virtually useless. Elixir responded by creating a USDC compensations program to compensate victims. The plan will consist of borrowers, liquidity providers on Automated Market Makers (AMMs) and Pendle LPs.
MEV Capital Steps In
MEV capital, a large player in crediting and liquidity, affirmed that they were continuing to work with Morpho, Elixir, and other impacted platforms such as Euler and Compound. The team intends to organize the strategies of repaying affected borrowers and lenders.
This partnership reflects the crisis management procedures of previous DeFi breaks when creditor collectives consolidated their assets to claim back part of their money via co-ordinated discussions.
Monetary Consequence and Estimates
The bad debt ratio of 3.6% indicates there is a loss that is quantifiable but with less contagion. With a TVL of say 10 million, Morpho will be short by approximately 360,000 dollars. In the case of bigger vaults, including $50 million, the losses may be up to $1.8 million. In the meantime, the compensation by Elixir may be in the form of payouts of between 10-20 million USDs depending on the circulation of the deUSD prior to its failure.
The incident reveals the current dangers of algorithmic and synthetic stablecoins. Similar to the TerraUSD (UST) crash in 2022, the failure of deUSD underscores the riskiness of assets, which operate based on inter-dependent lending and derivative networks.
Prospect of Morpho and Elixir
The fact that Morpho has moved to de-list the sdeUSD/USDC market very fast demonstrates that DeFi is becoming more mature in its risk management practices. Lending procedures in the present day are being based on programmed surveillance of solvency requirements including Health Factors, which guarantee prompt response to undercollateralized accounts. To the user, the incident indicates the possibility and susceptibility in the liquid staking and lending markets.
The rapid reaction can revive the faith in the community even though it can incur short term losses. In the case of Elixir the solution to recovery is to repay the USDC and regaining user confidence. These steps should, hopefully, allow stabilizing the levels of trust in the stablecoin industry of DeFi, but it is not surprising that new regulatory interest will become unavoidable.
