Abracadabra raises rates after MIM stablecoin falls 50%

Abracadabra launched emergency measures on Wednesday after its dollar-pegged stablecoin Magic Internet Money (MIM) fell roughly 50% from its $1 target to about $0.49. The protocol said it will raise interest rates across all Cauldrons to encourage borrowers to repay loans and reduce outstanding MIM.

Effective immediately, the protocol will gradually increase interest rates across every Cauldron, including deprecated markets, to make leveraged positions more expensive and encourage repayment that destroys MIM. The team wrote, “We’re acutely aware of the MIM depeg and are taking emergency actions to remedy the situation.”

MIM first showed stress in mid-June when it dropped to about $0.74, recovered briefly to roughly $0.89, and then fell to near $0.49 on Wednesday. Market data shows the token’s circulating supply is about $104 million. Less than ten days earlier, Abracadabra added $100,000 to its primary liquidity pool on Curve Finance to provide a liquidity base after unexpected withdrawals linked to changes in incentive strategies.

Abracadabra mints MIM by allowing users to borrow against yield-bearing tokens held in so-called Cauldrons. The stablecoin’s peg depends on sufficient crypto collateral and balanced liquidity in decentralized exchange pools, particularly Curve, to absorb selling pressure and permit swaps without large price slippage. Thin or imbalanced liquidity can push the stablecoin away from $1 and slow recovery.

The protocol wrote that higher interest rates will raise the cost of maintaining loans, creating an incentive for borrowers to repay at a discount and thereby accelerate supply contraction. “The current depeg creates a natural incentive for borrowers to repay debt at a discount, accelerating supply contraction and strengthening the path back to the peg,” the protocol added. It also said restoring confidence and returning MIM to a liquid peg are priorities.

Market conditions have added pressure on MIM. Crypto markets fell about 3% in the 24 hours before the announcement, a roughly $60 billion decline, with Bitcoin trading briefly below $60,000. Lower market liquidity can reduce participation by liquidity providers and traders.

Abracadabra launched MIM in May 2021 and operates as an omnichain lending platform that accepts interest-bearing tokens as collateral to mint the stablecoin.