It has been a couple of rough weeks in crypto, with the largest algorithmic stablecoin, Terra USD (UST) falling apart and plummeting from a ~ $18 billion marketcap to a measly $1.2 billion within a week. With huge withdrawals from Anchor, and subsequent swaps to other stablecoins, the large sell pressure drove down the price of UST, while causing LUNA to fall into a death spiral as people redeemed their UST.
Many investors had already moved their portfolios into stablecoins before this occurred, due to uncertain macro conditions. While UST was believed to be a stablecoin, this turned out to be far from the truth as events from last week clearly demonstrated. With many spooked by UST’s steep decline, faith in other stablecoins (centralized or not) were also shaken. In this edition, we take a look at how other stablecoins reacted to the Terra / UST collapse. And if you missed everything that went down with Luna / UST last week, head over here to catch up!
Tether (USDT)
Issued by Bitfinex, Tether is undoubtedly the largest stablecoin by marketcap. While its lead in the industry is undisputed, FUD seems to follow it everywhere. In the past, it has been claimed that each USDT is backed by USD, allowing holders to redeem each USDT for USD 1:1 via the Tether Foundation. Based on the latest breakdown published by Tether, its reserves now consist of various instruments including commercial paper, money market funds, cash, bank deposits, treasury bills, and reverse repo notes. While the reserves are not held completely in cash, the Foundation has always guaranteed redeemability for its stablecoins via certain partner exchanges, and thus far it has been proven true.
This guarantee came to the test when UST begin to spiral downwards. With investors uncertain about stablecoins (especially USDT due to previous FUD), many begin to swap from USDT to other stables, causing the peg on a number of exchanges to break momentarily. On Binance and FTX, USDT dropped to $0.94, while it even touched $0.80 on Kucoin. However unlike UST, the depegging of USDT seem to have only occurred on CEXes, while Curve pools remained relatively well-balanced. The unpegging only lasted a couple hours, and the peg was restored as arbitrageurs took advantage of the opportunity.
USDT Volume & Marketcap
Source: CoinGecko
Central to arbitrageurs stepping in of course, was the guarantee that USDT could still be redeemed 1:1 for USD, and the Foundation held up its end of the bargain. According to Tether, $2.3 billion USDT was redeemed over the period of 11 May - 12 May, and those seem to have occurred smoothly without a hitch. Due to such redemptions, the USDT marketcap dropped by $3.7 billion between 9 May and 13 May. It was at a high of ~$84 billion just before UST’s spiral, marking a decline of ~5%. Daily trading volume increased sharply as well, hitting $176 billion on 12 May. This is significantly higher than most days, whereby trading volume averaged between $40 to $60 billion.
As of today (17/5), redemptions have hit ~ $7.8 billion since 9 May, and USDT’s peg is still maintained, largely to the relief of the crypto industry. A USDT depeg would have been disastrous, with the majority of crypto trades be it on centralized or decentralized exchanges being settled in USDT. Most crypto users also hold USDT in some form of capacity, and a depegging of USDT would’ve probably resulted in a sharp and prolonged downturn in the crypto market.
USD Coin (USDC) and Binance USD (BUSD)
While USDT suffered due to a spotty history with regulators and unclear backing, other centralized stablecoins actually benefited from this situation. The two biggest winners from the past week were definitely USD Coin (USDC) and Binance USD (BUSD).
Many investors from USDT, and UST flocked to these alternatives, increasing their trade volumes as well as marketcaps.
USDC Volume & Marketcap
Source: CoinGecko
Over the course of 9 May to 13 May, USDC saw its marketcap increase by $1.4 billion. This was quite a sharp increase, and has only continued to grow as the week wore on. As of today (18 May), USDC now boasts $52.3B in marketcap, close to its all-time high. Meanwhile, daily volume jumped by ~480% from an average of $6 billion to over $29 billion.
Percentage of USDC Locked in Smart Contracts
Source: Glassnode
Interestingly, there were large withdrawals of USDC from smart contracts. It fell rather sharply from ~42% to ~33% between 8 May and 12 May. One possibility is that investors were afraid any yield farms they had USDC in could have UST exposure, which of course would have a negative impact on their holdings.
BUSD Volume & Marketcap
Source: CoinGecko
As for BUSD, it actually saw its marketcap dip slightly by about $1 billion from $17.8 billion, before recovering to its original level. Market cap of BUSD has also continued to grow since then, now sitting at $18.2B at time of writing. However, we did see volumes increase by about ~600%.
DAI and FRAX
With the death of UST, the largest decentralized stablecoin by far, the contagion effects left on its decentralized contemporaries were drastic. It’s important to note that not all decentralized stablecoins are created equal, and both DAI and FRAX had stronger foundations and redemption mechanisms to help maintain peg. While both DAI and FRAX suffered in terms of marketcap, both also managed to maintain their respective pegs during the volatile market.
DAI Volume & Marketcap
Source: CoinGecko
Between 8 May to 13 May, DAI’s marketcap plummeted from ~$8 billion to just over $6 billion, representing a drop of ~25%. During this period, volume increased 10 folds from an average of $400 million to over $4 billion. While DAI didn’t experience a depeg, it did go over $1 momentarily on 12 May coinciding with the time people rushed out of USDT into other stables.
FRAX Volume & Marketcap
Source: CoinGecko
Backed 80% by USDC, FRAX experienced volatility on 12 May with a slew of people swapping between stablecoins. FRAX fell to $0.97 for a bit, but rebounded each time it went off-peg as the built-in redemption mechanism kicked in and arbitrageurs purchased FRAX. Overall, the peg was maintained, but FRAX ended up suffering in terms of marketcap. During the period of 8 May to 13 May, FRAX’s marketcap dropped by ~$1 billion, marking a ~38% decline.
Other Stablecoins that Lost Peg
The fallout from UST was felt far and wide throughout the stablecoin ecosystem. Various algorithmic stablecoins lost their pegs, with most not being able to recover their pegs to this day.
One of the largest casualties happens to be Neutrino USD (USDN) issued by the Waves Foundation. Built similarly to UST, it has yet to see a death spiral though it did trade well below peg at $0.76 on 12 May. It has since recovered to $0.97 but is yet to reach its $1 target.
Fei USD (FEI) also suffered from a depegging event, reaching a low of $0.97. However, unlike USDN, it has managed to hold its peg. Meanwhile, DEI (DEI) a stablecoin issued on Fantom was moments away from a death spiral but managed to survive as the team stopped redemptions. While a calamity was avoided, the token is currently trading far below $1 at $0.60. The protocol now plans to hold a bond sale in order to use the proceeds to make it a fully collateralized stablecoin.
One stablecoin which emerged unscatched from this disaster was Decentralized USD (USDD) issued by the Tron Foundation. Throughout the turbulence, it managed to hold its value, and even saw its marketcap increase. Similarly, Mimatic (MAI) by QiDAO held its peg, thought marketcap has slightly dropped over time.
New Class of Stablecoins to Emerge?
Even with the death of Terra and UST so fresh, there have already been suggestions for new decentralized stablecoins to power the cryptoverse.
Arthur Hayes, co-founder of BitMEX has suggested a bitcoin-backed stablecoin issued via derivative contracts. Reason being that Bitcoin is the most widely available cryptocurrency out there. However, he admits that creating a fiat-pegged stablecoin on a public blockchain cannot be done without many compromises.
There have also been calls for FRAX’s model to be adapted, but with slight improvements. These include a fractional reserve backed with seigniorage (FRAX’s current model), coupled with a money market. With a money market, FRAX could potentially be minted with surplus collateral. Liscivia on Twitter breaks down the benefits of such a model in this thread.
What’s Next?
Throughout the UST / LUNA debacle, it has become clear that stablecoins aren’t always what they seem. Protocols may proclaim that their stablecoin is pegged and safe, but that isn’t always the case and investors should always be wary.
However, there is still a need for a decentralized stablecoin to power web3, and UST was the closest to achieving such a feat. We can expect many new decentralized stablecoins making their move to capture some of that value left by UST, but it remains to be seen whether investors will be willing to trust them as they trusted UST.
Shaun is a Research Analyst at CoinGecko, who has lived and breathed crypto since 2017. Previously a community manager for Synthetix and RedFOX, he dived down the crypto rabbit hole to grasp a better understanding of the industry. He now spends copious amounts of time on Crypto Twitter and Telegram, searching for the next idea for CoinGecko Research. Follow the author on Twitter @ShaunPaulLee
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