aUSD loses peg but then recovers it- The Cryptonomist

In recent days, the stablecoin aUSD based on Polkadot’s blockchain lost its peg with the dollar, but then recovered it. 

What happened to Polkadot (aUSD)

It all started on Sunday, 14 August with a hack to the DeFi Acala Network protocol. 

Acala Network is the protocol behind the Acala Dollar (aUSD) stablecoin deployed on the Polkadot and Kusama blockchains. Due to a configuration problem, the value of aUSD suddenly fell far below $1, so much so that the protocol had to suspend operations. 

Within just three hours, the value of aUSD imploded, even falling below one cent. 

However, yesterday suddenly, in about an hour, it rose from $0.009 to $0.95, and then even briefly rose above $0.97. 

Currently, the price is still below the dollar, but by less than 10%. Given yesterday’s very fast recovery from $0.009 to over $0.9, it is possible to imagine that aUSD is managing to recover its peg with the dollar, albeit rather slowly. 

In the past, there have been other stablecoins pegged to the dollar that have also lost the peg momentarily but then recovered it in the following days, and often the process has taken as many as several weeks in total to return to normal. 

In contrast, those that lost the peg permanently were not able to recover almost the entire loss in a short time, as happened to aUSD, so it is possible to imagine that eventually this stablecoin may be able to recover the loss completely. 

Still, the decentralized network on Polkadot, Acala Network, was hacked, although eventually the problem seems to have been fixed. 

The recently passed community governance referendum has now been executed.

1,292,860,248 total erroneously minted aUSD have been returned to the honzon protocol and burned.

Details in thread below ⤵

— Acala (@AcalaNetwork) August 16, 2022

The hacker had managed to generate almost 1.3 billion aUSD tokens out of thin air, causing their value to plummet. However, a specific vote by the DAO then decided to burn those tokens, theoretically making everything go back to normal. It remains to be seen whether this will also be enough to make the peg with the dollar fully recover. 

Since this was a bug, and since the hacker was able to identify and block the funds created out of thin air by the hacker, once the bug was fixed and the tokens burned in effect the problem would seem to be solved, from a technical standpoint. However, it is not yet clear exactly whether the hacker was able to monetize the theft by exchanging the tokens generated out of thin air for other tokens of greater value, or whether the attack caused losses to users of the protocol. 

Certainly, those who sold their aUSD tokens after the price implosion, and did not wait for the problem to be solved, have lost heavily.