Here is the on-chain indicator that may have heralded the recent drop in Ethereum price below the $1800 level.
Ethereum has plunged after metric spikes repaid by multi-collateral dai
According to data from the on-chain analysis firm Holy, 43.4 million Dai were redeemed in Wrapped ETH (WETH) over the past day. Multi-Collateral Dai (DAI) is a decentralized stablecoin built on the Ethereum blockchain that is pegged to the US dollar, meaning its value remains fixed at $1.
The coin is called multi-collateral because it is backed by a combination of cryptocurrencies. An earlier version of the coin was Single-Collateral Dai (SAI), and it was only backed by one asset.
When Dai is minted (meaning new coins enter circulation), users must deposit their collateral in smart contract vaults. In the context of the current discussion, stablecoin tokens minted using WETH as collateral are of interest.
“Multi-Collateral DAI Created” is an indicator that measures the total number of stablecoin coins being minted using WETH at this time. The counterpart metric for this indicator is “Refunded Multi-Collateral DAI”, which naturally tracks WETH instances that are returned after issued tokens are destroyed.
Here is a chart showing the trend in these two Wrapped Ethereum indicators over the past year:
One of the metrics seems to have observed a large value in recent days | Source: Santiment on Twitter
As you can see in the chart above, Santiment has highlighted an interesting pattern that the Ethereum price has followed in response to spikes in the Multi-Collateral Dai Redemption indicator.
It seems that every time a large amount of Dai was destroyed to release WETH, the price of the cryptocurrency hit a high or low. In the last year, there have been two instances of this trend.
The first of these took place almost a year ago, right after the ETH price crashed due to the bankruptcy of 3AC. This spike coincided with the bottom formation of the cryptocurrency.
The other was in early February of this year, and unlike the first, this rally coincided with the asset forming a local top.
Recently, the indicator has once again observed a large spike, which means that someone has withdrawn a large amount of the wrapped form of Ethereum that was previously used to back Dai tokens.
In total, 43.4 million DAI have been destroyed with this latest spike. This is the third largest the value of the indicator has been over the last 12 months and only the aforementioned cases of the metric saw withdrawals from larger scales.
If the pattern of the previous spikes has any weight, then the current WETH Dai redemptions may also lead Ethereum to observe a local high or local low.
Yesterday, Ethereum crashed below the $1800 level, so perhaps the drop was due to the indicator rising. Today, however, the cryptocurrency has already rallied above this level, so it is hard to say whether the influence of the metric is over or the real effect is yet to come.
ETH price
As of this writing, Ethereum is trading around $1,800, down 1% over the past week.
ETH has already recovered today | Source: ETHUSD on TradingView
Featured Kanchanara Image on Unsplash.com, Charts from TradingView.com, Santiment.net
