The past eighteen months have been dire for most stablecoins.
Following last year’s collapse of Terraform and its native stablecoin UST, the entire market capitalization for these digital assets has registered a dizzying 35% drop. According to crypto data provider DeFiLlama, the market peaked at $189 billion in May last year, only to settle on $124 billion as of writing, 18 months later.
Vaidya Pallasena, co-founder of Bluechip—a nonprofit organization dedicated to evaluating stablecoin safety—there are myriad reasons for the sea of red.
Retail participation is a fraction of what it was at its peak in mid-2021, he noted to Decrypt, with daily trade volumes averaging $50 billion–whereas in 2021, these sat at $150-300 billion.
Pallasena also said that since mid-2022, US treasury yield “started surging,” and there was no significant volatility within crypto. Combining these factors with the high opportunity cost of holding stablecoins when risk-free yields are around 5%, he said, “has led to the bleed.”
Nic Carter, a partner at Castle Island Ventures, explained to Decrypt that there is one simple driving factor for the drop: “It's really just traditional finance rates exceeding crypto-native yields,” he said. “When that crossover happened in 2022, stables started to sell off back into fiat.”
The crypto investor “isn’t expecting” the stablecoin selloff to end until traditional finance rates come down (namely, three-month treasuries), or crypto yields pick up in DeFi or Ethereum staking.
Further, the stablecoin market is highly concentrated, with only a handful of assets (USDT, USDC, DAI, TUSD, and BUSD) comprising more than 95% of the entire market capitalization.
Notably, USDT has proven to be the most resilient of them all, despite recent depegging fears. Although it suffered a precipitous loss in interest following UST’s implosion, it has recovered and Today offers an $83 billion market cap–slightly superior to what it was in May 2022. The token dominates the stablecoin sector, with 67% of all volume passing through its arches.
Second in command, USDC, has seen the opposite fate. It has plummeted to multi-year lows, countering the widespread expansion its parent company Circle has underway. A number of factors are fuelling its lesser interest, including a depeg of its own amid the banking turmoil suffered by the industry earlier this year.
The USDT-USDC disparity has a seemingly obvious reason.
Speaking at Token2049 in Singapore, Carter referred to the difference between what he calls on-shore and off-shore stablecoins.
The hostility of U.S. regulators, and their “desire to suppress the stablecoin market,” has pushed the market share of U.S.-native stablecoins (such as USDC), to “decline precipitously,” he said.
The big winner? Stablecoins outside the United States–with USDT leading the way.
Carter considers these assets “crypto’s killer app,” explaining that stablecoins only constitute 10% of the total market share of the crypto industry, but comprise 70-80% of all settlement activity on public blockchains.
For the crypto investor, the fact this is happening even in a bear market—a sign of importance and product-market fit.
So we have a somewhat contradictory situation. What’s to come?
Pallasena told Decrypt he expects the trend to reverse when the inverse of what caused it occurs. “A revived interest in crypto trading/investing and steady interest rate cuts,” concluding that a pro-crypto regulatory environment “could also do the trick.”