Key Points
- Pax Dollar (USDP) value unexpectedly surged to $1.28, causing a liquidation of $529,000 in USDC.
- The spike in USDP value raised concerns about the stability of this stablecoin.
The Pax Dollar (USDP), a stablecoin issued by Paxos Trust Company, recently saw an unexpected rise in value to $1.28. This surge led to the liquidation of $529,000 in USDC for a market player.
Stablecoins like USDP are intended to have a stable value equivalent to a U.S. dollar. They serve as a safe haven for traders against the often volatile cryptocurrency market. However, this sudden increase in USDP’s value, highlighted by PeckShield, has sparked concerns.
Unusual Spike and Impact
On a particular day, USDP’s value spiked to $1.2848 at 16:10 UTC. It then dropped back to its typical value of $1 four hours later. While this depeg went largely unnoticed, it had a significant effect on a trader’s loan position, leading to liquidations.
The liquidation took place on the decentralized finance (defi) platform Aave. The trader had used USDP as collateral for a USDC loan. In the defi ecosystem, loans are typically backed by other assets, with systems in place to manage sudden market changes.
Details of the Liquidation
On-chain data confirms that the trader lost 529,000 USDC in sixteen uneven transactions from 16:16 to 20:09 UTC. This time frame coincides with when USDP lost its peg. Aave’s built-in risk management algorithms automatically initiated the liquidation process, as indicated by the transaction label.
When the value of USDP spiked, the platform likely anticipated a possible correction or return to its normal pegged rate. Such a prediction can trigger preemptive liquidation to avoid potential losses, particularly if the borrower’s loan-to-value (LTV) ratio becomes unfavorable.
USDP, issued by Paxos, has had some challenges recently, marked by occasional depegs. A 2023 research from SP Global suggested that USDP records the highest deviations from the U.S. dollar among top stablecoins. It has experienced 7,581 mild depeg events in the 24 months leading up to June 2023.
