Author: Pedro Solimano, Decrypt; Translation: Song Xue, LianGuai
For most stablecoins, the past eighteen months have been terrible.
After the collapse of Terraform and its native stablecoin UST last year, the overall market value of these digital assets has dropped by 35%. According to data from cryptocurrency data provider DeFiLlama, the stablecoin market reached its peak of $189 billion in May last year, but 18 months later, as of the writing of this article, the market has reached $124 billion.
Bluechip is a non-profit organization dedicated to assessing the security of stablecoins. Its co-founder Vaidya LianGuaillasena said that there are many reasons for the red sea.
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He pointed out that retail participation was only a small part of the peak in mid-2021, with an average daily trading volume of $50 billion, compared to $15-300 billion in 2021.
LianGuaillasena also said that since mid-2022, US Treasury yields have “started to soar”, and there has been no significant volatility within the cryptocurrency. He said that combining these factors with the high opportunity cost of holding stablecoins when the risk-free rate of return is about 5% “led to the decline”.
Nick Carter, a partner at Castle Island Ventures, explained that the reason for the decline is simple: “This is actually just traditional financing rates exceeding native cryptocurrency returns,” he said. “When this crossover occurred in 2022, stablecoins began to be exchanged back into fiat currencies.”
Cryptocurrency investors “expect” that the sell-off of stablecoins will not end until traditional financial rates (i.e. three-month Treasury bills) fall or the returns on cryptocurrencies pledged in DeFi or Ethereum rebound.
In addition, the stablecoin market is highly concentrated, with only a few assets (USDT, USDC, DAI, TUSD, and BUSD) accounting for over 95% of the total market value.
It is worth noting that despite recent concerns about decoupling, USDT has proven to be one of the most powerful stablecoins. Despite suffering sharp interest losses after the collapse of UST, it has recovered and now has a market value of $83 billion, slightly higher than in May 2022. It dominates the stablecoin industry, with its circulation accounting for 67% of the total circulation.
On the other hand, the second largest stablecoin USDC has encountered the opposite fate. It has fallen to its lowest point in years, contrary to the large-scale expansion being carried out by its parent company Circle. Many factors have weakened it, including its own decoupling during the industry’s turbulent period earlier this year.
There is an apparent reason for the difference between USDT and USDC.
Carter mentioned the difference between onshore stablecoins and offshore stablecoins in his speech at Token2049 in Singapore.
He stated that the hostility of US regulatory agencies and their “desire to suppress the stablecoin market” has led to a “sharp decline” in the market share of domestic stablecoins in the United States, such as USDC.
The big winner? Stablecoins outside the United States, dominated by USDT.
Carter believes that these assets are “killer applications for cryptocurrencies” and explains that stablecoins only account for 10% of the total market share of the cryptocurrency industry, but account for 70-80% of all settlement activities on public blockchains.
For cryptocurrency investors, this situation can occur even in a bear market, which is a sign of the importance of the product and its fit in the market.
So we are facing a somewhat contradictory situation. What will happen?
LianGuaillasena points out that when a situation occurs that runs counter to the trend, the trend will reverse. “Renewed interest in cryptocurrency trading/investment and steady interest rate cuts” can also play a role in supporting the regulatory environment for cryptocurrencies.
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