The protocol is raising interest rates across its lending markets to encourage borrowers to repay loans and reduce the circulating supply of MIM. The stablecoin previously received a $100,000 liquidity injection into its Curve Finance pool, but this failed to prevent the depeg from worsening.
Abracadabra Scrambles to Restore MIM
Abracadabra, the decentralized finance (DeFi) lending protocol behind the Magic Internet Money (MIM) stablecoin, introduced a series of emergency measures after its dollar-pegged token suffered a dramatic loss of value. MIM fell by more than 50% below its intended $1 peg.
The protocol acknowledged the severity of the situation and said it is taking immediate action to stabilize the stablecoin and restore market confidence. According to the Abracadabra team, the primary response will be a gradual increase in interest rates across all of its lending markets, known as Cauldrons, including older and deprecated markets.
The move is designed to encourage borrowers to repay their outstanding loans, thereby reducing the circulating supply of MIM. Since borrowers can now purchase the depegged stablecoin at a massive discount on the open market and use it to repay debt valued at face value, the protocol believes this creates a natural incentive to accelerate debt repayments and permanently remove MIM from circulation.
Abracadabra stated that shrinking the token supply is one of the most effective ways to help restore the stablecoin’s peg. By increasing borrowing costs, users are encouraged to close positions rather than continue holding debt, which could ultimately reduce the amount of MIM in circulation and improve the balance between supply and demand. The team clarified that its immediate priorities are restoring confidence in the stablecoin, improving market structure, and returning MIM to a healthy and liquid dollar peg.
Magic Internet Money is a crypto-backed stablecoin that launched in May of 2021. Unlike fiat-backed stablecoins that hold cash or Treasury reserves, MIM is minted by depositing interest-bearing crypto assets as collateral through Abracadabra’s lending platform. The protocol operates on multiple blockchains and allows users to borrow MIM against their crypto holdings while earning yield on their collateral.
The latest depeg began in mid-June when MIM slipped to approximately $0.74 before briefly recovering to around $0.89. However, selling pressure intensified, which caused the stablecoin to plunge to roughly $0.49.
MIM’s price over the past week (Source: CoinCodex)
Abracadabra’s plan may already be showing results. At press time, MIM was able to make an impressive recovery, and was trading at $0.95.
The current crisis follows earlier efforts by Abracadabra to support the stablecoin. On June 15, shortly after MIM first began trading below its peg, the protocol injected $100,000 into its primary liquidity pool on Curve Finance. The liquidity injection was made to restore balance across Curve pools after unexpected liquidity withdrawals that the team attributed to recent changes in DeFi incentive strategies. While the move temporarily supported liquidity, it was ultimately not enough to prevent the stablecoin from experiencing a much deeper depeg.
Although crypto-backed stablecoins are generally seen as more resilient than algorithmic alternatives because they are backed by excess collateral, they can still face instability when liquidity dries up, market sentiment deteriorates, or large holders exit liquidity pools.
